Faltering economy could get $100 billion lift

WASHINGTON — The Bush administration and congressional leaders, increasingly concerned about a possible recession, are moving closer to agreeing on an economic stimulus package, Washington officials said Friday.

A Republican familiar with the administration's thinking said Bush would present ideas to stimulate the economy, most likely in the form of tax cuts, in his State of the Union message Jan. 28. Democrats and Republicans on Capitol Hill also are suggesting they might be able to put aside long-standing differences and work on a stimulus measure soon, lawmakers and congressional aides said.

In a fresh sign of the possibility of an agreement on a roughly $100 billion package of tax cuts and spending to spur the economy, House Speaker Nancy Pelosi, D-Calif., and Senate Majority Leader Harry Reid, D-Nev., wrote to Bush on Friday saying "we want to work with you."

Many Democrats say they could support tax rebates focused on lower- and middle-income people, and perhaps even tax breaks for corporations, if the White House and Republican congressional leadership accepted spending increases. Those could include extended jobless benefits, expanded food stamps, aid to states and public infrastructure projects that could ease rising unemployment among construction workers.

"We're looking at both tax cuts and spending stimuli," said Sen. Charles Schumer, D-N.Y. "We're focused on the middle class in terms of tax cuts and in terms of spending stimuli, things that get out quickly."

The White House also is examining broad-based tax rebates comparable to the $300 to $600 checks sent to taxpayers in 2001, as well as bigger tax breaks for businesses that invest in new equipment.

Responding to the letter from Pelosi and Reid, White House spokesman Tony Fratto said Bush had instructed aides to obtain views from all sides. "We would of course want to proceed in a bipartisan way," Fratto said, adding that Bush planned to meet, perhaps next week, with Pelosi and Reid.

Still, the White House and Democrats probably are on a collision course. Some lawmakers said Bush is likely to resist social-spending initiatives or efforts to restrict rebates to a relatively narrow segment of the public. He also is likely to press his favorite tax measures, such as a repeal of the estate tax or making his 2001 and 2003 tax cuts permanent — something Democrats promise to reject.

"It would make sense for the president to do something in a bipartisan way," said Rep. Charles Rangel, D-N.Y., chairman of the Ways and Means Committee. "But I'm scared to death to even talk about tax rebates because of what that might open up."

Said a senior GOP aide: "Republicans will have to talk about making the tax cuts permanent and all that kind of stuff. Democrats are going to want things on their long-term agenda. But if you figure those cancel each other out, there's probably a playing field where everyone can agree."

Democrats appear to be farther along than the administration, having decided in December to spend the early part of 2008 blaming Bush for the economic anxieties of the middle class. Until recently, Republicans in Congress and in the presidential campaigns have said the economy was healthy.

The tone changed quickly in recent weeks, especially after unemployment grew, oil prices reached $100 a barrel, the housing crisis worsened and the stock market stumbled (the Dow is down 5 percent since Jan. 1, and Nasdaq is down 8 percent). Leading economists from both parties soon began voicing fears of a recession, with some suggesting one already had begun.

The more-than-$30-a-barrel increase in oil prices since September alone has had all the negative effects of a tax increase — one big enough to outweigh any likely stimulus.

"The price of oil rising even from $80 to $100 a barrel is like adding $150 billion in taxes. It's quite a wallop," said Kenneth Rogoff, a Harvard University economics professor and former chief economist at the International Monetary Fund.

Moreover, he said, "it's worse than a tax increase because the money is going to Saudi Arabia and Russia rather than the U.S. government."

Higher oil prices not only slow growth but also add to inflation, raising the specter of stagflation like that of the late 1970s.

"Energy price increases, especially now that energy once again is becoming an ever-larger part of consumer spending and business costs, are both recessionary and inflationary," said Allen Sinai, chief global economist at Decision Economics. That, he said, makes higher oil prices "a very bad kind of tax increase. They add to costs and can be part of an upward spiral of price inflation, which possibly feeds back into wage inflation and more price inflation."

Federal Reserve Chairman Ben Bernanke laid out a bleak picture of the economy Thursday and suggested that the Fed would cut interest rates soon. That has made it more acceptable for lawmakers and administration officials to discuss the need for actions.

"Time will be of the essence," Treasury Secretary Henry Paulson said Friday on Bloomberg Television. "So I think we want to do something as quickly as possible if we do it."

The topic also has figured more and more on the presidential trail.

Democratic candidate Hillary Rodham Clinton on Friday unveiled a $70 billion stimulus plan. She offered no way to pay for the proposal, however, and her call for a freeze on certain mortgages was of questionable legality.

Other leading Democrats said they envisioned a proposal of at least $100 billion, which economists say is the minimum needed to counter a recession.

Yet, Democrats are hardly united. Some say they are worried that they will be accused of violating the party leadership's pledge to "pay as you go" by offsetting tax cuts or spending increases with savings elsewhere.

Most Democrats are saying that, at a time of an economic downturn, they do not need to stick to that pledge. However, some are steaming over a decision to waive that rule last month when passing a one-year, $50 billion "fix" of the alternative minimum tax.

Compiled from The New York Times, The Associated Press and The Washington Post