By Rich Miller
Nov. 17 (Bloomberg) -- President-elect Barack Obama and House Speaker Nancy Pelosi may throw as much as half a trillion dollars worth of stimulus at the economy -- and have little or no growth to show for it.
The forces arrayed against recovery, including the credit contraction and cutbacks by consumers, are so powerful that they may overwhelm the record sums of spending and tax cuts being discussed in Washington. The only consolation, economists say, is that without the stimulus, things would be even worse.
``It's hard for me to imagine we'll have a return to positive growth before the fourth quarter of 2009, even with a $500 billion stimulus,'' says Barry Eichengreen, an economics professor at the University of California, Berkeley. He sees the unemployment rate rising to 9.5 percent in early 2010, from 6.5 percent now.
The first dose of fiscal medicine might come within weeks, following the return of Congress today for a lame-duck session, and would focus on stepped-up government spending. The balance, including a tax rebate, would come after Obama assumes the presidency in January.
Mark Zandi, chief economist at Moody's Economy.com in West Chester, Pennsylvania, says the economy may contract 2 percent next year without a package of at least $300 billion. With it, ``we could get growth pretty close to zero,'' he adds. That would still be the worst result since 1991.
A `Bolder' Approach
``The breadth and potential depth'' of the crisis call for a ``bolder'' approach, Obama economic adviser Gene Sperling said in congressional testimony Nov. 13. A package costing $300 billion to $400 billion ``should be the starting point, with an understanding that more could be needed,'' Sperling said, noting he was speaking for himself.
That would make the next stage of stimulus significantly bigger than the plan President George W. Bush signed in February. The new package will also take a different shape, as policy makers try to get more economic bang for each government buck.
The earlier program -- $168 billion, mainly in tax rebates -- was neutralized by a surge in gasoline prices. It was also robbed of punch because skittish consumers used part of the money they received to build up their savings or pay down debt instead of spending all of it. The savings rate more than doubled to an average 2.3 percent during the last five months from a 1.1 percent average the previous five years.
Feldstein Favors
That's one reason why Martin Feldstein, the Harvard University economics professor, now favors a major government program that will directly inject money into the economy instead of depending on consumers.
``I hate to say it, because I'm a guy who doesn't like government spending and doesn't like fiscal deficits, but I don't see any alternative,'' he said in a Bloomberg Television interview Nov. 12.
Pelosi and her fellow Democrats plan to push a package of extended unemployment benefits, federal aid to the states and increased outlays on roads, bridges and other infrastructure in the lame-duck session that starts today.
The states will likely use immediately any money they receive because of falling revenue and rising costs. Unlike the federal government, most are required to run balanced budgets, so they must cut spending to make up for any shortfall in taxes.
As many as 27 states face deficits totaling $26 billion, according to a letter distributed to Congress last month by the National Governors Association.
``The numbers are astounding in terms of lost revenue,'' says Leonard Santow, a former Federal Reserve economist who is now a managing director at Griggs & Santow in New York.
Delayed Projects
Governors including David Paterson of New York and Jon Corzine of New Jersey are also pressing for federal money to spend on public-works projects delayed by the spending squeeze.
Paterson, a Democrat, told the House Ways and Means Committee Oct. 29 that New York has 40 ``shovel-ready'' plans to improve highways and bridges and another 58 water and sewer projects that could begin immediately with federal funds.
``There is a compelling case for a significant new commitment to infrastructure spending,'' Lawrence Summers, an Obama adviser and Harvard professor, told the House Budget Committee in September. While such spending ``is often seen as operating only with significant lags,'' he said, he's convinced that ``properly designed'' support can make ``a timely difference for the economy.''
Obama has also structured his proposed tax rebate to have more impact. Unlike Bush's one-time disbursement, Obama's would be a down payment on a permanent income-tax cut aimed at the middle class. It would boost take-home pay by lowering taxes withheld from paychecks, which might encourage households to spend more.
Nosediving Demand
Increased spending might benefit companies such as Intel Corp., the world's largest computer-chip maker, and Best Buy Co., the largest U.S. electronics retailer, which both said last week that demand for their products has nosedived.
``In 42 years of retailing, we've never seen such difficult times for the consumer,'' Brian Dunn, president and chief operating officer of Best Buy, said Nov. 12.
Allen Sinai, chief economist at Decision Economics in New York, says falling house prices and slumping stock markets will destroy some $7 trillion of household wealth this year, far in excess of the amounts being talked about for the stimulus.
Nomura Research Institute chief economist Richard Koo says the U.S. is undergoing a ``balance-sheet recession,'' much like the one that gripped Japan in the 1990s: Consumers and companies, seeing see their wealth shrinking, are curbing spending and reducing debt, while banks are shying away from lending.
Japan's Experience
Japan's experience suggests the U.S. should be cautious about when it decides to start easing up on its stimulus programs. The world's fourth-largest economy raised consumption taxes in 1997 and fell back into a recession.
That's why economist Sherle Schwenninger of the New America Foundation in Washington, says talk about Obama's plan to raise taxes on the wealthy isn't ``helpful'' now.
The Japanese example also suggests that a big increase in government borrowing won't push up interest rates, as some fear. Yields on Japanese bonds fell throughout the 1990s, even as borrowing grew, because the economy stayed weak.
The U.S. faces a recession that will be ``deeper, broader and much stickier than the last couple,'' says Martin Regalia, chief economist at the U.S. Chamber of Commerce in Washington. ``This is not the time to be penny wise and pound foolish,'' he adds.
To contact the reporter on this story: Rich Miller in Washington rmiller28@bloomberg.net
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