JEFFREY BROWN: When Fed Chairman Ben Bernanke came to Capitol Hill today, the question was whether he would endorse calls for a fiscal stimulus package, some combination of government spending and tax relief to boost the economy.
He did so, but with some clear caveats. Here’s a short excerpt from today’s hearing before the House Budget Committee, beginning with his opening statement.
BEN BERNANKE, Federal Reserve Chairman: I agree that fiscal action could be helpful in principle, as fiscal and monetary stimulus together may provide broader support for the economy than monetary policy actions alone.
But the design and implementation of the fiscal program are critically important.
Any program should be explicitly temporary, both to avoid unwanted stimulus beyond the near-term horizon and, importantly, to preclude an increase in the federal government’s structural budget deficit.
REP. TOM ALLEN (D), Maine: I want to just follow up. And so it may seem like Economics 101, but you said that cash, whether it’s tax rebates or other money going to low- and moderate-income people, is more likely to be spent quickly. That’s the phenomenon of the multiplier.
But could you just explain the multiplier enough to help us understand why it’s true that money going to those groups is more likely to create, have a stimulative effect on the economy?
BEN BERNANKE: In terms of who’s most likely to spend, if you’re somebody who has lots of financial assets and you receive an extra dollar, you may not change your spending much because you can simply, you know, either put the dollar in your bank account or take out a dollar as you need it.
If you’re somebody who lives paycheck to paycheck, you’re more likely to spend that extra dollar. The evidence seems to be consistent with that.
And I want to be clear that people at all levels of income do seem to respond, to some extent, to extra cash. But both sort of economic logic and the empirical work we do have suggest that that effect is somewhat stronger for people with low financial assets or low and moderate income.
REP. JOHN CAMPBELL (R), California: Relative to this potential fiscal stimulus package, wouldn’t some kind of business, tax-related stimulus have more of a multiplier effect on the economy?
BEN BERNANKE: A lot depends on the structure. The fact that it’s temporary may induce firms to bring up spending they might otherwise have done into the current period, and therefore add spending to the economy
And it has the advantage, to the extent they do that, you also create more capital in the economy, which supports job creation. So that’s an alternative direction.
And again, as I said before, what the Congress might well want to consider, a diversified mix of elements, as you try to craft a package.
Urgent but temporary measures
JEFFREY BROWN: And joining me now are the leaders of the House Budget Committee that held today's hearing: Chairman John Spratt, Democrat of South Carolina; and the ranking Republican, Paul Ryan of Wisconsin.
Well, Congressman Spratt, even on the day you held this hearing, the Dow has fallen another 300 points. How serious is all this? How urgent is the need for some kind of economic boost?
REP. JOHN SPRATT (D), South Carolina: Well,Â read Mr. Chairman's testimony. He described some very dire conditions in our economy, which we're spreading from subprime markets to regular mortgage markets, possibly the credit card debt.
And he sees the situation -- his word -- worsening in this particular year, this calendar year.
So, therefore, he believes that he could use some complementary help from fiscal aid to complement the monetary policies the Fed is now putting into effect.
He essentially bought into what we were proposing today and endorsed the central ideas, the framework of the agreement we think should be made.
JEFFREY BROWN: And, Congressman Ryan, you just came off a holiday break. I'm guessing you were able to check conditions back home. Where did you see the greatest need?
REP. PAUL RYAN (R), Wisconsin: Well, I did 15 town hall meetings in my district last week. And I think the greatest need is the concern that we're going to have an economic downturn.
People see the press. They read it. It's happening in certain parts of Wisconsin in manufacturing. And so there's a big concern that we're headed for a downturn.
You just got that reinforced by the Federal Reserve chairman today. I think what you got from the Federal Reserve chairman were three things: a downturn is in the offing; he believes it's not going to be a recession; he believes we're going to come back out with better growth the second half of the year.
But in order to mitigate that, he's calling for a stimulus package that's near and upfront. And he's also basically sent the signals that he's going to continue easing interest rates. That's what he said today.
JEFFREY BROWN: So let me stay with you. What are the key things that you think need to be done, in terms of fiscal stimulus?
REP. PAUL RYAN: Well, personally, I think we should have more tax certainty in this country. We should say that all these enormous tax increases that are going to hit us in two years, with all the income tax increases coming, with the alternative minimum tax, we ought to say, "We're not going to raise those taxes. The American economy will not get hit with the largest tax increase in American history."
Unfortunately, that has been taken off the table in this discussion of a stimulus package. So within the context of what is being discussed right now, I believe what has shown to prove to do most for growth and jobs is the expensing provision.
Giving businesses the ability to immediately write off all of their expenses by purchasing new plant and equipment and putting people back to work in the near term does a lot to help bring growth.
What you're going to see in this package -- I think your layout basically showed it, the two answers that Chairman Bernanke said -- some form of rebates, some form of business expensing. Those are probably going to be the two pillars of any economic stimulus package that we're going to come up with.
JEFFREY BROWN: Congressman Spratt, let me give you a crack at that. What do you think are the pillars of any package?
REP. JOHN SPRATT: Listening to Bernanke today, he told us that the most immediate impetus to the economy will come from giving to low- and moderate-income Americans money they need and will spend in a hurry, because the idea is to get it spent, to give aggregate demand in our economy a boost, and that's what he was calling for today.
He was not ruling out tax cuts of the kind that Paul was just referring to for the future. He's saying that's part of your long-run economic plan, which includes the solvency of Social Security and Medicare. You've got to look at that on a longer run.
In the short run, today, this is what I think the economy needs, according to Mr. Bernanke. And as I said earlier, he agreed with us essentially on everything, that it should be timely. That means now, as quickly as possible.
It should be targeted. That means it goes to the people who are most apt to spend it. And it should be temporary, so that we don't send the wrong message and have investors and others seeing us as abandoning fiscal discipline and giving rise to an even bigger structural deficit in the future.
Tax rebate proposals
JEFFREY BROWN: Staying with you, what exactly are we talking about, in terms of getting money back to people? Is it tax rebates along the lines of what happened in 2001? What size would you imagine?
REP. JOHN SPRATT: Well, the number I had in mind was somewhere in the range of $500 to $600, but that number is very much in play right now. The White House today even suggested a much bigger number, but apparently that's not a concrete offer.
In any event, that's one of the big components of the package. But I think there should be some other things with it, too.
For example, if this becomes a long and deep recession -- let's hope it doesn't -- but if it should become that, we will need to have extended and expanded unemployment benefits, and we should make provisions for that in this particular package.
JEFFREY BROWN: Mr. Ryan, what do you think about the prospects or the scale and size of any tax rebate?
REP. PAUL RYAN: I think John is right. You're going to see something in the $500, $600 amount. That's what we keep hearing.
I think it's important we don't oversell this, that we don't raise expectations, that this is going to get the economy growing again and save all of these jobs. We're talking about perhaps $50 billion in rebates in a $14 trillion economy.
So let's put this in perspective. I don't want to mislead the American people into thinking that this is going to work and this is going to bring all these jobs back.
I think, if we focus on growth, if we focus on things that incentivize workers and entrepreneurs and families to go out, and create jobs, and do growth, those are the kinds of policies that work.
I think expensing for businesses will probably be a piece of this package, because that leverages businesses to go out there and take risk, bring into the current business model more spending on plant and equipment, hiring more people.
It worked when we did it in the 2003. We had eight consecutive quarters of business decline before those expensing provisions, and then eight consecutive quarters of large business investment and job creation.
So I think those are the things that work the best. I do believe you'll see a rebate. The entire size of the package is what's being debated right now.
We're around the $100 billion mark, I think, here. But the key that the chairman mentioned is, what Chairman Bernanke said is, don't add to the structural deficit. Don't conduct new spending programs that then get built into the baseline and make our deficit reduction problems out of reach and out of control.
Temporary, emergency spending provisions, not new spending programs through Washington, through state governments that actually increase the baseline and make our deficit projections even worse.
JEFFREY BROWN: Well, Mr. Spratt, that is a key point that Chairman Bernanke brought up over and over again. You both mentioned it. Taking steps that are temporary, that are quick, but that are not counterproductive in the long run. So how do you guard against that?
REP. JOHN SPRATT: Well, in order not to be counterproductive now, we need to act now so that the fiscal aid we are proposing reaches the economy, works its way through the economy soon enough to be of some advantage.
Secondly, we need to keep this confined within a certain period of time, well-defined components of it. We don't need to go overboard here. We're talking about something in the range of $100 billion, maybe a bit more, a bit less.
Other elements can be added to this, such as FHA mortgage loans for those who have housing foreclosures. We should do something in the housing sector.
But we've got to be careful so that it's temporary and it doesn't have long-term consequences that everyone will read as surely worsening the bottom line with budget, the so-called deficit.
JEFFREY BROWN: And staying with you, Mr. Ryan had mentioned business steps that could be taken to stimulate business activity...
REP. PAUL RYAN: Well, what he proposes is a bonus depreciation. It could be 50 percent; it could be 30 percent; it could be more. Paul, I think, is proposing 100 percent in the year of acquisition.
Essentially, that's a tax timing thing, because the tax that is not paid this year due to the fact that you have a big write-off, a big expense write-off, will be paid in the future when you don't have those depreciation charges to fall back on.
So we could probably go with something like that as the business component of the package. We could also go, I would think, on the outside and the House, with a net operating loss carry forward/carry back provision, which we've done in the past. That helps those firms who are losing money and need the help most.
Concerns over inflation
JEFFREY BROWN: Now, Mr. Ryan, is there also a potential fear on the inflation side?
REP. PAUL RYAN: There is. That is my...
JEFFREY BROWN: Explain that. Because now that's kind of a balancing act for the Fed, right?
REP. PAUL RYAN: That was the line of questioning I pursued with the chairman today. I am very concerned that they're courting inflation, because the Fed is claiming pursuant of this dual mandate, which in this instance is sort of conflicting with one another, employment mandate and a price stability mandate.
Given that the Federal Reserve has sole power over monetary policy and price stability, it's my opinion that they're primary responsibility ought to be price stability.
However, they're not doing that. They're going with more easing, more interest rate cuts, and that at a time when gold is at an all-time high, that at a time when the CPI is up 4 percent, that at a time when all of these indicators of inflation are screaming inflation.
I'm concerned that this notion that the Federal Reserve can see the expectations of inflation coming in the economy early enough to actually stop inflation. I worry that they just don't have that kind of ability to do that and that these moves will court inflation. And that would be terrible for the economy.
If we have inflation, people living on fixed incomes see their savings eroded. If we have inflation, it takes a lot more than just a couple of quarters to get rid of it. It takes more interest rate hikes; it takes slowing down the economy. And that is not what we want to have happen.
So I think the fiscal policy is safer, which is what we're talking about, things that I think work, like expensing, is safer than all of these interest rate cuts, which can bring forth inflation. And I think that's something we have to do more to be concerned about.
JEFFREY BROWN: Mr. Spratt, do you share those fears?
REP. JOHN SPRATT: Well, I do, but Bernanke feels that inflation is well in check now. There are some troubling indications of an edge-up. Wholesale price index, for example, increased by 6 percent or more this year over last year, which is the biggest increase in 26 years. We have to be attentive to that.
However, inflation is typically the problem that you run into with monetary policy which expands the monetary system, the monetary supply, and leads to more money chasing fewer goods, and it therefore runs up prices.
That's one reason we need to have a balanced economic policy here that also relies upon fiscal policy that doesn't run that risk nearly as much.
A bipartisan deal?
JEFFREY BROWN: And finally, gentlemen, starting with you, Mr. Spratt, the political prospects here, the realities on the table as you go forward.
There were some reports this afternoon that President Bush said he would support some tax rebates, some breaks for businesses. Both the leaders of your parties today got together and said they wanted to move ahead.
As a practical matter, how fast do you think things will move? And will they move in the right direction?
REP. JOHN SPRATT: Well, today was long step forward, because the chairman of the Fed essentially agreed with the framework that we laid out.
We very much in the Democratic Party, in the House and the Senate, would like to cut a bipartisan deal with the White House and with our colleagues in the Congress.
Number one, we think that's the way to get the best package in place the quickest. And since time is of the essence, that's important.
But, number two, if we could do it together, without a lot of bickering, some legitimate debate, I think the markets and the American people might just stand up and cheer with that accomplishment itself.
And it might build a little bit of confidence in the market in and of itself that we were able to get together and agree upon this.
JEFFREY BROWN: Mr. Ryan, is that possible, given divisiveness in Congress and given we're in the middle of a presidential campaign, which you might have noticed?
REP. PAUL RYAN: I think it's more possible the sooner we act. There is room for both of our ideas on what works best.
John and I have slightly different ideas on how best to grow jobs in this economy. This package can accommodate both of those ideas. I think there's room for that.
I do believe -- I've got to tell you, after doing my 15 town hall meetings, people think Washington is broken, that all we do up here is fight. Wouldn't it be refreshing if we actually do come to agreement, put a package together, to try and get jobs back into this economy, and do something that actually works, rather than posturing?
I just want to make sure that whatever we do actually works to help grow the economy and is more than just press release economics, but actually real, sound economics. And if we can do that, that would be a great thing for the country.
JEFFREY BROWN: Paul Ryan of Wisconsin and John Spratt of South Carolina, thank you both very much.
REP. JOHN SPRATT: Thank you.
REP. PAUL RYAN: Thank you.