Amid Economic Woes, Push Intensifies for Stimulus Package

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.