Update on Economic Stimulus Package

January 27, 2009 06:00 PM

via a special arrangement with Informa Economics, Inc.

Additional efforts (and a lot more funding) will be needed for financial system rescue

NOTE: This column is copyrighted material, therefore reproduction or retransmission is prohibited under U.S. copyright laws.

-- Doubts rise about effectiveness of economic stimulus package. The Tax Policy Center, a nonprofit Washington think tank, in a report this week graded each of the stimulus package's 10 tax provisions on how well they would boost the economy in the short term. They rated two B-plus, with the rest falling short of that.

-- Union wages provision in House stimulus package. The House economic stimulus bill to be voted on today requires all employers that receive contracts under the bill to pay their workers the prevailing union wage under Davis-Bacon laws.

-- Projected costs of House economic stimulus proposal rising. The Congressional Budget Office (CBO) estimated that the $816 billion cost of the House stimulus bill would result in an additional $347 billion in interest payments on the national debt — effectively raising the package’s cost to more than $1.1 trillion.

-- Obama supports return to pay/go. Office of Management and Budget Director Peter Orszag sent a letter Tuesday to House Appropriations Chairman David Obey (D-Wis.) saying Obama was "committed to paying for any of the temporary tax cuts included in the recovery plan that he would like to make permanent," and supported a return to "pay-as-you-go" budget rules for nonemergency spending.

Details: Orszag wrote that the stimulus bill “should not be seen as an opportunity to abandon the fiscal discipline that we owe each and every taxpayer in spending their money — and that is critical to keeping the US strong in a global, interdependent economy. Although it is not feasible to avoid any spillover whatsoever of the recovery package on out-year spending, the administration believes that the package should minimize such effects on out-year spending as much as possible. Furthermore, the president is committed to paying for any of the temporary tax cuts included in the recovery plan that he would like to make permanent, and will detail the manner of doing so in his budget submission.” Orszag also wrote that the Obama administration intended to return to the “pay-as-you-go budgeting that we had in the 1990s.” He concluded, “Putting the country back on the path of fiscal responsibility will mean tough choices and difficult trade-offs, but for the long-term health of our economy, the president believes that they must be made.”

-- Focus will be on Senate stimulus package, not the House. Republicans on Tuesday met with President Barack Obama about their concerns over the House bill lacking enough incentives to jumpstart the US economy. The Senate bill will likely include some GOP-pushed changes but at this juncture it is unclear whether there will be enough changes to warrant a significant number of Republican votes for either the eventual Senate bill or in a resulting conference bill. (Very few Republicans will vote for the House measure to be considered today.)

-- Stimulus package will not be last effort. The Obama administration is working on several additional programs that they believe will be needed relative to financial rescue. Huge additional losses in the banking sector are ahead, especially as unemployment rises in most states, resulting in more loan defaults.

FDIC wants to manage “bad bank”. Reports note that the Federal Deposit Insurance Corp. (FDIC) may manage the so-called “bad bank” that the Obama administration may set up. Obama’s financial team may announce the outlines of its financial-rescue plan as early as next week. While setting up a bank to buy underwater assets is emerging as a favored approach, it could drive up the cost of the rescue in excess of $1 trillion. Treasury Secretary Timothy Geithner has pledged to unveil a “comprehensive plan” for responding to the crisis. (Some sources report the FDIC is busy renting office space in several cities...perhaps ahead of a major role ahead relative to the "bad bank" possibility.)

-- Ethanol blending percentage language not likely part of final stimulus package: Efforts to get language boosting the current 10 percent maximum blend into the Senate stimulus package will likely fail, according to our sources. If so, that means efforts will be renewed to get the percentage increased via an announcement from the Environmental Protection Agency (EPA), but based on our talks with sources on this topic, our contacts suggest the odds for an EPA announcement are less than 50 percent.

NOTE: This column is copyrighted material, therefore reproduction or retransmission is prohibited under U.S. copyright laws.


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