Stimulus Talks Look Good, but Beware Fiscal Dangers

Posted January 29, 2008 at 4:32pm

The swift and civil negotiation between Speaker Nancy Pelosi (D-Calif.), House Minority Leader John Boehner (R-Ohio) and Treasury Secretary Henry Paulson that enabled them to reach an agreement on a stimulus package was a pleasant departure from the usual state of play between the leaders in the House, and between the White House and Congress.

[IMGCAP(1)]Each party was willing to compromise, could see the constraints and pressures on the others, and was willing to take some heat internally to make an agreement happen. The agreement is nowhere near ideal, but it is a reasonably good package that will do some good even if economists could come up with a better package more likely to have the appropriate quick ripple effect on the economy. But that is never how government and politics work.

Of course, whether the happy result gets enacted anytime soon depends, as so much else, on the Senate. Even if Senate leaders in both parties stepped back and ceded the negotiation to their House counterparts, Senators were never likely to simply rubber-stamp what the House did. It is fascinating that the Senate’s desires do not simply break down on partisan or ideological grounds, but there are more important issues to consider even if the Senate can reach its own bipartisan accord.

Can the Senate act quickly enough to make a five-party negotiation — House and Senate leaders from both parties, along with the Bush administration — feasible? The key to any stimulus package is speed; the longer it takes to get the package together, the longer it will take to get the elements working in the economy. Most stimulus packages are singularly unimpressive in their effect, in part because they do not get under way until the economy already is recovering on its own.

In this case, since tax rebates are a core component and the Internal Revenue Service already is spread thin with the processing challenge of 2007 tax returns, the rebate checks will be delayed for critical weeks and months, at least. Any longer delay in a compromise package means longer delays getting the rebates out there. And that means the cost of the rebates, in terms of a big addition to the deficit and debt, will not be matched at all by the benefits of the stimulus they provide.

Will the Senate be willing to back off from its likely demands for spending, probably including unemployment benefits, food stamps, infrastructure, and wind and solar tax credits? Will the administration be open to accepting some share of the spending for the same? Will Congressional Republicans rebel against additional spending even as they swallow hard to accept checks being sent to those who pay no income taxes?

This is a huge test for both Congress and the president, one that Americans will view as either evidence that when the chips are down, the leaders can act together to solve problems or that the process is so thoroughly dysfunctional that even the simplest things can’t be resolved in a timely way.

Even if the process works, it is no sure thing that we have a year ahead with more cooperation than confrontation. The president’s last State of the Union message was far less pugnacious than many previous SOTUs, but the number of occasions when all members of both parties stood together to applaud was still fewer than those when half the chamber rose and cheered while the other half sat in stony silence. And the president’s challenge on earmarks after six years of enthusiasm for them was not designed to build bridges (pun intended).

Scott Lilly, former staff director of the House Appropriations Committee and now at the Center for American Progress, has pointed out the massive number of presidential earmarks buried in this budget, along with the earmarks incorporated by executive officials via no-bid contracts and grants. Will Congress be tempted to hit back by specifically deleting some of these by denying them funds in appropriations and other bills? This sideshow over minor spending could create major tensions.

In addition, the confrontation and tension will clearly be there on surveillance and intelligence matters, as well as on Iraq. On the domestic front, Congress did not exactly react with enthusiasm to the president’s rousing call to reauthorize No Child Left Behind, or his call for enactment of the trade agreements that are pending.

But at the same time, this is the last chance for George W. Bush to cement his legacy at home and abroad, and the stimulus negotiation shows that opportunities are there in several domestic areas, from education to health to energy and the environment, and even in narrower fashion on immigration. Democrats in Congress clearly need a year of some accomplishments to go out as the “do-something” Congress. These dynamics were present in 2007, to be sure, and did not result in any grand compromises, but 2008 could well be different — at least a little bit different.

Compromise and action on pressing problems would be nice — but there also is a big danger here that is raised by the stimulus package. After a year in which the majority Democrats worked very hard to abide by pay-as-you-go budgeting and held the line on all significant bills except the alternative minimum tax fix, the dynamic is very different. Of course, a stimulus package, by definition, means additions to the deficit to jump-start the economy. But once Congress starts down the path of waiving PAYGO, it will be very tempting to stay on that course, especially given the president’s SOTU pledge to veto any bill with any tax increase of any sort.

With a fiscal meltdown ahead in the next decade, with spending slated to rise sharply and no concomitant increase in revenues on the horizon, the last legacy we need this Congress and president to leave us is another huge addition to the deficit and the debt.

Norman Ornstein is a resident scholar at the American Enterprise Institute.