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FINANCIAL CRISIS: THE CONSUMER AT RISK

Politics could delay a package to aid consumer

Sinking retail sales add urgency to calls for a 2nd round of stimulus.

October 16, 2008|Jim Puzzanghera and Richard Simon | Times Staff Writers

WASHINGTON — Amid fresh signs that the nation is in recession -- and yet another jaw-dropping decline in the stock market -- Congress is gearing up to enact a new economic stimulus plan to help ordinary Americans.

But getting quick bipartisan agreement and White House support to help consumers is far from certain. The battle could be even tougher than the one that played out last month over the $700-billion rescue plan for the financial system.

Democrats and Republicans have starkly different views of what a stimulus package should contain, and President Bush has signaled his opposition to some of the key ideas being floated.

What could force compromise is the outpouring of evidence that the nation is headed for tough times even if the financial system should begin to stabilize.

The Dow Jones industrial average plummeted more than 700 points Wednesday after the government reported that retail sales sank 1.2% in September, the third straight monthly decline and the largest such pullback since 2005.

The unexpectedly steep drop was an ominous sign heading into the crucial holiday shopping season and comes as more Americans are losing their jobs.

"I believe the economy is now in a recession," said Richard DeKaser, chief economist at banking firm National City Corp. in Cleveland. "What today's retail sales report implies is that it will be steeper than many of us had feared."

The grim retail sales report coincided with a warning from Federal Reserve Chairman Ben S. Bernanke, who told a group of economists in New York that the government's plan to infuse $250 billion into the banking system wasn't a cure-all.

"Stabilization of the financial markets is a critical first step, but even if they stabilize as we hope they will, broader economic recovery will not happen right away," Bernanke said. He added that the Fed would continue to use all available tools to support the economy, leaving open the possibility of additional interest rate cuts.

Key members of both parties in Congress believe the government must find a way to put more money into the hands of average Americans, especially with consumer spending accounting for more than two-thirds of gross domestic product.

"Clearly, a significant initiative is required to promote job creation and economic growth," House Speaker Nancy Pelosi (D-San Francisco) wrote to Democratic members this week.

"I agree wholeheartedly that Congress should take additional measures to get our economy back on track, and we should not wait until January," said House Minority Leader John Boehner (R-Ohio).

The question is whether Congress can unite behind a stimulus plan before a new president takes office. If not, substantial pump-priming might not take effect until the spring or summer, a delay that could intensify the pain for many people.

Though it's better late than never, the delay could hurt many struggling Americans, said Christian E. Weller, an associate public policy professor at the University of Massachusetts in Boston. "We've now, I think, avoided at least a major financial crisis, but we haven't done enough on the economic side to avoid a major recession," he said.

"In the end, there are hundreds of thousands of people who won't be helped if it's delayed for five or six months," said Weller, who supports a broad stimulus package.

What makes quick agreement problematic is that the two parties have very different ideas about what a plan should contain.

Senate Majority Leader Harry Reid (D-Nev.) unveiled a $150-billion package that mirrors a stimulus proposal made by Democratic presidential nominee Sen. Barack Obama this week.

It includes spending on infrastructure projects, such as roads and school construction, extending unemployment benefits, providing energy assistance to low-income families and offering tax breaks to encourage businesses to hire more workers.

It would also require the federal government to be "more aggressive" in using its authority to push lenders to reduce foreclosures by renegotiating mortgage loans.

House Democrats have been discussing a similar package that would also help states with such costs as healthcare for the poor via Medicaid. Pelosi asked committee heads to hold hearings on such provisions and Bernanke is already scheduled to testify at one such event Monday.

Republicans, by contrast, favor tax cuts, including suspending the capital gains levy, lowering the corporate tax rate and providing federal guarantees on interbank lending. Among other things, they believe such measures would help create jobs.

"Our constituents are not looking at the mess in Washington or Wall Street and asking for the federal government to take care of other governments," Boehner said.

"They are not asking for a one-term accounting fix to Medicaid, or pork-barrel spending masquerading as stimulus."

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