Obama, Democrats plan $500B economic package

By JULIE HIRSCHFELD DAVIS

Associated Press

November 25, 2008

WASHINGTON (AP) -- Congressional Democrats and President-elect Barack Obama are laying the groundwork for quick enactment in January of a giant, two-year economic rescue package that will total about a half-trillion dollars.

His economic team in place, Obama has tasked his aides with assembling an ambitious measure to not only swiftly pump money into the battered economy, but also create 2.5 million new jobs, send a tax cut to the poor and middle class, and make massive government investments in energy-saving and other technologies designed to pay for themselves in the long run.

Some senior Democratic lawmakers put the cost of the package as high as $700 billion, a figure Obama's team calls premature and several Democratic aides said was unlikely. One top Democratic congressional official, speaking on condition of anonymity because talks on the economic rescue measure are ongoing, said it will probably cost between $400 billion and $500 billion over two years.

The president-elect has already acknowledged that its price tag will be far higher than the $175 billion economic aid plan he advocated while he was campaigning for the White House.

"We have to make sure that the stimulus is significant enough that it really gives a jolt to the economy, that it is putting people back to work, that it is making investments, that it is restoring some confidence in the business community that, in fact, their products and services are going to have customers," Obama said Monday as he announced his economic team.

Declining repeatedly to estimate the cost of the plan, Obama said, "It's going to be costly."

Indeed, many economists now agree that in order to jump-start the anemic economy, Obama needs to put in place a rescue costing at least $300 billion to $400 billion, or 2 percent of the size of the economy, as measured by the gross domestic product.

It needs to be "very big, because it's a very serious situation," said Alice M. Rivlin, a Brookings Institution economist and former top budget official who has been advising Democratic leaders on the size and scope of the forthcoming package. "We do need to stimulate the economy and to keep this snowballing recession from getting worse."

Democratic congressional leaders have been pressing for months for another "stimulus" plan to follow the $168 billion package of tax rebates enacted in February. In a statement Monday praising Obama's economic team, House Speaker Nancy Pelosi, D-Calif., said President George W. Bush and congressional Republicans should agree to a second economic aid plan before year's end, to "provide a down payment on new job-creating infrastructure investments, help states avoid deep cuts to health care and other essential services, and provide nutrition assistance to struggling families."

But there's little chance that Bush and the Democratic Congress will reach a breakthrough on such a measure. Instead, Obama's team and Democratic leaders are hard at work on Plan B: The new Congress that convenes in early January will move swiftly on an aid package, readying it for Obama's signature as one of his first acts after being inaugurated.

The measure is likely to a beefed-up version of a $61 billion stimulus plan the House passed in September, which included $37 billion in spending on public works projects such as road-building and water and sewage projects; about $15 billion in aid to cash-strapped states to guard against cuts to health care for the poor; a $3 billion boost in food stamp aid; and a $7 billion jobless benefits extension for unemployed workers whose payments would otherwise run out.

Those elements are likely to grow, given that economic conditions have worsened since that legislation was drafted, said people familiar with the emerging plan.

Obama has also embraced calls for a "green jobs" program that invests as much as $100 billion in projects to slash harmful emissions. This could include projects such as retrofitting buildings to make them more energy-efficient, upgrading the electrical grid and improving mass transit.

"It turns out that putting money into green technologies ... has a very large positive employment effect relative to tax cuts," said Robert Pollin, a University of Massachusetts-Amherst economist who has written extensively on what he calls the "green recovery."

"It's very efficient in terms of creating jobs for a given amount of spending, and it has the added benefit that the short-term effects are compatible with long-term needs in the economy," Pollin said.

Democrats also plan to include tax cuts for low- and middle-class workers, along the lines of what Obama proposed on the campaign trail. One likely component is Obama's proposal to send tax credits of $500 to individuals and $1,000 to couples, including payments for people who make too little to owe any taxes. Those credits are estimated to cost about $115 billion in their first two years, according to the nonpartisan Tax Policy Center.

Obama's aides have said the early-January recovery plan will not include a tax increase for those earning $250,000 or more annually, something the president-elect has vowed to put in place to, in his words Monday, "restore some balance to our tax code." But economists caution that the measure, which will add substantially to the already soaring deficit, will have to contain some significant trade-offs to avoid making things worse.

"If you're going to do something that is big and long-run, like a major infrastructure effort that lasts into the future, then you need to offset it some way -- either with tax increases or other kinds of spending cuts," Rivlin said.