By Martin Vaughan Of DOW JONES NEWSWIRES WASHINGTON -(Dow Jones)- The chairman of the Senate budget panel said Wednesday that economic stimulus legislation Congress is expected to take up early next year should be coupled with a long-term plan for deficit reduction.
A number of economists, including Princeton University's Paul Krugman, have said policymakers should spend the money needed to get the economy back on track and worry about the deficit later.
But Senate Budget Committee Chairman Kent Conrad, D-N.D., said Congress should craft a plan to deal with the looming fiscal consequences of the financial meltdown and the government's response, at the same time as it considers billions in new spending to shore up the economy.
"If we don't send a signal and begin a process to get us back to fiscal responsibility, we will risk losing credibility" with those that lend money to the U.S., Conrad said during a Wednesday committee hearing.
Economists testifying at the hearing predicted much gloom, and called for Congress to approve spending of at least $400 billion to avoid a prolonged recession.
"Without fiscal stimulus, the recession will last throughout 2009 and much of 2010. It's not in the league of the Great Depression, but it's certainly the most severe we've seen since that dark time," Mark Zandi, chief economist at Moody's Economy.com, told committee members.
Zandi said that in the absence of fiscal stimulus legislation, U.S. unemployment could reach nearly 10% by the end of 2010. It now stands at about 6.5%.
But economists speaking at the hearing differed on where the stimulus should be directed, and the importance of tax cuts versus spending in the package.
John B. Taylor, a Stanford University economist and former under secretary of the Treasury, said Congress should pledge immediately not to permit tax increases scheduled to take effect in 2011.
"Put it in the books: no tax rate increases anywhere," Taylor said. He argued that consumers and businesses will change their spending habits if they know that changes are permanent.
Zandi, by contrast, said any tax relief should be temporary to minimize the impact on the long-term fiscal deficit. He proposed a $400 billion stimulus package mostly comprised of direct spending including aid to states, infrastructure spending, food stamps and an extension of jobless benefits. The package would also include tax incentives for housing and a payroll tax holiday.
Taylor and Zandi agreed that lawmakers should take advantage of low borrowing costs for deficit spending now, but plan for future deficit reduction.
"Flagrantly ignoring a trillion-dollar deficit is a concern, it's a major concern," Taylor said. "You have to be thinking about a glidepath to get back to stop deficit spending."
Conrad declined to give specifics of what he has in mind with respect to a long-term deficit reduction plan. He said it should be "simultaneous" with the stimulus discussions, expected to ramp up in January.
Meanwhile, Sen. Judd Gregg, R-N.H., said the incoming Obama administration should target the remaining $350 billion Congress authorized in the financial rescue plan to relief for troubled home loans.
"What's important is that we put the dollars on the problem. And the problem is foreclosure, and the real estate market," Gregg said.
He said Treasury Secretary Paulson has "made it fairly clear" that at least $350 billion of those funds will be at the discretion of the Obama White House.
-By Martin Vaughan, Dow Jones Newswires; 202-862-9244; martin.vaughan@dowjones.com
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(END) Dow Jones Newswires
November 19, 2008 14:15 ET (19:15 GMT)

Publié le 19 novembre 2008 Copyright © 2008 Dowjones