December 21, 2001

Page One Feature

What Killed Plans for a Stimulus Package?
Hints of a Recovery and the Politics of 2002

By SHAILAGH MURRAY and JOHN D. MCKINNON
Staff Reporters of THE WALL STREET JOURNAL

WASHINGTON -- Efforts to craft a stimulus plan for the U.S. economy collapsed this week because of a clash of ideologies, an explosive mix of personalities and a focus on next year's high-stakes election. But they also collapsed because of a growing sense that the patient may not need the medicine.

The economy is already showing nascent signs of recovery. This week, as negotiators struggled to reach agreement on a package of measures to kickstart the economy, the news came trickling out: new housing starts up 8.2% in November; the index of leading indicators up for the second consecutive month; new claims for unemployment insurance down for the third consecutive week.

And significant government stimulus is already in the pipeline. The Federal Reserve has cut interest rates 11 times this year -- most recently, a week ago. Since Sept. 11, Congress has approved some $40 billion in emergency spending, as well as a $15 billion airline bailout plan. And the tax cut that became law last spring promises to inject $70 billion into the economy in 2002.

With all that, an increasing number of lawmakers have concluded that an economic stimulus package just isn't necessary -- and could actually do more harm than good.

That was evident Tuesday evening, when administration officials and Republican leaders made a private pitch for their stimulus plan to the "Blue Dogs" -- a group of 30 or so conservative Democrats in the House of Representatives who often vote with the GOP. The Blue Dogs were unimpressed. Rep. Allen Boyd Jr., a Florida Democrat, said "economists are telling us the economy will be coming back anyway." Instead, their concern is that further tax cuts will add to the deficit. "If you'll pay for this package" by raising taxes or cutting spending elsewhere, Mr. Boyd told his GOP colleagues, "then I'll vote for it."

Other Democrats voiced similar sentiments, especially about hefty tax breaks for business embedded in the package. Sen. Barbara Boxer says her high-tech Silicon Valley constituents, hit hard by the recession, haven't pressured her to support a stimulus plan. "No one's called me, not a one," she says. They think that a stimulus plan would just "drive up long-term interest rates and hurt us in the long-term." Sen. Boxer's fellow Californian, Sen. Dianne Feinstein, made an impassioned plea against further tax cuts in a meeting with Democratic colleagues this week. And Sen. Tim Johnson of South Dakota called the plan's tax breaks "reckless" in light of the deteriorating budget outlook.

Not everyone agrees. President Bush, in particular, continued to push vigorously for an economic stimulus plan Thursday. His economic advisers said failure to pass such a plan could cost the economy 300,000 jobs. And in an interview in his office Thursday morning, Treasury Secretary Paul O'Neill said he wasn't giving up until "the sun goes down," noting that he had placed a call to Senate Majority Leader Tom Daschle that morning.

Sen. Daschle returned the call at 11:30 a.m., but the 10-minute discussion ended with no new breakthroughs. By day's end, members of Congress from both parties were focused on confirming their plane reservations out of town. Few seemed overwrought with concern that the lack of an economic stimulus plan would prove devastating to the economy.

Discussions on Capitol Hill on the need for a stimulus package began even before the Sept. 11 terrorist attacks and only gained momentum afterward. The idea was to focus on tax cuts and other measures that would give the economy a quick kick.

Some of the measures in the bill might have done just that. Faster depreciation allowances for companies buying computers and other short-lived equipment, for instance, could have boosted business investment.

But other parts of the bill ran the risk of taking effect too late to help. Many of the $300 rebates for low-income people, for instance, wouldn't have gone out until spring. And proposals to extend unemployment benefits and provide health insurance to the unemployed were designed less to stimulate the economy than to cushion the effects of an economic slowdown.

Either way, it was clear by week's end that the great economic stimulus debate of 2001 had much more to do with politics than with economics. In the immediate aftermath of Sept. 11, leaders of both parties vowed to work together. But in recent days, they began looking ahead to the elections of 2002, from which either party could emerge with control of the now closely divided Congress.

That was evident Wednesday, when President Bush met privately with 200 Republicans in the basement of the Capitol. According to people who attended the meeting, Mr. Bush told the group that "a top priority" is to ensure that the GOP retains control of the House. The president is "focused like a laser on the congressional elections in 2002," says GOP lobbyist Bill Paxon, an informal adviser to the White House and House Republicans.

Part of the Republican strategy for that election, which was clearly being tested by the White House over the past two weeks, is what one aide called "Blame Daschle." The idea is to accuse Sen. Daschle of blocking the Bush agenda to help the economy.

President Bush's announcement to the television cameras on Wednesday that he had struck a deal with Democrats was clearly part of that strategy. At the time, Mr. Bush had a framework agreement with only three Senate Democrats -- not nearly enough to give him the 60 votes necessary to overcome a Senate filibuster. But by announcing a deal, he forced Sen. Daschle to say there was no deal.

For their part, Democratic strategists are taking delight in getting Republicans to go on record supporting large tax cuts for the nation's biggest corporations while opposing benefits for the unemployed. That's a theme they are likely to hit hard in next year's election campaigns.

And at a breakfast with reporters Thursday morning, Sen. Daschle stressed the GOP stimulus bill's budget-busting impact. His staff distributed a four-page analysis showing that the bill would cost more than $200 billion over the next five years, and only $88 billion of that cost would come next year -- when the stimulus was needed. "Do we really want to borrow $211 billion for this package?" he said. "I don't think we do."

The stimulus bill wasn't the only piece of legislation that fell victim to the pitched year-end political battle. A bill to create government-backed terror insurance also got pushed aside in the waning hours of Congress. With many insurance contracts set to expire Dec. 31 and commercial insurers threatening not to renew those contracts, the consequences for commercial real estate could be serious.

"From an economic point of view, this could be more important than the stimulus bill," Treasury Secretary O'Neill said. While legislation to create federal terror insurance passed the House, it got bogged down in the Senate after the GOP added a measure to limit the ability to sue for damages in the case of a terrorist attack. Democrats saw that as an attack on trial lawyers, who provide the party with substantial financial backing.

"We're already paying a price" for failure to act, Mr. O'Neill said. "Insurance premiums for people who had to do renewals for property and casualty since Sept. 11 have doubled and tripled and more because of the uncertainty created by the lack of a federal legislative framework for dealing with the cost of terrorist acts."

A genuine bipartisan desire to create an economic stimulus package seemed to emerge in the weeks following Sept. 11. Kent Conrad, chairman of the Senate Budget Committee, joined with his Republican counterparts to draft a set of bipartisan principles for the stimulus bill. Drawing on advice from former Treasury Secretary Robert Rubin, who has become a trusted adviser of congressional Democratic leaders, that proposal emphasized short-term measures that would boost the economy without hurting the federal balance sheet in the long term. Initially, Mr. Bush seemed to embrace the same bipartisan spirit, wedging Democratic priorities into his wish list.

But then House GOP leaders began to chide Mr. Bush for being too accommodating. House Ways and Means Committee Chairman Bill Thomas, a California Republican, went ahead with a partisan bill without attempting to get Democratic support.

Mr. Thomas remained a polarizing figure throughout the stimulus discussions. He gave long lectures during the negotiations on the need to eliminate the corporate alternative minimum tax or the merits of an individual-based health-care system. Democrats referred to these lectures as "Thomas rants" and took to leaving the room once they got started. Rep. Charles Rangel of New York called them "horrendous." Rep. Thomas himself, when asked about the Democratic complaints, conceded: "I know I'm weird."

In the end, it was largely the issue of providing health-care benefits to the uninsured -- an issue that has stumped Washington for a decade now -- on which the stimulus talks foundered. While leaders of the two parties had reached agreement on a wide range of issues, they couldn't seem to find a compromise on how to provide health benefits for those who had lost their jobs.

Republicans wanted to give tax credits to jobless workers. Democrats, fearing that tax credits would be of little benefit to people who can't get affordable insurance, wanted to help people buy health coverage through their former employers, or extend Medicaid benefits to cover workers who don't have the employer option. Some Republicans grew alarmed that both approaches would become a back-door expansion of costly entitlement programs. "A lot of people have lost their enthusiasm, given the direction this thing has taken," said GOP Sen. Phil Gramm of Texas.

For much of the week, Treasury Secretary O'Neill and Senate Finance Committee Chairman Max Baucus chatted over the phone in an effort to find a compromise on the health-care plan. Even after House Republicans abandoned the talks on Tuesday, the two men continued speaking. On Wednesday evening, Mr. O'Neill even asked Sen. Baucus whether senators might stay in town over the weekend to nail down the health-care provisions. But Sen. Baucus says he replied: "Paul, that's not the way things work around here."

The collapse of the talks was another black mark for the secretary, who in October staked his reputation on the passage of a stimulus bill. If a package didn't become law by year's end, he said at the time, "then I guess as the point person, I'd say I failed." In the interview Thursday, Mr. O'Neill said: "The president believes that we should have this stimulus bill. ... If somebody wants to pin the rap on somebody that this didn't happen, I'm willing to accept accountability for the fact that it didn't succeed."

The deteriorating federal budget outlook clearly took a toll on the stimulus talks. Republican analysts at the Senate Budget Committee acknowledged this week that even without the stimulus package, the 2002 surplus was down to a slim $1 billion -- down from the $176 billion surplus projected as recently as August. The changes were due to continuing weakness in tax revenues, as well as increases in spending. A fresh reminder of the worsening budget picture came Thursday, when the Treasury announced the government had a $54.27 billion deficit in November -- double the size of the deficit a year earlier. Looking over the next 10 years, surplus projections had dropped below $2 trillion from the $5.6 trillion projected in January, according to Republican Senate budget experts.

Democrats, who issued stern warnings throughout the spring tax debate that rosy surplus forecasts wouldn't hold, felt vindicated. "I hope you're ready to increase the debt ceiling," Democratic Rep. Charles Stenholm chided Republicans Wednesday evening as they voted for a new GOP stimulus package that was headed for certain defeat in the Senate. "I hope you're willing to borrow the money with the same enthusiasm of tonight."

Ultimately, the collapse of the talks reflects the fundamental distinctions between the two parties. Republicans were advocating income-tax cuts and corporate tax relief while combating expanded entitlement programs. Democrats were advocating relief for lower-income Americans and the unemployed, while opposing tax breaks for big corporations and high-income individuals.

As Mr. Daschle put it Thursday, economic issues are the "philosophical basis for identification" of the two parties. "I think there are deep divisions."

-- Jim VandeHei and Sarah Lueck contributed to this article.

Write to Shailagh Murray at shailagh.murray @wsj.com⁸ and John D. McKinnon at john.mckinnon@wsj.com⁹

For information about subscribing, go to http://wsj.com