Congressional leaders and Treasury officials will likely be working all week on a plan to rescue the slumping economy. While House Democrats and President Bush say they are confident they will reach common ground on a $145 billion stimulus package in coming weeks, the specifics are still up in the air. The Bush administration has been pushing corporate tax breaks. Democrats want more individual tax rebates, as well as payments to people with low incomes who don't pay income taxes. They also want to increase spending on unemployment compensation and food stamps. U.S. News Congressional Correspondent Danielle Knight spoke to Rep. Barney Frank, Democrat of Massachusetts and chair of the House Financial Services Committee, about the different proposals to jump-start the economy. Excerpts:
What needs to be done?
We need to put money in the pockets of people who are going to spend it. That means a broad set of tax rebates. The lower income the taxpayer, the better it is from a purely economic standpoint, because you get the highest spending out of that.
But we don't want it to just be a rebate to people who pay taxes because we also want to get the money to people who don't pay income taxes. This also means more money and time on unemployment compensation and food stamps. That both helps the victims of the negative economy and gets money spent.
Are you confident that the president and Democrats will find common ground by February?
I think it is very likely that we are going to pass a bill of about $145 billion—about 1 percent of GDP—that will get pumped very quickly into the economy. I believe we will pass a bill in February.
What I'm hoping is we can show people that we can have very serious disagreements between Democrats and Republicans, liberals and conservatives, on a whole range of issues and we can keep arguing about those, but we can still come together on a stimulus package. The president wants to do some business-oriented things—including perhaps depreciation tax breaks. And the administration doesn't want to increase unemployment compensation. But there is a deal in the works there.
What do you think of the proposal by Sen. Arlen Specter, Republican of Pennsylvania, to allow companies to deduct—or expense—a greater share of the value of an asset in the first year of use?
The administration is going to want some kind of business tax cuts. And something like that will be in the bill. Exactly how you do it in effect will be the administration's call.
Are there any tax breaks that you wouldn't support in this bill?
I don't think cutting the capital gains tax would be a very useful thing to do in the short term. And I wouldn't want to cut the top marginal income tax rate.... I don't think Bill Gates is going to spend a thousand bucks if I send it to him.
What about assisting state economies?
We have states that have some problems—state layoffs and cutbacks are coming. We want to provide some help. The best way to do that is increase the federal share of Medicaid. This frees up money that the states could then use for other things.
Will the stimulus package include measures to get to the root of the mortgage crisis?
We should put a housing stabilization package into the stimulus package. The House and the Senate have both passed bills that would get the Federal Housing Administration more actively into the subprime lending business as an alternative to the abusive loans. It's foreclosure avoidance—it doesn't cost money. We've already got a lot of House-Senate-administration agreement on that.
It also aims to get the market unstuck at the upper end. Right now it's hard for people to sell houses that cost more than $417,000, which is a lot of houses in California and some other places in America. So we would take the cap off what the FHA, Freddie, and Fannie could do in terms of upper income.
The administration has said to the lenders, don't raise the interest rates and don't reset the interest rate on these adjustable rates for five years. Well, now what you need to do is allow people to get out from under during those five years. So we can get them to go to the FHA and get a conventional mortgage that has mortgage insurance and they can get a lower interest rate. It's an increase in the cap in the upper limit.
In the Senate, Sen. Ben Nelson, Democrat of Nebraska, has proposed a temporary increase in the cap on state housing finance agency mortgage bonds so that state housing finance agencies can increase the number of loans they make to qualifying first-time homebuyers. What do you think of this?
It makes good public policy sense, but it may not have as immediate an impact as the Fannie and Freddie and FHA cap increase.