Obama’s Stimulus Plan Backed by Promises of Fiscal Restraint & Tax Cuts

By , Contributing Writer, Money Morning •

By Don Miller
Contributing Writer
Money Morning

President-Elect Barack Obama headed to Capitol Hill yesterday (Monday) to meet with House and Senate leaders to push for quick action on his broad economic stimulus package that could cost as much as $775 billion. 

But in a concession to his need for bi-partisan support to pass any package, Obama promised "radical reforms" to impose more control over the federal budget in the future, The New York Times reported.

Republican leaders have already started voicing criticism of the recovery plan, offering their own ideas about what it should contain. Obama aides hope to soften the perception of the plan as an "open checkbook" by focusing more on tax cuts than on spending. 

To firm up support among Congressional skeptics worried that Obama was too focused on government spending, Obama's team revealed the package will devote about 40% to tax cuts, costing roughly $150 billion. The package will also include more than $100 billion in tax incentives for businesses to create jobs and invest in equipment or factories,

U.S. Sen. Mitch McConnell, R-KY, proposed that any money distributed to the states be provided as loans rather than outright grants.

"Nobody thinks we ought to be spending this money on things like mob museums and waterslides," McConnell said on "This Week" on ABC. "And if the money were lent rather than just granted, states would I think spend it wisely, and the states that didn't need it at all wouldn't take any."

Republicans were more likely to favor tax relief and tax credits as part of the economic measure, he said.

In a move to further assuage Republican fears about spending, Obama will use his public events this week to showcase his plans to put tight controls on the budget down the road.

Obama's plans call for a new focus on controlling Pentagon contracting and aid to American corporations, among other areas. To insure a more efficient government, he will appoint a chief performance officer and a chief technology officer tomorrow (Wednesday), aides said.

But not matter what shape it takes, the package - dubbed the "American Recovery and Reinvestment Plan" - isn't likely to land on Obama's desk before mid-February. Obama had hoped to have Congress enact the recovery plan in time for him to sign when he takes office Jan. 20. But even his spokesman, Robert Gibbs, conceded Sunday night that this optimistic scenario was "very, very unlikely."

"We don't anticipate that Congress will have passed, both houses, an economic recovery agreement by the time the inauguration takes place," Gibbs said.

But Obama's team continued to press for swift action, saying the dismal state of the economy demands that Congress expedite the matter. 

"There is no short run, other than keeping the economy from absolutely tanking. That's the only short run," Vice President-elect Joseph R. Biden Jr. said on "This Week."

Added Biden: "We've got to begin to stem this bleeding here, and begin to stop the loss of jobs and [start] the creation of jobs."

The Obama transition team is searching for the best way to get tax credits into Americans' pockets quickly to help stimulate spending, but without using rebate checks like those that were issued last year as part of the Bush administrations stimulus package.

Instead, they are discussing a retroactive credit for the 2008 tax year and revised withholding formulas, meaning U.S. workers would see the actual benefits in their paychecks.

The package will likely include tax cuts of $500 to $1,000 for individuals and couples, as well as some $200 billion to help revenue-starved states pay for Medicaid programs for the poor. Major new spending would go to infrastructure projects - some on old-fashioned road-and-bridge repairs, and some going to Obama's pet issue: Renewable energy.

In a related development yesterday, the dollar rose to a three-week high against the euro and rose versus the yen on speculation the fiscal stimulus will help the U.S. economy recover from recession sooner than others, according to Bloomberg News.

"I do expect the euro-dollar to fall further," said Sebastien Galy, a currency strategist at BNP Paribas Securities SA (OTC ADR: BNPQY) in New York. "It's really a question of where you will get most of the return for your money. It does seem that we'll see stabilization in the economic downturn first in the U.S."

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