Congress and Wall St. pivot on economy

Times Staff Writers

As the increasingly troubled economy emerges as the trump issue of the 2008 political season, senior congressional Republicans said Wednesday they would put aside demands to make President Bush's tax cuts permanent if that was what it took to get quick action on a stimulus package.

Democrats, meantime, signaled they too would consider compromises in the interest of fast action, such as reining in some social spending they might otherwise push for and accepting inclusion of business tax incentives in the bill.

"I think there is a way to come to an agreement," House Minority Leader John A. Boehner (R-Ohio) said in an interview. "Not having an agreement is a lose-lose."

The White House has not addressed the issue in detail, but Bush, who has been traveling in the Middle East, is scheduled to hold a conference call today with congressional leaders. To avoid a veto, they hope to get his nod in advance on the outlines of a plan that would probably include a $500 rebate check for taxpayers, extended unemployment benefits for the jobless, and incentives for businesses to expand and create jobs.

The president also has invited congressional leaders to the White House for a meeting Tuesday. And Federal Reserve Chairman Ben S. Bernanke is expected to add his voice to the support for stimulus when he testifies on the Hill today.

The sudden unanimity on the need for action, standing in sharp contrast with the ideological deadlock and partisan jockeying that have characterized Washington for more than a year, reflects a confluence of developments that threaten trouble for both parties.

On the political front, exit polls in Michigan's GOP presidential primary Tuesday showed that economic anxiety outstripped all other issues on voters' minds. Former Massachusetts Gov. Mitt Romney won in Michigan after setting aside conservative orthodoxy and vowing to play a highly active role as president to set the nation on the road to prosperity.

With presidential tests looming in Nevada, South Carolina, Florida and other states where economic distress is evident, candidates in both parties have ratcheted up their expressions of concern and rushed out their own stimulus proposals.

A stream of unwelcome economic data has added to politicians' sense of urgency. The Labor Department announced Wednesday that consumer prices rose 4.1% last year -- the fastest in 17 years -- led by soaring gasoline costs and higher prices at the supermarket. Average wages, meantime, recorded a slight drop when adjusted for inflation. Earlier this month, the department reported unemployment had hit 5%, the highest rate in two years.

Economists consider the dual ills of rising inflation and rising unemployment to be the worst situation policymakers can face, because the cure for one -- increasing fiscal spending or the money supply to spur job growth -- can stimulate further price increases.

A member of the GOP rank-and-file, Rep. Lee Terry of Nebraska, expressed the feelings of both parties when he said: "People expect us to act." If Democrats and Republicans can get together, he said, it will "let people know we can do something here."

Perhaps the most striking illustration of how much these developments were changing the atmosphere on Capitol Hill was the readiness of Republicans to step back from their long insistence that Congress make the Bush tax cuts permanent. Such tax cuts have been central to GOP economic policy for more than two decades.

Now Republican leaders say they are ready to put off action.

"It's impossible for me to believe that [permanent tax cuts] would be part of the agreement, as much as I would like to see that happen," Boehner said.

Republican leaders met privately with House Speaker Nancy Pelosi (D-San Francisco) on Wednesday to discuss stimulus ideas -- a meeting Boehner described as his first policy get-together with her since Democrats won control of Congress in November 2006.

While yielding on the Bush cuts, Republicans said they would insist that Democrats not include new taxes as part of the package and that they try to hold the reins on some social welfare spending.

House Minority Whip Roy Blunt (R-Mo.), who attended the meeting with Pelosi, revealed no details of the talks but said he and Boehner had "made clear that Republicans are interested in working toward an agreement on a short-term stimulus package."

"But we were equally clear that hard-working middle-class families must not be burdened with new taxes or wasteful spending if any such plan has a chance of becoming law," he said.

Democrats say they are mindful that the president wields a veto pen and that their Senate majority is thin. If they want to avoid the kind of extended tug-of-war they had with Bush over Iraq war funding last year, Democrats will have to get him and his Republican allies on board in advance.

"This will need an unusual level of bipartisanism," said Jim Manley, staff director for Senate Majority Leader Harry Reid (D-Nev.).

Some Republicans acknowledged that the emerging shape of the stimulus legislation made it more likely that the president -- who mentions the issue at every opportunity -- would not get his tax cuts extended before he left office.

"If they don't get it in the stimulus package, they are not likely to get the Bush tax extension this year," said Bill Frenzel, a former Republican congressman from Minnesota and longtime member of the House Budget Committee who is now a guest scholar at the centrist Brookings Institution.

For their part, Democrats indicated that they were likely to set aside "pay-go" standards under which they have pledged to offset any new spending with revenue increases or cuts elsewhere. Keeping the economy growing and stemming job losses are higher priorities in the short term than worsening the federal budget deficit, they indicated.

There is "a growing consensus that this is not the time for pay-go, because you want to inject money into the economy," said Sen. Charles E. Schumer (D-N.Y.), chairman of Congress' joint economic committee.

Despite the new urgency, both parties see opportunities to score partisan points on the economy.

Democrats, including Schumer, say that to stimulate the economy, it makes the most sense to give money to people who need it the most and will spend it right away. For example, they favor extending unemployment benefits in hard-hit areas.

But Republicans, wary of expanding government entitlements even temporarily, favor tax incentives to businesses to help them create more jobs.

Conservatives angered over Democrats' opposition to previous tax-cut proposals noted that new spending enlarges the federal deficit just the same as new tax cuts, which Democrats long have opposed.

"The Democrats have been preaching, 'We can't do anything to increase the deficit.' Now it appears they've kind of thrown that by the wayside," said Rep. Jeb Hensarling (R-Texas), leader of a group of House conservatives.

To get the Republican support they need to pass a bill, Democrats may need to give greater weight to tax incentives and less weight to social welfare spending than they might otherwise want.

Schumer said such compromises would be better than delay, in large part because economists say a stimulus package has to be enacted fast or it will have little effect.

"If this isn't done in the first quarter -- finished, signed, sealed and delivered and already going into effect -- it may be too late," he said.

Neither party looks forward to running for election in the fall with the economy in the dumps, but the prospect may be especially unwelcome for congressional Republicans.

"Bad economic times almost certainly work against the party of the president," said Thomas Mann of the Brookings Institution, who studies the relationship between Congress and the White House. "For Bush to block it would make a drubbing only more likely for the Republican candidate for president."

Fed Chairman Bernanke visited Pelosi in her office Monday to discuss a need for economic stimulus; he signaled last week that the central bank was increasingly worried about an economic downturn. Some analysts said his remarks suggest the Fed is going to make a bold, three-quarters-of-a-point interest rate cut at its next meeting on Jan. 30.

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maura.reynolds@latimes.com

richard.simon@latimes.com

Times staff writer Noam N. Levey contributed to this report.

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