WASHINGTON, Oct. 2 (UPI) -- For the first time, a top Bush administration official told the Senate Tuesday that the nation is entering a recession as Democrats and Republicans in Congress agreed on the need for a stimulus package, but not on the scope of a plan.
Glenn Hubbard, chairman of the Council of Economic Advisers, told the Senate Budget Committee that though the physical damage from the Sept. 11 terrorist attacks was "horrible," that alone did not force the economy into a recession.
The disruption of the financial systems, loss of life and effect on commercial aviation sent an already teetering economy into a real slump, he said.
"These 'supply shock' consequences of the attacks substantially reduce the growth rate of GDP during the third and fourth quarters of 2001, and increase significantly the likelihood that the economy is in a recession," Hubbard said.
The long-term danger facing the economy is the effect the attacks will have on consumer confidence, Hubbard said.
"On the demand side, the attacks and their potential repercussions lowered household and business confidence about the future, and along with it their willingness to spend and invest," he said. "If the confidence effects are substantial, the attacks must necessarily shift our focus somewhat -- away from simply providing dollars to households, for example, and toward buttressing the confidence of households to make purchases out of those dollars."
To simulate the weak economy, lawmakers seem inclined to follow Federal Reserve Chairman Alan Greenspan's recommendation for a $100 billion rescue package. That package would include the $15 billion airline bailout and the $40 billion emergency spending bill passed to deal with the effects of the Sept. 11 terrorist attacks.
Committee Chairman Kent Conrad, D-N.D., expressed support for a stimulus package to help with both the recovery both from the attacks and for the economy.
"I believe the economic data will show that we need additional short-term stimulus to get this economy moving again, particularly following the Sept. 11 attacks," Conrad said. "But any stimulus measures must be coupled with long-term fiscal discipline."
Conrad led the charge of his fellow Democrats in accusing the administration of using Medicare and Social Security trust funds for tax cuts while the economy slowed. However, in light of the recent terror attacks, he admitted that such spending was needed.
But Conrad and other Democrats appear to disagree with some Republicans over the type and size of any stimulus package.
House Majority Leader Dick Armey, R-Texas, told reporters Tuesday, "We have a recession," and said he supported an immediate package of about $150 billion in additional tax credits and tax breaks, mostly for business investment.
But Conrad seemed to agree with last week's statements by Federal Reserve Chairman Alan Greenspan that the package should be around 1 percent of the overall GDP -- about $100 billion.
He was unsure, though, if Greenspan included the more than $40 billion that has been appropriated for cleanup and airline bailout efforts, as Conrad would prefer.
Democrats are pushing for protections for airline workers that were laid off in the wake of the attacks, expanded unemployment benefits and an increase in the minimum wage, while GOP lawmakers seem to prefer a series of corporate, capital gains and personal tax cuts to stimulate investment.
Even the administration seems more inclined to pursue this angle for recovery. Hubbard said that restoring consumer confidence includes taking steps to ensure security in commerce and finding a way to offset the new costs of such security.
As businesses learn, however, to incorporate new security and transaction costs in planning, they also need encouragement to expand.
"A reduction in corporate income tax rates raises cash flow for investments, employment and restructuring; if enacted for a significant period of time, such tax reductions will also reduce the present double taxation of equity-financed investment and raise equity values, reducing the cost of capital for investment and raising household net worth," Hubbard said. "In the non-corporate sector, similar benefits could be obtained by accelerating the reductions in marginal personal income tax rates recently enacted."
Hubbard did stress that despite the need for these measures, the recent attacks have done little to damage the overall health of the economy.
"The U.S. economy is very resilient, and, with prudent investments in security and public policies to promote confidence, I have little reason to suspect that the economy's long-time fundamentals have been shaken by the tragedy of Sept. 11," he said.
