The messy fight over bank bailout funds will be the first test of strength for President-elect Obama.
Top Obama advisers met late Wednesday with Senate Republicans in hopes of defusing a messy fight over bank bailout funds — a first test of strength for the new president and his ability to deliver on his larger economic recovery plan.
Senate Majority Leader Harry Reid (D-Nev.) remains confident that Obama can win the crucial vote, which could come as early as late Thursday or Friday. But Republican support for the Treasury program has plummeted, and Democratic freshmen — who campaigned against the rescue effort in the fall — could be required to step in to help Obama.
“Circumstances have changed,” Sen. Tom Udall (D-N.M.) told Politico.
At issue is the release of $350 billion, the second half of the $700 billion Treasury rescue fund enacted in October to help stabilize credit markets. But more is at stake than just dollars.
Obama already has his eye on a much larger economic recovery plan approaching $850 billion. Anxious Democrats have warned labor allies that if the incoming president loses on this round, it will endanger both the stimulus bill and separate legislation making it easier for unions to organize workers.
The president-elect is slated to tour an Ohio manufacturing company and speak on his recovery plan on Friday, by which point Democrats hope to have completed a draft of their two-year package to go before House and Senate committees next week.
House Speaker Nancy Pelosi (D-Calif.) still hopes to uphold a cap in the vicinity of $850 billion or slightly lower, and the tax cuts included will probably be somewhat less than the 40 percent share envisioned by the Obama team. After a leadership meeting Wednesday, it appeared less likely that the bill will include a costly $70 billion provision related to the alternative minimum tax. But Democrats predicted that an Obama-backed business tax break allowing an accelerated write-off of a company’s net operating losses will survive, despite criticism from some liberals.
“We have to make choices as to what creates the most jobs. That’s the standard: Create jobs, grow the economy,” Pelosi told Politico. “We have to go with our first priorities, which are investments and those tax credits and tax cuts that help middle-income people and stay within our cap.”
“If we do all of that, then we can decide what else we can do,” she added.
State aid commands an ever-increasing share of the package, which will use health care and education programs to pump tens of billions of dollars to governors struggling with their own deficits and layoffs.
An estimated $90 billion would help reduce the cost of Medicaid, the joint federal-state health care program for the poor and disabled. And another $80 billion in funds would be channeled to states and localities with the requirement that at least 60 percent goes for education.
The massive government intervention bets heavily on the economic theory that by pumping up demand, Washington can create jobs to stave off rising unemployment. But given the economy’s condition, Obama has warned that the jobless rate will still grow in the coming months, and a big part of the package includes new health and unemployment benefits for those thrown out of work.
The current program of extended unemployment benefits will be authorized through the end of 2009, and Pelosi is pressing for what could be up to a $50 increase in the weekly benefit. An estimated $20 billion is budgeted for increased food stamp and nutrition spending, and about $35 billion is allocated to preserve some health insurance coverage for those who have lost their jobs.
Many of these expenditures are unprecedented in scale. It’s estimated that total federal aid to education could increase by as much as $140 billion over two years, virtually doubling the annual rate today.
But the same investments could help Obama navigate between the Wall Street vs. Main Street politics that so dominated last fall’s debate over the financial rescue package. Congress was urged then by Treasury Secretary Henry Paulson to make the $700 billion commitment to avert a credit meltdown, but voters were angered by the cost and the failure to do more to help homeowners deal with the threat of foreclosure.
Thirty-four Senate Republicans, led by Minority Leader Mitch McConnell of Kentucky, were pivotal to passing the bailout bill in October, but the mood has soured dramatically since November’s elections.
After a tough campaign in Kentucky, McConnell returned to Washington in a much more skeptical frame of mind. In a speech Wednesday on the Senate floor, he warned he would “find it exceedingly difficult to support additional taxpayer funds without serious assurances from the incoming administration that the taxpayers will be protected.”
Those remarks set the stage for Obama to send his senior economic adviser, Lawrence Summers, as well as the incoming White House chief of staff, Rahm Emanuel, to meet with Senate Republicans in the late afternoon. In the time remaining before the floor vote, a key issue will be how far Obama will go to assure Republicans that he won’t use the Treasury funds as a tool for industrial policy.
Many, like McConnell, were upset when the outgoing Bush administration reversed itself and tapped Treasury funds to help Detroit automakers facing bankruptcy. Sen. Judd Gregg (R-N.H.) said Bush’s decision opened a Pandora’s box for conservatives. Prodded by Gregg, Summers and Emanuel emphasized that Obama had no desire to expand Treasury’s commitment to new industries.
“It hopefully gave people some comfort,” said Gregg, who has been a valuable ally for Obama given his standing on fiscal issues. “They made very clear that they aren’t going to use [the Treasury] money outside the financial industry except for what’s committed to auto and maybe something additional under a major reorganization plan for auto.”
Summers and Emanuel left without comment, but McConnell said he would also want something beyond closed-door assurances from the administration. And a second decisive vote could come from Arizona Republican Sen. John McCain, Obama’s defeated presidential rival.
Much as this is a first test for Obama, it could also be a first test of that relationship with McCain. The Arizonan’s office refused to comment on his stand, but Gregg said hopefully of McCain: “When I last asked him, he said he was still listening.”