How Obama Will Stoke the Economy

He may spend up to $500 billion on stimulus. Lobbyists are already angling for a piece of the action

By Jane Sasseen

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Obama and Pelosi: Business wants a cut in the Social Security tax rate Mark Wilson/Getty Images

Christmas in January?

It increasingly looks that way. For all the talk in recent weeks that Congress, the White House, and the incoming Administration might agree by late November on another extensive stimulus package, prospects are fading for any but the most minimal aid being passed by Thanksgiving. The real action will happen—and the real money will flow—come January, when President-elect Barack Obama takes over.

Obama's aides have begun working on a plan to spend up to $500 billion in new funds if the economy continues to worsen. That's well over the roughly $300 billion House Speaker Nancy Pelosi (D-Calif.) had initially considered for a new package—a figure that had been viewed as the outside limit until now.

Economists, including Goldman Sachs' (GS) Jan Hatzius and New York University's Nouriel Roubini, have been arguing in recent weeks that even $500 billion—almost 4% of U.S. gross domestic product—will not be enough to pull the economy out of its nosedive. That's because GDP is poised to contract by an annualized 3% in the fourth quarter and a further 1.5% in the first quarter of 2009, pushing joblessness toward 8% next year. "If the sense of crisis continues to grow, Obama will have a lot more leeway to be bold," says Robert Reich, an Obama adviser who served as Labor Secretary under Bill Clinton and is a veteran of many budget battles from that era. "Even fiscal conservatives will come around."

So far, of course, they haven't. With hopes for a larger November stimulus dashed, Pelosi now is trying to put together a more limited stimulus package on the order of $60 billion to $100 billion. The White House is refusing to go along, however, arguing that much of the money would simply go to pork. The Administration also is focusing on Treasury Secretary Henry Paulson's new strategy, announced Nov. 12, to direct a big chunk of his $700 billion bailout fund at the troubled market for consumer debt, nonbank financial companies, and homeowners facing foreclosure.

That means many of the items on the Democrats' wish list will have to be deferred to January, when the party will control both the White House and Congress. "Everyone knows that the January bill will be the one train leaving the station," says Daniel Clifton, head of Washington policy research for Strategas Research Partners.

So what is likely? A big batch of infrastructure spending clearly is on the way. Obama and the Democratic leaders believe there are tens of billions' worth of projects that could quickly be tackled to bolster crumbling roads, bridges, and airports while at the same time creating hundreds of thousands of jobs. An additional $50 billion or so could go to states directly, helping to plug the budget shortfalls many are now facing. Obama also wants to follow through with campaign promises to invest in alternative energy and health care, so such spending could be repackaged as necessary to help jump-start the economy.