The head of the Senate Budget Committee said he doubts President-elect Barack Obama’s $825 billion economic stimulus package will create as many jobs as promised because it won’t do enough to unlock credit markets.

Senator Kent Conrad, a North Dakota Democrat, said his committee projects the plan will reduce the unemployment rate by “maybe” 1 percent, or about half of the 3 million jobs Obama has said the plan would generate.

While the stimulus plan is about the right size, the proposed $140 billion payroll tax cut is “not a particularly good idea” because it won’t do enough to boost consumer spending, Conrad said in an interview with Bloomberg Television’s “Political Capital with Al Hunt,” scheduled for broadcast today.

Even so, Conrad said it’s “critical” that lawmakers press ahead with the stimulus, in the face of record deficits, to avoid “a second Depression.” The Senate, therefore, is likely to go along with the payroll tax provision, he said.

To resolve the banking crisis, “we have to seriously consider bolder, more far-reaching steps,” the senator said. Policymakers should consider a “good bank, bad bank” plan to boost lending at troubled institutions by moving toxic assets from them to other banks that would have to “work through those bad assets,” he said.
The government should insist that banks receiving federal funds not use taxpayer money to buy other healthy financial institutions, the senator said.

‘Long-Term Imbalances’
Once Congress completes work on the stimulus, lawmakers also must “face up to our long-term imbalances” through the tax code and changes in the quickly growing Social Security and Medicare entitlement programs, he said.

The stimulus plan announced yesterday by House Democrats aims to help lift the economy out of recession through tax cuts for families and businesses and a half-trillion dollars in new government spending. More than half of the tax cuts would be provided through a $500 payroll tax cut for individuals and $1,000 for families.
The plan would add to the $1.2 trillion deficit the government was already projected to run this year.

The payroll tax provision won’t boost consumer spending because “when people are afraid of losing their job, if they get additional money because their withholding is reduced, they tend not to spend it — they tend to save it,” Conrad said.

Still, the Senate probably won’t change those provisions because lawmakers want to “signal to the middle class that we recognize how hard-pressed” they are, the senator said.

Conrad praised the proposed waiver of a requirement that homebuyers receiving a special $7,500 tax credit eventually pay the money back because “housing still remains at the centerpiece of this crisis.”

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