White House's Romer: Stimulus may pack more punch

ARLINGTON, Virginia (Reuters) - The U.S. stimulus package may pack a big punch in the current crisis because households and businesses struggling to get credit are more likely to spend the money, a top White House adviser said on Tuesday.

"I think it is possible that fiscal policy will have even more 'oomph' in this situation," Christina Romer, who heads the Council of Economic Advisers, told an economics conference.

"When households and businesses are liquidity-constrained by reduced lending, any money put in their pockets is more likely to be spent," she said.

Romer's academic research into the effects of stimulus is widely cited, and her work has shown that a permanent tax cut of 1 percent of gross domestic product raises output by between 2 and 3 percent over the next three years.

But many economists have expressed concern that the current stimulus package would have only a modest impact on 2009 growth, and consumers would be inclined to pocket tax cuts as they try to rebuild savings wiped out by falling real estate and stock markets.

Romer brushed aside worries that investors would eventually balk at cheaply financing U.S. borrowing, particularly after President Barack Obama forecast a record-large $1.75 trillion budget deficit for the coming fiscal year.

"There is no reason to think the government will have any trouble doing the borrowing needed to finance the (stimulus) package," she said. "Investors appear to be delighted to lend to the U.S. government at very low interest rates."

She said one of the most striking elements of the current recession was the steep drop in confidence. Much like President Franklin Delano Roosevelt's aggressive response to the Great Depression of the 1930s lifted consumer sentiment, Obama's response may have a similar effect, she said.

The stimulus package, coupled with efforts to shore up the banking sector and housing market, "may provide just such a Rooseveltian moment," she said. "We could see fiscal policy having more effect than usual by giving American consumers and producers the confidence and certainty they need to get back to spending and investing."

(Reporting by Emily Kaiser; Editing by James Dalgleish)