View Full Version : U.S. Issues Democrats call for new stimulus

06-22-2011, 08:21 PM
* Biden group pushes ahead in deficit-reduction talks

* CBO says benefits will swamp economy in long term (Adds Baucus, other details)

By Richard Cowan and Andy Sullivan

WASHINGTON, June 22 (Reuters) - Democratic leaders called on Wednesday for new spending and tax cuts to boost the sluggish U.S. economy, setting up a fresh hurdle for bipartisan efforts to head off a government debt default this summer.

At the same time, a new report warned that the country could face a European-style debt crisis unless Washington cuts spending or raises taxes.

The report by the nonpartisan Congressional Budget Office adds urgency to the work of negotiators, led by Vice President Joe Biden, who are trying to find trillions of dollars in savings as part of a deal that would allow Congress to sign off on new government borrowing before the U.S. runs out of money to pay its bills.

As the group faces competing demands for stimulus and austerity, some have suggested that it may not be able to get a deal done in time to head off a debt default in early August.

Senate Democrats want the deal to include a payroll tax cut, more money for highway construction and clean-energy subsidies to bring down the 9.1 percent unemployment rate.

"Get the recovery right before you get in this deficit-cutting mode," Assistant Senate Democratic Leader Dick Durbin told reporters. "Get people back to work."

Republicans said that idea is not likely to go far in the Biden-led talks, which have largely focused on spending cuts.

"They're not talking about spending money in there," said Ryan Patmintra, spokesman for Senator Jon Kyl, one of two Republicans participating in the talks. Many Republicans view President Barack Obama's 2009 stimulus package as an $830 billion failure and say spending cuts would help the recovery.

Federal Reserve Chairman Ben Bernanke questioned that approach. "I don't think that sharp, immediate cuts in the deficit would create more jobs," he told reporters. "In the short run ... fiscal tightening is at best neutral and probably somewhat negative for job creation," he added.


As the United States struggles to emerge from the deepest recession since the 1930s, rising health costs and an aging population pose a longer term threat.

The CBO report found that public debt will exceed the size of the economy by 2021 unless lawmakers raise taxes or scale back benefits.

President Barack Obama is due to meet with Biden and top Democrats from the House of Representatives on Thursday morning to discuss the talks, the White House said.

The Biden group, which includes six Republican and Democratic lawmakers, is racing to complete a deal by next week but negotiators are at odds over the big-ticket items.

Republicans say they will not consider tax increases, while Democrats have said they won't back cuts to expensive health care benefit programs.

The group aims to reduce budget deficits by $4 trillion over the next 10 years to give lawmakers the political cover to raise the $14.3 trillion debt ceiling by a large enough increment to cover borrowing needs through the 2012 elections.

Treasury Secretary Timothy Geithner has warned that the country could default on its loans if Congress doesn't act by Aug. 2, a scenario that could push the country back into recession and upend financial markets.

Obama and House Speaker John Boehner, the top Republican in Washington, want the Biden group to wrap up its work next week to give them time to hammer out the final details. Any stimulus efforts could enter the discussion at that point, a congressional aide said.

The deal would then have to win approval from the Republican-controlled House and the Democratic-controlled Senate -- a tough task for party leaders. Many Republicans have said they won't back a deal unless it includes immediate spending cuts and advances a balanced-budget amendment to the Constitution, which would be unacceptable to Democrats.

Democratic and Republican leaders in the Senate say Congress may have to pass a short-term fix if the Biden group fails to reach a deal soon.

Durbin said Congress could pass a "serious down payment on the deficit" followed by more work on long-term savings.

Many in Congress do not want to focus on the issue longer than necessary. Senator Max Baucus, a Democrat involved in the talks, said a short-term fix was unlikely. "There will be an agreement," he said.

Investors say a temporary fix would likely cost the United States its coveted AAA credit rating, raising borrowing costs and hurting the fragile economic recovery.

Moody's main analyst for the United States Steven Hess told Reuters in an interview that a modest rise in the debt ceiling could be a sign that Washington's final budget agreement will not be enough to meaningfully cut the U.S. deficit.

(Additional reporting by Donna Smith, Deborah Charles Alister Bull and Steve Holland; Editing by Cynthia Osterman)


06-22-2011, 08:26 PM

Yeah, because the first one really worked miracles. By all means let's keep doubling down.

06-22-2011, 08:27 PM

The Mad Crapper
06-22-2011, 08:27 PM

06-22-2011, 08:47 PM
Thank God this has no chance in the House.

06-22-2011, 10:21 PM
The Economist magazine weighs in:

Buffers for the Flighty

ON BALANCE, I agree with the "it's insane" analysis offered by Matthew Yglesias of America's refusal to borrow money at historically cheap rates and spend it on infrastructure and other job-generating activities that will need to be undertaken eventually anyway. Certainly low demand isn't the only reason why unemployment remains stubbornly high in this recovery; in many sectors, technological change and globalisation have a lot to do with it. But technological change and globalisation have absolutely nothing to do with high unemployment in the construction sector. The people who build things in America will always be Americans, and there haven't been any revolutions in construction technology between 2007 and 2011 that have made it possible to build bridges, tunnels, trains, electric grids and highways with far fewer employees. The reason the construction sector is sitting on the couch playing with the Wii instead of out fixing America is that America isn't spending the money to do the fixing. America has a $2 trillion backlog of infrastructure maintenance, according to the Urban Land Institute. With the government able to borrow money at ridiculously low 10-year rates, it seems pretty convincing that we should be borrowing that money and spending it now, both to improve that infrastructure and to get the economy going.

(Insert sub-argument: yes, but infrastructure programmes take a long time to get underway. Response: did you or didn't you say this was structural unemployment that will take many years to resolve?)

On the other side of the coin, the global mood of eagerness to pay down debt in a highly risky economic environment makes a lot of sense. In an increasingly volatile economy, as (here comes my Thomas Friedman impression) a central banker told me yesterday, you need more buffers. For the past three years large businesses have been aggressively deleveraging to build up buffers and decrease their exposure to risk, and it's natural to feel like governments should be doing the same. Many certainly should. But unless I misunderstand things, the basic reason businesses need to deleverage is that they're exposed to the risk of higher costs that they can't pass on to their consumers. They may not be able to pass on costs to consumers because their competition would then eat them for breakfast. Or they may not be able to pass on costs because demand for their products is highly elastic, and people would just buy less of what they're selling.

The question is, though: is the American government like a business in this sense? Will creditholders begin to demand higher yields because they worry that, if things go pear-shaped, the government cannot pass on costs to consumers, viz raise taxes, should it need to? Creditholders certainly haven't demanded higher yields yet. And you can see why not. America is the world's largest economy. Its citizens are among the richest and least-taxed in the developed world. American citizens will not move to other countries en masse if taxes go up (the equivalent of "losing market share"), and citizens can't simply refuse to pay their taxes (the equivalent of "elastic demand"). Setting politics aside, there should be no question that the American government can "pass on its costs to consumers" if necessary. This ought to mean that debtholders will continue to trust the credit of the government, which should mean interest rates on its debt will stay low until growth picks up, which should mean that no extra tax increase to pay off debt will be necessary.

There is, however, a low but mounting level of anxiety amongst ratings agencies that in fact the American government will not be able to pass on costs to consumers. The reason is that one of the two political parties, and the voters who support it, appear unwilling to pass those costs on, and are sending ambiguous signals that they may default on debt obligations rather than do so. If ratings agencies downgrade America's debt because political unwillingness to pay the bills on time causes a temporary default, and this downgrade leads to higher yields on American bonds, which in turn requires higher taxes to pay off existing debt that would again be resisted by politicians, then I suppose you could see the government getting into real trouble. To the extent that I do worry that increasing America's debt to pay for infrastructure improvement now rather than later is a dangerous thing to do, it's mainly because I worry that political irresponsibility over making the payments on that debt could lead to problems. A household can safely carry a higher level of debt when both partners are responsible about paying their bills on time than when one is so flighty that it endangers the joint credit rating.


06-22-2011, 10:35 PM
So according to your article we'd all be fine if the mean and nasty conservatives were just willing to pay 80% in taxes to give $75k/yr government ditch digging jobs to everyone else?

06-22-2011, 10:42 PM
So according to your article we'd all be fine if the mean and nasty conservatives were just willing to pay 80% in taxes to give $75k/yr government ditch digging jobs to everyone else?

Yep, thats what it says. :rolleyes:

06-22-2011, 10:44 PM
Dems gotta give up huffin. Messes your head all up ya know?