Democrats call for stimulus spending

DEBT DEFAULT WORRIES::The US Treasury secretary said the country could default on its loans if Congressional officials can’t overcome a budget impasse by Aug. 2

Reuters, Washington

Fri, Jun 24, 2011 - Page 7

Democratic leaders called on Wednesday for additional spending to boost the sluggish US economy, setting up a fresh hurdle for bipartisan efforts in Washington to head off a government debt default this summer.

Democrats’ demand for new stimulus spending is at odds with the work of negotiators, led by US Vice President Joe Biden, who are trying to find trillions of dollars in savings as part of a deal that would allow the US Congress to sign off on new government borrowing before the US runs out of money to pay its bills.

Those talks, which resumed on Wednesday, have largely focused on spending cuts over the next 10 years. Senate Democrats want the deal to include more money for highway construction, a payroll tax cut 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. Let’s start moving in that direction.”

Republicans, who favor deep spending cuts, said that idea was not likely to go far in the Biden-led talks.

“They’re not talking about spending money in there. That’s not what they’re trying to do,” said Ryan Patmintra, spokesman for Senator Jon Kyl, one of two Republicans participating in the talks. Many Republicans view US President Barack Obama’s 2009 stimulus package as an US$830 billion failure.

However, as negotiators met for the second day this week, US Federal Reserve Chairman Ben Bernanke called into question a key part of the Republican approach for healing the economy.

“I don’t think that sharp, immediate cuts in the deficit would create more jobs,” Bernanke told reporters.

“In the short run ... fiscal tightening is at best neutral and probably somewhat negative for job creation,” he said.

The conflict between stimulus and austerity underscores the precarious state of US finances.

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 healthcare benefit programs.

The group is trying to find a way to reduce stubborn budget deficits by US$4 trillion over the next 10 years to give lawmakers the political cover to raise the US$14.3 trillion debt ceiling by a large enough increment to cover borrowing needs through next year’s elections.

US 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 of Representatives Speaker John Boehner, the top Republican in Washington, want the Biden group to wrap up its work by Friday next week to give them time to hammer out the final details. Any new 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 of Representatives and the Democratic-controlled Senate — a tough task for party leaders.

Some Republicans have suggested that Congress may have to approve a short-term fix if the Biden group fails to reach agreement soon, which would allow more time to reach a broad deal to help ensure the budget gets under control.

Durbin told reporters he thought that effort could become a “two-step” process containing a “serious downpayment on the deficit” followed by more work on long-term savings.

However, others in Congress do not want to focus on the issue any longer than necessary, particularly in an election year.

Investors see a temporary fix that delayed a long-term budget plan until next year as a bad move.

They said it would likely cost the US its coveted “AAA” credit rating, raising borrowing costs and hurting the fragile economic recovery.