Democrats Split on Stimulus as Job Losses Mount, Deficit Soars

By Matthew Benjamin

July 8 (Bloomberg) -- Democrats who control the levers of power in Washington are divided over whether to push for more deficit spending to end the recession and stem job losses, complicating the possibility of a second stimulus bill.

“We need to be open to whether or not we need further action,” House Majority Leader Steny Hoyer, a Maryland Democrat, told reporters yesterday. Senate Majority Leader Harry Reid of Nevada countered that “there is no showing to me that another stimulus is needed.”

President Barack Obama underscored the dilemma by addressing both sides of the argument. In an interview with ABC News yesterday, he said unemployment approaching 10 percent is something “we wrestle with constantly.” He added that spending more borrowed money is “potentially counterproductive.”

The split reflects two major challenges facing the Democrats: Record budget deficits that make additional spending much tougher to pass and a 26-year-high unemployment rate of 9.5 percent that is expected to rise to double digits.

“They’re between a rock and a hard place,” said Stuart Rothenberg, editor of the Rothenberg Political Report in Washington.

The U.S. economy lost 467,000 jobs in June, exceeding economists’ forecasts, while the federal budget deficit is projected by the Congressional Budget Office to top $1.8 trillion this year and $1.4 trillion in fiscal 2010. That’s provoked criticism of the $787 billion stimulus bill passed in February as either wasteful or not large enough.

Borrowing Surge

The Treasury is increasing debt sales to pay for the spending. After more than doubling note and bond offerings to $963 billion in the first half, another $1.1 trillion may be sold by year-end, according to Barclays Plc. The second-half sales would be more than the total amount of debt sold in all of 2008.

The U.S. should consider drafting a second stimulus package focusing on infrastructure projects because the bill approved in February was “a bit too small,” said Laura Tyson, an adviser to Obama during last year’s presidential campaign who now sits on the White House’s Economic Recovery Advisory Board.

Rhode Island Senator Sheldon Whitehouse, a Democrat whose home state has a 12 percent jobless rate, told ABCNews.com that a second stimulus is “probably needed.” Action by Congress would “probably take place towards the end of the year,” Whitehouse said.

With the White House and congressional Democrats focused on a major health-care overhaul and a climate bill, some lawmakers expressed pessimism about the likelihood of such legislation.

Deferring to Obama

“I’m not sure how you would do it,” said the Senate’s second-ranking Democrat, Dick Durbin of Illinois. He said he would leave any decision on the need for a fiscal stimulus to “the president’s evaluation.”

Republicans seized on the unemployment rate and job losses of about 6.5 million since the recession began in December 2007 as validation of their vote against the measure in February.

Senate Republican leader Mitch McConnell of Kentucky said in a floor speech yesterday that Democratic proponents of the stimulus program “over-promised on results and now their predictions are coming back to them.”

McConnell mocked the idea of another stimulus. He called it “mind-boggling” and a worse idea than the previous one, which he said “has been demonstrably proven to have failed.” He added, “There is no education in the second kick of a mule.”

Bernstein Defense

The White House dismissed calls to augment or alter the initial legislation.

“It’s working, it’s demonstrably working,” said Jared Bernstein, chief economic adviser to Vice President Joseph Biden, whose office is overseeing the rollout of the first stimulus.

Bernstein said about $200 billion of the $787 billion allocated in the bill has been obligated or spent, adding that the effects of the spending and tax cuts will continue to ramp up in the next few months.

“There is no conceivable stimulus package on the face of this earth that would fully offset the deepest recession since the Great Depression,” Bernstein said in a telephone interview yesterday.

The Obama administration may have to stick with that argument, as more spending is unlikely in the face of record deficits, said Stan Collender, a former House and Senate budget analyst.

“Adding additional spending or tax cuts right now would be very difficult,” Collender said. He added, however, that if the economy deteriorates, another bill to juice the economy may become possible.

“Right now it doesn’t seem to be justified,” said Collender, managing director of Qorvis Communications in Washington. “Come September, it might be.”

To contact the reporter on this story: Matthew Benjamin in Washington at Mbenjamin2@bloomberg.net