Mixed Messages: Administration Asks For More Stimulus

It was only last week that Treasury Secretary Tim Geithner said that the US economy was strong enough to weather the threat of a slowdown in Europe. That seemed improbable because of the size of US exports to the region and the Eurozone sovereign debt holdings of  US banks.

The Administration changed its message yesterday, as Lawrence Summers, the senior economic adviser to The White House, said that the US economy needed a “second stimulus” on top of the $787 billion earmarked last year. The FT reports that “The Obama administration made a strong plea to Congress on Monday to grit its teeth and pass a new set of spending measures.” The amount of the new package would be about $200 billion and would extend unemployment insurance and loans to small businesses. The Senate outlined its version of the bill on Friday.The request comes only three months after President Obama appointed a blue chip group to look for budget cuts. The commission is chaired by former Clinton White House Chief of Staff Erskine Bowles and former Republican Sen. Alan Simpson of Wyoming. While the Obama request for a “second stimulus” is now a fact, the recommendations of the new commission may be rejected or pushed to the side when they come out later in the year. It may be inconvenient to make too much of plans that would undermine the Administration’s stimulus philosophy

Congress may vote down or simply put off action on the spending request. The mid-term elections will be determined in part by the issue of deficit spending and the matching concern that taxes will eventually have to go higher to pay for the growing national debt. Those problems make the odds longer that Congress will approve a sweeping new spending bill.

The troubles in the US have begun to mirror problems in the European Union. The Administration and Congress are reluctant to increase the deficit and re concerned that the global capital markets will begin to reject America’s need for funds, which would drive the interest rates that the Treasury will have to pay in the future higher.

At the same time, the IMF and many economists say that the GDP expansion in developed nations will stall if governments do not continue to pump liquidity into the markets, help the private sectors with job creation, and fund public works projects. The success of China’s $585 billion stimulus program gives the argument some support.

Washington cannot have what are really two mutually exclusive goals.  One has to give way. Congress’s aversion to going to the public with plans to increase the deficit may decide the matter regardless of what the Administration wants.

Douglas A. McIntyre