States Exhale as $26 Billion Aid Package Passes Senate
Business + Economy

States Exhale as $26 Billion Aid Package Passes Senate

Just when it looked as if the government had been reduced to the role of helpless giant, incapable of doing anything more about the troubled economy and high unemployment, Senate Democrats scored a breakthrough Wednesday that now sets the stage for enactment of $26 billion of fresh aid to states. This will avert teacher and first-responder layoffs and plug gaping holes in many of the states’ Medicaid budgets.

Final Senate action on the measure could come as early as Thursday. Speaker Nancy Pelosi, D-Calif., meanwhile, has summoned House members back to Washington next week to take final action on the bill and send it on to President Obama for his signature ― a near-certain victory for Democrats to take into their summer break that runs through Labor Day.

“The view from the top of the mountain is always better.”

Democratic Sen. Sherrod Brown of Ohio called it one of the best days the Senate has ever had, while New Jersey Sen. Frank Lautenberg said that these victories “were steep climbs, but the view from the top of the mountain is always better."

But even as some giddily celebrated a 61-38 vote that broke a Republican filibuster of the package, frustrations remain that congressional leaders, the White House and the Federal Reserve couldn't do more to reduce a punishing 9.5 percent national unemployment rate.

“Things Left Undone”
In the year since Congress and President Obama rushed through a massive package of spending measures and tax breaks estimated at more than $800 billion, the public and many lawmakers have soured on stimulus spending. The unemployment rate has stubbornly hovered near 10 percent and polls show that many worry about a budget deficit that is likely to top $1.4 trillion for the second year in a row. The Federal Reserve has used just about all the tricks it has up its sleeve, as interest rates have plummeted to record lows and few ways remain for officials to spur the economy by manipulating the monetary levers.

“I can’t remember an August recess that coincided with such economic hardship in the country – with things left undone," said Ross Baker, a political science professor at Rutgers University, who suggested a New Deal-style public works program to add jobs. "The extension of the unemployment benefits was one thing, but there are people who used it all up, and many more will during the course of August.”

Now, the government appears to be bumping up against the limits of its power in dealing with the economy in an election year. In July, Congress reluctantly voted to extend emergency unemployment benefits after a bitter battle over whether they should be paid for. A far more ambitious package of stimulus spending, above $100 billion, that House Democrats passed last year eventually was whittled down to the $26 billion package awaiting further action in the Senate. This measure would provide $10 billion intended to prevent layoffs of teachers and other public employees, as well as $16 billion to continue a federal boost to states' Medicaid programs that began with last year's stimulus.

It took Democrats nearly six months to clear the latest war spending bill, which included money to fight domestic disasters. Stymied in the Senate, Democrats have also put off action on energy legislation, which they cast as a job creator, and a House-passed bill to support tax credits and a $30 billion loan fund for small business. That bill, supported by business groups, in the past would have attracted bipartisan support, but it is now bogged down in partisan warfare.

“I think the political concern about deficits is stifling any effort to consider a serious stimulus package,” said William G. Gale, a senior fellow in economic studies at the Brookings Institution. “And that’s a shame, because the best way to help the budget in the medium term is to stimulate the economy right now” and worry about deficit reduction later.

Unlikely Victory
At the height of the global financial crisis, the Federal Reserve and other central banks around the world took the largest monetary policy action in history in order to expand money supplies to avoid the risk of a deflationary spiral, in which lower wages and higher unemployment lead to a self-reinforcing decline in global consumption. The Fed has also cut its target for overnight interest rates, traditionally its key tool for influencing the economy, almost to zero. That has left the central bank with little room for further maneuvering. Some say that further reductions would do little to help the economy.

Fed Chairman Ben S. Bernanke recently told Congress that there are still some steps the Fed can take that would help, and that if the economy weakens, the central bank will consider action, although he offered no details.

The action on the money for states was an unlikely victory, as the two Republican senators from Maine joined Democrats to break the filibuster. Just last week, Obama spokesman Robert Gibbs said that the White House had squeezed all the stimulus it could out of Congress. And Democrats had shifted their vision to a longer-term effort to strengthen manufacturing.

But with the unemployment benefits extension added in, their accomplishments total $60 billion in stimulus in just the past two months, along with an earlier $15 billion bill to encourage small business hiring. Several Democrats said they had to do a better job of selling their record, which includes the recent health care and financial regulation laws.

"We're this party of melancholy, you know, kind of hangdog," said Senate Banking Committee Chairman Christopher Dodd, D-Conn. "This has been an incredible Congress. I've never served in a more dynamic process, where more has gotten done."

That's a point even some Republicans concede. "We've won a lot of arguments; we haven't won a lot of votes," said Sen. Lamar Alexander, R-Tenn., who also predicted a more Republican Senate next year. "I think in the new Congress we'll win more of the votes."

The aid to states was fully offset with cuts and tax hikes elsewhere — a key Democratic move to counter the GOP charge that their spending would add to the deficit. This bill was offset in part by rolling back food stamp benefits. Without the additional aid, many states would be facing immediate budget crises this summer and fall. Some 30 states counted on Congress continuing aid to Medicaid in their budgets, money that makes up an average of 4 percent of states' general funds.

"It's hard to understand the reluctance of our friends on the other side, because everybody has an interest there," Lautenberg said. "But the electronic bracelet that they're forced to wear gives them shocks if they disagree."

Sen. Jon Kyl, R-Ariz., said spending that began with the stimulus should not be made permanent, and that extending it only postpones states' day of reckoning with longer-term budget problems.

"A lot of people said when the stimulus was passed, 'Beware, they'll be back for more money,'" Kyl said. "It just postpones the time that states have to get serious about finding ways to reduce their budgets." Kyl said that, as an example, his home state should cut back the Medicaid benefits it extended to the poor under the stimulus, but that more funding only fed those programs.

"We would like to have the ability to dial that back down, if that’s possible, but you can't do that if you accept the [Medicaid] money," he said.

“If we don’t get the economy going, we’re never going to get the deficit in place,” said Gale of Brookings. “So we need to stimulate now, but the public debate seems to be confused about whether we stimulate or cut. The answer is we do both, but we do them at different times. We stimulate now and we cut later.”