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 Richmans' Trade and Taxes Blog

Senate only passes a quarter of Obama's $266 billion stimulus
Howard Richman, 6/19/2010

Congress is starting to lose its enthusiasm for failing stimulus plans. Washington Post staff writer Lisa Montgomery reports (Election-year deficit fears stall Obama stimulus plan) that the Senate just recessed after only passing a quarter of President Obama's latest $266 billion stimulus plan:

Congress has delivered only about a quarter of the $266 billion in "temporary recovery measures" the president sought in his February budget request and ignored much of the rest. There is unlikely to be another "recovery" check for Social Security recipients. Come December, Obama's "Making Work Pay" tax credit -- the signature initiative he regularly touts as a tax cut for 95 percent of Americans -- will probably be gone.

Even the state aid that Obama last week called critical to preventing the layoffs of hundreds of thousands of teachers and other government workers is foundering. After days of talks, frustrated Democratic leaders in the Senate failed again Thursday to muster the 60 votes needed to approve the cash and left town for the weekend with no clear path forward.

Meanwhile, in a recent Wall Street Journal commentary (U.S. Debt and the Greece Analogy) former Fed Chairman Alan Greenspan predicted that our continued deficit spending will eventually cause a rapid rise in the interest rate that the United States government must pay. 

Such a rise would make the budget deficits grow, requiring even more borrowing, causing higher interest rates, perhaps producing a vicious cycle that could cause a dollar crash and a U.S. government default.

It is hard to blow up the economic tire without patching the trade deficit leak. As Congress pumps up aggregate demand with stimulus plans, the trade deficit lets it out. The most recent reports show the trade deficits growing and the economy stagnating.

In a recent commentary (New Balances will Threaten Global Recovery), the Peterson Institute's Fred Bergsten predicted that the growing trade deficits will continue to require economic stimuli in order to prevent recession. He wrote:

Along with the large surpluses of China and other Asian countries, the new European surpluses will probably double the American current account deficit beyond its previous record of $800bn in 2006. The US could then maintain its recovery only by continuing to run large budget deficits and again tolerating debt-financed consumer demand....

Not only is the strategy of pumping up the economy without patching the trade deficit leak not working, it is risking disaster. There is an obvious solution that WTO-compliant Import Certificates makes possible: PATCH THE LEAK!