Senate Budget Committee Weighs Deficit Impact Of Financial Stimulus

Wed. November 19, 2008; Posted: 04:47 PM

(RTTNews) - The Senate Budget Committee heard arguments Wednesday in favor of short term spending to get the economy back on track as well as a long-term plan to reduce the national deficit.

Although panelists argued that deficit spending is forgivable in light of the current financial crisis, committee chairman Kent Conrad (D-ND | Quote | Chart | News | PowerRating) argued that it is important that congress demonstrate a commitment to paying down the rapidly-expanding national debt.

Washington has been in hyper-spending mode recently, as Congress passed a $700 billion financial rescue package in early October and there is talk of a second economic stimulus to lift the economy out of the doldrums of recession.

However, while some economists say the wild spending is warranted, Conrad warned that it could have dire consequences if not reined in.

"If we don't send a signal and begin a process to get us back to fiscal responsibility, we will risk losing credibility" from nations we borrow from, Conrad said.

However, the severity of the current economic crisis led some economists, including Nobel prize winner Paul Krugman and Moody's Economy.com chief economist Mark Zandi to push Congress to approve a second fiscal stimulus to avoid a possible depression.

"Without fiscal stimulus, the recession will last throughout 2009 and much of 2010," Zandi said. "It's not in the league of the Great Depression, but it's certainly the most severe we've seen since that dark time."

Without such a stimulus, unemployment could soar to 10 percent by the end of 2010, Zandi warned, up from its current level of 6.5 percent. He proposed a $400 billion stimulus package that would aid suffering state and local governments, improve infrastructure, and extend jobless benefits and programs, like food stamps, to help workers facing layoffs as GDP declines.

Conrad said that long-term debt reduction should happen alongside any additional stimulus for the economy. His concerns were not unnoted by the economists, who said that long-term goals should be focused on reducing the national debt.

"Flagrantly ignoring a trillion-dollar deficit is a concern, it's a major concern," Stanford University economist John Taylor said. "You have to be thinking about a glidepath to get back to stop deficit spending."

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