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Does U.S. need another round of stimulus?
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08:29, July 08, 2009

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If asked a few months ago whether the U.S. economy needed another round of stimulus, many economists and politicians would have said no.

But with unemployment continuing to rise, some are calling for a second injection of funds to jumpstart the economy.

In February, U.S. President Barack Obama signed into law the 787-billion-U.S.-dollar American Recovery and Reinvestment Act in a bid to create 3.5 million jobs and stymie the toughest recession in decades.

Jobless rates, however, are still rising in spite of the act. The U.S. Department of Labor announced Thursday that unemployment rose to 9.5 percent in June -- or around 14 million people out of work -- from 9.4 percent in May. Many experts predict figures could reach 10 percent.

Vice President Joe Biden on Sunday raised speculation over whether a second stimulus could be on the horizon when he said the Obama administration underestimated the recession's depth.

"We misread how bad the economy was," he said on "This Week," a TV talk show.

When asked whether an additional stimulus package was needed, he said it was "premature to make that judgment" but did not rule out the idea.

The administration will continue to monitor the funds' effects during the next few months as they work their way through the economy, he said.

There is, however, some support among House Democrats for a fresh package.

A House Democratic staffer told Xinhua, "Additional stimulus funding has some support, especially among many progressive representatives."

But there is a general sense that the initial stimulus plan is starting to work now and will continue to be effective as more of the money is spent in the months to come, the staffer said.

Many members of Congress are willing to give it more time, but they will be keeping a watchful eye on the unemployment numbers and other economic indicators, the staffer said.

"If more assistance is needed, additional stimulus funding is possible," the staffer said.

For their part, Republicans may support a new stimulus bill, as long as it does not resemble the first one.

House Minority Whip Eric Cantor, R-Virginia, said on Monday that Republicans would work with Obama on a second bill if it contained the heavy tax cuts the GOP originally proposed.

Cantor's statement comes amid mounting criticism of the first stimulus for not yet delivering the jobs it promised.

House Minority Leader John Boehner, R-Ohio, pointed out that the Obama administration vowed to halt unemployment before it passed the 8 percent mark.

But Boehner's state has yet to see one single contract related to the infrastructure spending that the stimulus promised, he said.

"This was supposed to be about jobs, jobs, and jobs. And the fact is it turned into nothing more than spending, spending and more spending on a lot of big government bureaucracy," he told FoxNews on Sunday.

Many conservatives are wary of another bill that would amount to what they view as a waste of taxpayers' funds. They see tax cuts as the solution, rather than more spending. Others are wary of the government's ability to find a way out of the recession and say it should have been left up to the economy's invisible hand.

Economists have differing views.

Heidi Shierholz, economist at the Economic Policy Institute, a Washington, D.C. think tank, is in favor of a second round of spending.

"The evidence of the need for another round of stimulus is overwhelming," she said, adding that any new package should be as large as the last one.

When the first stimulus bill was being debated, few predicted unemployment would reach such record highs, she said.

But once those funds were disbursed, the economy slid fast and the nation soon lost twice as many jobs as the package sought to generate, she said.

The bill also failed to account for the additional monthly demand for 127,000 new jobs for recent high school and college graduates, she said.

Other economists recommend a new package on grounds that most of the first stimulus has already been spent.

Dean Baker, co-director at the Center for Economic and Policy Research, a Washington, D.C. think tank, said most of the moneys went to tax cuts, unemployment benefits and state and local governments.

"So the amount of money left is not large enough to have all that much impact," he said.

Another round of 450 billion dollars a year for two years is necessary -- and that is a conservative estimate, he added.

"It's the only thing that can boost the economy," he said.

Others, like Biden, maintain that the funds from the first stimulus have not yet kicked in.

Ben Carliner, director of research at the Economic Strategy Institute, another Washington, D.C. think tank, said a new package could be necessary, but it is best to wait until the second half of the year to see how the funds take effect.

Other economists, however, see no need at all for an additional round.

Alan Viard, resident scholar at the American Enterprise Institute, a Washington, D.C. think tank, said government spending rarely helps pull the economy out of recession.

That is because timing is tricky and plans do not immediately take effect, he said. The first stimulus will add jobs, but not until the recession has already passed, he said. "In many cases in history, (stimulus packages) have taken effect after the economy has already recovered," he said.

But he added that this recession is unusual in its severity, and is one of the few in recent memory in which a stimulus is justified.

Others are wary of markets' reaction to more government spending.

Barry Bosworth, former presidential advisor and senior fellow at the Brookings Institution, a Washington, D.C. think tank, said he doubts whether a second bill will be enacted, as financial markets are concerned about large future budget deficits from the Obama administration's heavy spending.

Some economists are concerned that more government spending on top of an already record budget deficit -- expected to reach 1.8 trillion dollars this year -- could rattle investor confidence and even spur inflation.

Others, however, said some short term debt is not harmful, as economies must spend in order to reap long-term benefits.

Shierholz said, "The fact that we have a big deficit is a good thing. As far as turning this economic ship around, (spending) is exactly what we need to be doing."

"It's like spending money for college," she said. "It pays off in the long run."

Some economists said it is the nature of the U.S. system itself that has generated a need for a stimulus package.

Carliner said no stimulus at all would be required if the United States had a better safety net to shield unemployed Americans from financial ruin if they are laid off.

Indeed, recessions tend to hit consumer spending harder in the United States than in Europe, as U.S. unemployment insurance pays relatively low, causing unemployed Americans to tighten their belts, he said.

And losing one's health insurance -- most Americans' health coverage is through employers -- spurs more people to save in case they are hit with an unforeseen medical expense, he said.

The more people save, the longer it will take to revive the economy, he said.


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