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Will bailout crimp Democrats' spending plans?

At first blush, an era of constrained federal spending appears to be looming: Every $1 billion  going to the bailout would be $1 billion less for highway construction. But House Speaker Nancy Pelosi does not see it that way.
Image: Speaker of the House Nancy Pelosi
Speaker of the House Nancy Pelosi, D-Calif., in her office Friday awaiting the House vote on the financial sector rescue bill.Lauren Victoria Burke / AP
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Friday’s House approval of an $800 billion bill to keep banks and investment firms afloat heralds a new fiscal era.

At first blush, an era of constrained federal spending appears to be dead ahead:  Every $1 billion going to the bailout and the tax provisions in the bill would be $1 billion less for highway construction or federal aid to public schools.

But House Speaker Nancy Pelosi and other Democratic leaders do not see it that way.

House Financial Services Committee Chairman Barney Frank, D-Mass., said shortly before the House voted that the cost of the bailout will not be $700 billion, but far less than that. For that reason, he said, the bailout will not inhibit the ability of Congress to spend on roads, bridges, public education and other items.

“It’s not going to cost $700 billion,” he said, referring to the bailout portion of the bill. “It’s going to cost something. We are buying assets with that money, which we will own and we will resell. Nobody knows what the net cost will be. ... It depends on how the economy performs.”

Limp economy, robust federal spending
As Friday's employment data indicated, the economy is not performing well right now. The Bureau of Labor Statistics reported that nearly 160,000 jobs were lost last month, the ninth straight month of net job losses.

Yet federal spending and borrowing are robust, with federal outlays growing nearly three times as fast as the economy itself.

The nonpartisan Congressional Budget Office reported that, as of August, federal spending for the first 11 months of the current fiscal year was 8 percent higher than in the same period the prior year.

But receipts are down 1.4 percent so far this fiscal year and are sure to decline further given the dismal employment data.

The revenue forecast facing the new president and the new Congress looks grim, largely due to that unemployment.

Fewer Americans are earning income and thus fewer are paying federal taxes. Higher unemployment means higher federal outlays for the Medicaid program for low-income people, as laid-off workers lose their employer-provided medical coverage.

'Revenue is going to dry up'
That has many Republicans calling for restraint on spending.

“Revenue is going to dry up because we’re going into a recession, so you can’t whet your spending appetite when you have a recession and eroding revenues,” said Rep. Paul Ryan, R-Wis., the senior Republican on the House Budget Committee. Ryan voted for the bailout.

“We’re going to have lower revenues next year because I think a recession is unavoidable," he said. "The question this (bailout) bill hopefully will answer is whether it is a short recession or a long recession.”

An increasing number of House Democrats, looking at Obama’s campaign momentum, assume he will be president. But many do not believe his and their spending desires will be limited by huge debt, borrowing costs and inflation.

Indeed, Obama made phone calls Wednesday and Thursday to several House Democrats, including freshmen members such as Rep. Mazie Hirono, D-Hawaii, and Rep. Betty Sutton, D-Ohio, assuring them that, if elected, he will sign a new economic stimulus spending bill.

At Pelosi’s press briefing Thursday, she indicated that the $800 billion is expected to be offset, in part, by congressional action raising tax rates on higher-income people.

Investing in the future’
And if the bailout bill ends up costing the Treasury money, she said, “the financial services industry and those affected by this would have to make up that shortfall.”

Turning to new spending, Pelosi used the word “invest” or “investment” five times in response to a question, using it in the accepted Capitol Hill sense: federal spending on items that Congress deems useful and likely to encourage economic growth.

“Nothing brings more money back to the Treasury than investing in the education of the American people,” she said.

She also argued for “investing in the future, whether it is infrastructure, whether it is investing in innovation to create good paying jobs in America, whether it is investing in our health care system in a way that reduces costs, reduces harm and improves health care.”

The spending would, she predicted, have the salutary effect of “creating good paying jobs, bringing jobs to America.”

Democrats won’t let the fiscal picture discourage them, Pelosi said.

And yet she also said, “We have said all along that when we go forward we do not want to increase the deficit.”

The paradox: How to spend more — much more — and yet not increase the deficit and borrowing at a time of sluggish income growth and with $800 billion in revenue potentially already spoken for?

Evoking Ronald Reagan
Using the phraseology of Ronald Reagan, Pelosi spoke of “subjecting the spending of the federal government to the harshest scrutiny to remove waste, fraud and abuse.”

And Pelosi assumes the $120 billion per year being spent on Iraq will go away fairly quickly.

But one longtime Pelosi ally, Rep. George Miller, D-Calif., the chairman of the House Education and Labor Committee, did not sound quite as bullish as the speaker.

Miller said, “I don’t know yet” when asked whether the bailout and tax extenders bill might inhibit Congress’ desire to spend more on domestic items.

“When you’re inheriting an $11 trillion debt, you have to have a fundamental conversation," Miller said. "The new administration and the Congress have to decide, because there are so many unmet needs. Whether it will inhibit or not, or whether we’ll have to figure out another way to finance it, I don’t know yet.”

He added, “There’s a pent-up demand in the country for infrastructure, for research and development dollars. We’re falling way behind here.”