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GOP Takes Hardline on Federal Deficit By Killing Unemployment Benefits Extension

By , Contributing Writer, Money Morning •

Drawing a line in the sand over the federal deficit, Senate Republicans on Thursday killed a spending bill that included an extension of unemployment benefits and increased taxes on bonuses paid to executives at private equity firms.

The collapse of the comprehensive legislation spells the end of assistance for a total of 1.3 million unemployed Americans who were scheduled to lose their benefits at the end of last week. It also will leave a number of states with large budget holes they had expected to fill with federal cash to help with Medicaid.

Even though lawmakers voted 57-41 in favor of the measure, Democrats failed to secure the 60 votes needed to end a GOP-led filibuster. The legislators split along party lines with the exception of Sen. Ben Nelson, D-NE, who voted with the Republicans. Senate Majority Leader Harry Reid, D-NV, said this third vote on the matter would be the last, and that the Senate needed to move on to legislation cutting taxes for small businesses.

White House Press Secretary Robert Gibbs lashed out at Republicans, who he said "obstructed a common-sense package that would save jobs, extend tax cuts for businesses and provide relief for American families who have suffered through the worst economic downfall since the Great Depression, even after Democrats offered multiple compromises to gain Republican support for the bill."

Among other provisions, the legislation would have provided $16 billion in aid to states and raised taxes on the share of profits paid to executives of buyout firms. The last version of the legislation had a price tag of $85.5 billion, down some $20 billion from last week and well below the more than $120 billion initially brought to the floor.

President Barack Obama earlier this month urged lawmakers to approve $50 billion in aid to states to help prevent layoffs. Economist Mark Zandi has projected that without additional aid states will have to fire 300,000 employees, Bloomberg News reported.

Even though Democrats repeatedly cut the bill in an effort to win Republican backing, the latest version would have added $33 billion - roughly the cost of the six-month extension of jobless benefits in the bill - to the budget shortfall.

Despite Democratic efforts, Republicans found any addition to a deficit expected to reach $1.4 trillion this fiscal year unacceptable, saying Democrats have lost sight of the economic risks posed by the nation's rapidly mounting debt.

Senate Minority Leader Mitch McConnell, R-KY, chided Democrats for refusing to fully pay for the legislation with offsetting savings or revenue increases.

"The principle Democrats are defending is that they will not pass a bill unless it adds to the deficit," McConnell told The Wall Street Journal.

Sen. Reid fired back at Republicans after the vote, telling The Journal they had "turned a deaf ear" to jobless workers.

"This is not a good day for America," he said, adding that the Senate would give up for now any efforts to push forward with the jobless-benefits extension.

Congress last year enacted a program granting jobless workers up to 99 weeks of aid, including 26 weeks of basic assistance provided by states plus longer-term federal payments. The Labor Department estimates that the long-term unemployed, meaning those out of a job for at least six months, make up 46% of all jobless workers in the United States.

Some economists say there are economic risks in ending the benefits, especially since workers receiving them tend to funnel money back into the economy immediately, increasing demand for goods and creating jobs.

In addition, if workers are unable to find work and are no longer eligible for unemployment benefits, some will turn to other government programs, such as disability and Social Security, Harvard economist Lawrence Katz told The Journal.

"If you're really concerned about the long-term deficit, you should be really concerned about the long-term unemployed," Katz said.

Other economists argue that extended benefits have encouraged people to stay off the job.

"There's a very large body of research that says that more generous benefits and benefits that last longer…encourage people to stay out of work longer," Bruce Meyer, an economist and public policy professor at the University of Chicago told The Journal.

The fate of other provisions that were to be included in the legislation are unknown, including some $50 billion in new taxes designed to help offset its cost. They included an increase in taxes paid by private equity firms, including hedge-fund firms and real-estate partnerships. Democrats are likely to revisit the issue down the road.

Another provision of the bill that will survive is a proposal to suspend a 21% cut in Medicare payments to doctors that took effect this month. That was stripped from the bill last week in a cost-cutting step and sent to the House as a stand-alone measure. The House, voting 417 to 1, approved the six-month suspension of the cuts late Thursday.

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