Obama's Economic Dilemma: To Spend or Not to Spend

As each day brings signs of both revival and relapse, Obama is under pressure to throw more money at the problem. Voters want no part of that. How an economic recovery ran into a political storm

By Michael Crowley Saturday, July 17, 2010
    • Carolyn Kaster / AP

    President Barack Obama delivers remarks on the National HIV/AIDS Strategy in the White House, July 13, 2010.

    Imagine the desktop of White House economic adviser Larry Summers. There he sits, reams of data piling up around him, all presenting a confounding picture. Half of his inbox features good news: Manufacturing is up. The private sector has added jobs for six consecutive months. Corporate earnings are rising, and CEOs are reporting greater confidence. Inflation is almost nonexistent. Even Wall Street (where big profits are back) is hiring again in anticipation of a coming recovery.

    But the rest of Summers' stack stinks of depressing, and even alarming, news. Job growth has been anemic. Unemployment is hovering just below 10%. The number of people who have been unemployed for more than six months is approaching 7 million, and millions more are believed to have stopped looking. Foreclosures and bank closings are exceeding last year's levels, while home sales have slumped. And the $787 billion stimulus (now revised to $862 billion) passed by Congress last year to kick-start the economy will soon run down, shutting off the cash spigot just as states compound the dampening economic effect with severe budget cuts and layoffs of their own. That low inflation, meanwhile, may be veering toward unwanted deflation. "We had a major economic acceleration coming out of the economic crisis, and it was very impressive," former Federal Reserve Chairman Alan Greenspan said in a July 9 public appearance. "And then it's like we've hit an invisible wall."

    That strangely mixed picture leaves Summers and every other Obama adviser with an excruciating call to make the next time they head into the Oval Office. Is the U.S. on a firm path to recovery — one that just needs more time to play out? Or are we trapped in the doldrums, perhaps on the way to a lost decade like the one Japan had in the 1990s? Worst of all, could we be headed for a terrifying reprise of 1937, when a U.S. economy fighting its way out of the Great Depression crashed a second time, requiring the massive industrial effort of World War II to rejuvenate it?

    For the moment, senior Obama advisers tend toward the doldrums theory. They foresee a long and slow recovery, one they would like to speed up with the fuel of more government stimulus to get money into the pockets of consumers who will spend it fast. They don't expect another economic crash, but they also know it's possible and would sleep better if a new wave of cash were headed into the system. And they are quick to note that despite what their critics may say, this is not an excuse to promote a loony-left tax-and-spend agenda. Even a recent Goldman Sachs analysis recommended that policymakers consider more stimulus spending.

    But Obama and his advisers know their hands are tied. Polls show that voters either don't understand — or don't buy — the long-established economic theory of John Maynard Keynes, which calls for more government spending (even if it means running up deficits) to help the economy through hard times. Instead, the public is in the mood to smack big Washington spenders hard this November. White House officials say Obama's economic team is resigned to the granite-hard public resistance to more bold action as laid out by political advisers. "The arithmetic is simple, but it's been very, very hard to convince people," says Jared Bernstein, chief economic adviser to Vice President Joe Biden.

    A new TIME poll reveals just how hard that task is: Two-thirds of respondents say they oppose a second government stimulus package. And 53% say the country would have been better off without the first one.

    The result is a White House pulled in three directions at once as it tries to repair the economy — and ensure that Obama and the Democrats can survive a rising tide of public anger. First, the Obama team is improvising ways to pass piecemeal spending items through a Congress where stimulus has become a toxic word. At the same time, the White House is signaling its concern about that budget deficit that has Tea Partyers raging — both through token gestures, like a White House contest that lets the public vote on cost-cutting ideas submitted by federal employees (the winner gets to meet Obama and see his or her idea go in the President's next budget), as well as substantive ones, like Obama's support for a bipartisan deficit commission. And finally, the White House is trying to explain to angry liberals that it's doing everything possible to keep the economy moving and fight Republican resistance to new spending.

    It's a delicate balancing act, on a par with Obama's effort to pass health care reform without appearing to get too involved in the details. And just as it did in the health care battle, the future of Obama's presidency — as well as the fate of the American economy — may hang on the outcome.

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