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

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Carolyn Kaster / AP

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

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Spending or Austerity?
Obama hardly wanted fiscal policy to be the central battleground of his presidency. Iraq, health care, global warming — those were the high notes of his hope-and-change anthem. Yes, Obama promised middle-class Americans a better standard of living. But he was motivated by the opportunity to transform the nation's economy, not merely fix it. When he decided to run for the presidency, he never expected to inherit an economic collapse, nor did he expect to find himself, 18 months into his tenure, stuck under the hood of the American economy with his hands smothered in engine grease and 300 million increasingly angry customers watching him.

Some of the angriest are his allies: liberals in Congress and outspoken economists, like Nobel Prize winner and New York Times columnist Paul Krugman, who warn that the recovery is stalling and we may be in for a dreaded double-dip recession, in which the economy slides back into negative growth after a brief rebound. Their solution is to crank up the spending once more. Yes, the stimulus is already pumping mind-boggling amounts into the economy. But $862 billion is only about 6% of our gross domestic product.

The Obama Administration, which has been working to sell a "Recovery Summer" theme through a flurry of photo ops and press events, now credits the stimulus with saving or creating from 2.5 million to 3.6 million jobs. While their estimates vary, even many private-sector assessments conclude that the stimulus blunted the economic blow and prevented unemployment from climbing even higher. The problem is that the stimulus is about to stop stimulating: the money peters out soon. To the do-more school, that's like taking off the training wheels before your kid has learned to keep her balance. (Ouch.) Moreover, states are getting ready to make a collective $200 billion in cuts to balance their budgets, since revenues have cratered as local economies and tax receipts have dried up. (Translation: layoffs galore.) Capping it off, the Great Recession wiped out huge amounts of wealth; other recessions were followed by economic booms because people sat on their money during the lean years and then unleashed pent-up demand for all sorts of goods and services. That hasn't happened this time: households and businesses alike are keeping their hands firmly in their pockets. So the only way to inject more money — and therefore growth — into the economy, according to this school of thought, is through more government spending. "The economy is expanding, but growth is still weak," says economist Gus Faucher of Moody's Economy.com "We would argue that it makes sense for the government to step in." Step in, he means, to the tune of an additional $100 billion to $150 billion in new spending. Faucher isn't alone: Democratic Congressman George Miller of California has sponsored a $100 billion package of aid to states that includes direct hiring at both state and local levels to save or create a million new jobs.

Hold on, you (and a parade of TV pundits) might say. How can we possibly afford that right now? The federal deficit, after all, is forecast to finish the fiscal year at a whopping $1.3 trillion. Just how big is that? It comes out to about 10% of GDP, while some fiscal experts, including former White House budget chief Peter Orszag, warn against running deficits larger than about 3% of GDP. (Other countries with double-digit deficit-to-GDP percentages include reeling Greece, Spain and Ireland.) But while spending more now might seem like pouring fuel on the fire, many economists say the pain of more short-term debt is outweighed by the all-important need to keep the economy moving.

No way, say Republicans and deficit hawks. They argue that the government has been writing IOUs that we already can't afford. And that if the first stimulus bill couldn't prevent near double-digit unemployment, what's the sense behind a second one? The stimulus, says the conservative economist John Cogan of Stanford University's Hoover Institution, has been a "demonstrable failure." Cogan argues that Democratic efforts to expand the role of government in health care, the financial industry and the environment have contributed to an "extraordinary climate of economic uncertainty" and that it is precisely that which has businesses large and small hoarding cash instead of investing it. Many Republicans agree, preferring to goose the economy with tax cuts rather than new spending, which they fear would just become enshrined in future budgets in perpetuity. Some GOP leaders are also calling for austerity now, including Congressman Paul Ryan of Wisconsin, who's touting a deficit-trimming plan that features deep — though politically treacherous — cuts in federal spending.

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