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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A Stimulus in Pieces

Last winter, the members of the President's economic team debated the need for stimulus figures substantially higher than those Congress finally approved. And they would like to drive more money into the economy now to pump up the recovery as a hedge against that feared double dip. There may have been a chance to do that late last year, when Nancy Pelosi's House Democrats approved a $154 billion package they described as a "jobs bill." But Senate majority leader Harry Reid concluded that even if he could pass such a plan, Democratic Senators facing re-election wouldn't survive attacks by conservatives branding them as reckless big spenders. "The tension is that the public still wants big things to happen on the economy, but they have big-number fatigue," says a senior Administration official.

Once that became clear, White House discussions about the economy turned from how to win another big stimulus plan to the selling of piecemeal measures. In place of that $154 billion jobs bill, the White House prompted the House to pass a narrower $54 billion plan in May. It would send emergency aid to cash-strapped states to prevent the layoffs of thousands of public-school teachers. And it would extend long-term unemployment-insurance checks and health care subsidies for millions of jobless Americans whose benefits are starting to run out, leaving them with no safety net even as the job market shows little sign of improvement. But Senate Democrats couldn't pass that bill either. Nor has the Senate been able to pass a stripped-down extension of the unemployment benefits totaling about $30 billion. (The White House hopes the smaller plan can squeak through with the help of a newly appointed successor to the late Democratic Senator Robert Byrd.)

The Obama team will happily take a $30 billion unemployment-insurance bill, but the victory will be more a moral one (helping the jobless) than anything that amounts to real stimulus. So now the White House is trying to prod economic growth in small steps around the margins of the economy. In some cases that means a renewed push for ideas Obama has been touting since late 2009. He's currently urging the Senate to approve a $30 billion small-business-lending fund, for instance, and a $6 billion "cash for caulkers" program that would subsidize energy-efficient retrofitting of homes. "We don't think of this in terms of stimulus in the sense we were talking about in February of 2009. We're thinking in terms of targeted programs," says Bernstein.

With even those initiatives bogged down, the White House is looking to steps that don't involve Congress — for instance, more aggressively promoting a $13 billion business-hiring tax credit that Congress has already passed but only about two-thirds of which businesses have used. It's the equivalent of scrounging in the couch cushions for spare change — and it's not likely to have more than a slight impact on the economy (or prevent another downturn if there's one on the horizon).

And that stance sends Obama's liberal base into orbit. The lefty blog queen Arianna Huffington has been blasting Obama for not using his bully pulpit more forcefully to denounce Republicans for standing in the way of unemployment-insurance extensions. But White House officials, who have an eye on the polls, believe that making more noise about spending won't win more seats in Congress and risks playing into the hands of Republicans.

Little Room for Compromise
In theory, there's a chance for a compromise that would give both parties what they really want. Earlier this year, Obama appointed a bipartisan commission to study the U.S.'s long-term fiscal situation and recommend ways to rein in the deficit. The 18-member body, chaired by former Clinton White House chief of staff Erskine Bowles and former Wyoming Republican Senator Alan Simpson, is due to issue recommendations by Dec. 1. Early reports suggest that the commission may propose some tax hikes along with long-overdue cuts to entitlement programs like Social Security and Medicare.

Could Democrats and Republicans come together on a plan to increase short-term discretionary spending while limiting long-term entitlements? Such deals aren't unprecedented. George H.W. Bush reached a budget agreement with Democrats in 1990 that raised taxes and capped spending, and Bill Clinton was reluctantly pushed toward a balanced-budget deal by Republicans in 1997. But such agreements are rare — and tend to happen amid prosperity. With the Tea Partyers on the march, the Republican Party adamantly opposed to higher taxes and some liberals declaring Social Security all but off-limits, it's hard to see how Obama can muster the political capital to do the big deal.

Here's hoping, then, that the good news about the economy will soon outweigh the bad news. A rebound wouldn't just put long-suffering Americans back to work; it would also help bring down the deficit, thanks to higher tax revenues. But if gloomier forecasts are correct, then we may be in even more trouble than we know. And there's little evidence that a deeply divided Washington can save us.

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