Dollar Politics: Why Washington Has No Plans to Ride to the Economic Rescue

By the time President Obama sat down with House Republicans on June 1 to talk about the exploding public debt, the economic data had been grim for days: another decline in home values, a new dip in consumer confidence and, just that morning, the lowest manufacturing-sector growth rate in more than a year and a dismal payroll report showing job growth far below expectations.

In another era, these sorts of numbers would have led to a predictable chain of events for either a Republican or a Democratic President: rush to the cameras, empathize with those suffering the pain and declare that help is on the way. But at the closed-door White House meeting this month, Obama made no mention of new, short-term fixes for the latest bad news. Instead, the discussion focused on long-term problems: the inefficient tax code, the federal deficit, growing debt and the need for entitlement reform. House Republicans emerged triumphant, since the debate had shifted to their turf. "I'm looking forward to more serious conversations about how we reduce the deficit and the debt," said Speaker John Boehner.

A few days later, Obama seemed to minimize the bad news, declaring it little more than "bumps on the road to recovery." But no one should mistake the President's public optimism for a lack of concern. These are white-knuckle days at the White House as the nation awaits word on whether the latest economic disappointments are a blip or a trend that will delay the recovery. No President since Franklin Roosevelt has won re-election with unemployment higher than 7.2%, and Obama's own economists in February predicted 8.6% unemployment in 2012. That number may yet be revised upward in light of recent economic headwinds, including the Japanese earthquake, gasoline prices approaching $4 a gallon and continued economic troubles in Europe. "We could use a break," admits one Administration official.

But with 7 million fewer people employed than at the start of the recession and only marginal relief in sight, the concern is not merely political. Economists who have left the Obama Administration, including the former top economist Christina Romer, say more stimulus is needed. "The risk is that what we are facing now is many years of anemic growth," says Romer, who believes it's time for a cut in payroll taxes on employers. "We somehow have decided it's O.K. that 9% of the country is unemployed."

For now, Obama's aides have chosen to take a careful path, aiming to spur short-term growth while protecting the President from Republican charges that he is a Big Government big spender. How? In public, they talk of "leveraging the private sector" and "investing in the future," with more long-term funds for infrastructure, education and energy, not more bailouts or stimulus. The White House agrees with Boehner that long-term budget cuts and entitlement reforms could add some confidence to the markets, but some Obama aides also want more short-term stimulus to make sure the economy does not languish. "In an ideal world," says one Obama adviser, "you would still have a little more help to the economy right now."

That ideal world hasn't existed since well before the midterm elections. Exit polls in 2010 found that voters said reducing deficits was a higher priority than spending money to create jobs — a clear rejection of Keynesian theories, which hold that in hard times, government should increase spending and decrease taxes. The concern was not only among Republicans: 32% of voters who favored deficit reduction voted for Democrats last fall.

Since then, talk of spending more has been a nonstarter. Yes, the President succeeded in pushing some relief through in December in a deal with Republicans, winning hundreds of billions in tax breaks for business and employees in a deal that also extended tax cuts for the wealthiest Americans. And yes, the Federal Reserve has credited those tax breaks with largely counteracting the effects of rising gas prices this year. But as a political matter, talking about spending more money that the government doesn't have has become too risky. In the absence of a new influx of government support, the President is offering empathy and optimism, as well as smaller initiatives like a new manufacturing-skills certification program for community colleges, which will be developed by the private sector. "I'm not concerned about a double-dip recession," Obama said on June 7. "But we've still got some enormous work to do."

It is work that will most likely have to be done without the typical quick-response stimulus, as practiced most recently by Obama and George W. Bush, who cut $168 billion in checks to Americans in 2008. With the re-election season already under way, policymaking has moved on. Barring a major downturn, more help is not on the way this year. In Washington, elections matter. The people have spoken. And now, they are on their own.