Did team Obama get it wrong on the stimulus?

McClatchy NewspapersJuly 7, 2009 

WASHINGTON — Should the federal government be doing more to help the economy regain its footing? That's the question du jour following a dismal June employment report last week and Vice President Joe Biden's Sunday talk-show confession that the administration "misread" the economy.

Within a month of taking office, President Barack Obama and Congress pushed through a $787 billion economic stimulus plan that many economists warned would be slow in delivering help. Much of the plan isn't short-term stimulus, but at laying a foundation for Democrats' long-term policy priorities, such as alternative energy projects.

Only about a tenth of the money has been spent so far, and only about half of it will have been spent by October 2010, according to the nonpartisan Congressional Budget Office.

Meanwhile, the unemployment rate stands at 9.5 percent and is headed higher. More than 6.5 million jobs have been wiped out since the recession began in December 2007. Home foreclosures continue at record rates, despite a flurry of government programs. Remember those toxic assets clogging bank balance sheets and resulting in a credit crunch? Treasury's program to deal with them still isn't producing results.

This wasn't what the administration envisioned.

"We misread how bad the economy was," Biden told ABC's "This Week," prompting Obama to note, while in Russia, that he didn't misread the economy but rather had incomplete information.

Maybe. However, the Obama administration made its work harder by fostering unrealistic expectations. It projected in February a far rosier economic outlook than private analysts did. Team Obama expected an economic contraction of 1.2 percent in 2009, followed by a rapid expansion of 3.2 percent next year. Unemployment was expected to stay below 8 percent.

The latest monthly survey of top economists by the Blue Chip Consensus, a private concern, forecasts a weak return to growth in the third and fourth quarters, and only mild growth next year of 2 percent. Unemployment is projected to peak at more than 10 percent in the first three months of 2010.

Obama's stimulus was designed to create 3.5 million jobs. That would replace only about half the jobs lost since the recession began. Population growth alone demands that the U.S. economy add 100,000 new jobs each month just to keep the jobless rate from rising, economists said, and that's independent of the need to recover lost jobs.

So there's growing talk of a second stimulus bill.

"I think we need to be open to whether we need additional action," House Majority Leader Steny Hoyer, D-Md., said Tuesday. "We need to continue to focus on bringing the economy back to a place where we're not losing jobs."

In the Senate, however, there's less appetite for additional stimulus — and little chance of getting the 60 votes needed to push one through.

"It's mind-boggling," said Senate Minority Leader Mitch McConnell, R-Ky. "A second stimulus is an even worse idea than the first."

Facing such opposition, Senate Majority Leader Harry Reid, D-Nev., prefers to emphasize the positive.

"There is no showing to me that another stimulus is needed . . . the crop's been planted and the shoots are in the ground," he said.

Even if the Obama administration decides to do more, it's hampered by a record peacetime federal deficit, now projected this year to equal about 12 percent of gross domestic product, or the total output of goods and services. Investors fret that rising deficits and national debt could erode confidence in the U.S. economy and raise borrowing costs for the government — and everyone else.

"I think politically it's a major impediment to getting a second stimulus plan. But it shouldn't be," said Isabel Sawhill, a budget expert at the Brookings Institution, a center-left policy research organization. Short-term deficits are acceptable, she said, as long as creditors see the U.S. taking steps to rein in longer-term spending, such as overhauling the finances of Social Security and Medicare.

"The fear is if we just let the economy continue to be a big hole, that in itself will balloon the deficit, because revenues are just anemic right now," Sawhill said.

The administration's official view is that talk of a second stimulus is premature. However, one prominent outside adviser, former top Clinton White House economist Laura Tyson, said Tuesday in Singapore that the original stimulus was too small because the economy "is a sicker patient" than first thought. She said that more is needed.

Republicans argue against additional spending, favoring instead a temporary payroll tax holiday. Businesses and workers would get more money to spend through a reprieve from taxes — a move that also would push up the federal deficit.

"A payroll tax holiday gives you some modest consumer demand," said Douglas Holtz-Eakin, who was the chief economic adviser to Republican presidential candidate John McCain.

He'd cancel some stimulus-funded infrastructure projects scheduled for next year and beyond and instead give businesses and workers a tax break.

At least one prominent liberal economist agrees, in part.

"If we need a second stimulus — which is by no means clear — then a payroll tax holiday should be among the candidates," said Alan Blinder, a Princeton University professor and a former Federal Reserve vice chairman. "But I would not repeal the out-years' spending, because we might need it."

Blinder thinks that the economy may be bottoming out, and with stimulus funds now in the pipeline, patience is in order.

"So I wouldn't be rushing into a second fiscal stimulus just yet," he said.

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