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How Economy Fares in Summer Is Crucial to Obama Agenda

AP
Tuesday, 7 Jul 2009 | 11:43 AM ET

Politically and economically, the next three months are critical for Barack Obama's presidency.

The pace of the economic recovery heading into the fall—electric smooth or diesel rough—will determine whether Obama can prod Congress on the key features of his agenda with momentum or from a defensive crouch.

President Barack Obama
Photo by: Pete Souza
President Barack Obama

Steady economic improvement that is perceptible to the American public would boost his political standing and give him the thrust to get Congress to complete action on his ambitious plans to overhaul health care, attack climate change and put the financial sector under greater government oversight.

But a stumbling recovery would erode Obama's currently high approval ratings, a source of much of his political power. At the same time, continued high unemployment might force Obama to ask Congress for another boost in spending to stimulate the economy—a political challenge that could delay if not undermine his other goals. So far there is little cause for cheer.

Since Obama signed the $787 billion economic stimulus bill in February, the economy has shed more than 2 million jobs and unemployment now stands at 9.5 percent, the highest in more than a quarter century.

Economists and heavyweight Obama backers such as Warren Buffet already are calling for another stimulus, saying the recession proved to be deeper and more devastating than originally believed.

"The economy took away everything they put on the table," said Lawrence Mishel, president of the Economic Policy Institute, a labor-leaning economic think tank.

Obama on the Economy
President Barack Obama sits down with NBC News' Chuck Todd to discuss the state of the economy. CNBC's John Harwood shares his insight.

"We strongly believe we need another stimulus, and we need it now," added Thea Lee, the AFL-CIO's policy director.

Republicans don't agree and are citing the lack of job creation as a sign of a failed Obama policy. "What they did is they miswrote the stimulus bill and got the prescription wrong," Rep. Eric Cantor of Virginia, the second-ranking member of the House Republican leadership, said Monday. "There is no question that we find ourselves now in a place that the administration had promised we wouldn't."

The need for a new stimulus has been a matter of internal debate within the Obama administration, according to people familiar with internal discussions. But White House officials have made no public commitments.

Vice President Joe Biden said the administration "misread how bad the economy was" but stands by its stimulus package and believes the plan will create more jobs as the pace of its spending picks up. Obama himself has fretted that spending under the current stimulus package needed to speed up.

Biden, in an interview broadcast Sunday on ABC's "This Week," did not rule out a second stimulus but said it was premature to say whether it would be needed.

But Obama responded to Biden's comments on Tuesday. "I would actually—rather than say misread, we had incomplete information," President Obama told NBC News' Chuck Todd. "What we always knew was that a) this recession was gonna be deep, and b) it was gonna last for a while."

Said Mishel: "Publicly they've been quite cautious. Sometimes annoyingly so."

The conundrum for Obama is that his health care and climate plans ultimately rely on a strong economy. A weak recovery that falls short of the administration's forecast of 3.2 percent growth in gross domestic product in 2010 would result in lower than expected revenue and greater potential deficits over time.

US Capitol Building with cash
US Capitol Building with cash

Trying to further prime the recovery, however, would require additional short-term deficit spending and there's declining appetite for that in Congress as well.

"Perversely, you actually have to have higher deficits to generate some growth," Mishel said.

Analysts and the administration officials say the full effect of the $787 billion is only beginning to be felt. But that initial beneficial shock to the system will dissipate and if the economy is still sputtering next year, it could become a political danger for Democrats who now control the White House and the two chambers of Congress.

"The economy is obviously being supported by significant stimulus," said economist Mark Zandi of Moody's Economy.com, who has advised Washington policy makers. "But that's going to begin to fade by certainly this time next year, right in time for the next election."

Many of those favoring a stimulus say it should be smaller than the current one. Estimates range from less than $200 billion to up to $500 billion. Advocates say it should contain unemployment assistance and aid to states. While some reject tax cuts as an element, others say it could include a payroll tax holiday.

Labor intends to make a louder case for a new stimulus. AFL-CIO President John Sweeney on Thursday issued a statement urging Congress and the administration to "remain focused on stimulus efforts" and issued an international call for governments to increase stimulus spending by 1 percent of GDP. And Richard Trumka, the labor federation's secretary treasury, has been pushing for a new stimulus as a member of Obama's Presidential Economic Recovery Advisory Board.

"The employment numbers are so dire and the long-term prospects so poor that it seems clear to us that additional stimulus is needed and we need to start planning for it now," the AFL-CIO's Lee said.

Beyond unemployment, however, the economy is also hurting the employed, posing an even greater political risk to Obama and congressional Democrats. Work hours have declined and wages have eroded, a further drag on the recovery.

"It's going to constrain the growth of consumption and the strength of any rebound," Mishel said.

Complicating the calculus for the administration is the role deficits might play. Martin Regalia, chief economist for the U.S. Chamber of Commerce, maintains there is a 1-in-5 chance that deficits will drive up interest rates and the economy will dip into recession again sometime next year.

"You don't have to have a whole lot of dissipation in the growth in order to see a return to declines in the economy," Regalia said.

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