President Barack Obama has proposed a larger than expected $447bn package of tax cuts and spending increases, structured for maximum impact over the next year and focused on policies such as infrastructure investment that in the past have enjoyed a measure of support across party lines.
Many of the steps he has outlined – extending the payroll tax cut and unemployment insurance coverage, for example – will only prevent existing legislation from lapsing. Tax credits to stimulate hiring have been tried in the past, and economists are divided over their effectiveness. Aid to state and local governments, an important ingredient of the 2009 stimulus, did temporarily stave off large cuts in public sector employment but had little long-term effect on the private economy.
Behind this approach lies a political calculation. While Mr. Obama paid a price for the extended debt ceiling standoff, so did congressional Republicans, whose public approval is significantly lower than even the president’s depressed standing.
By proposing steps that seem non-threatening and relatively affordable, Obama hopes to force his adversaries to acquiesce, at least to the measures they have supported in the past. If they don’t, he will be positioned to argue that Republicans are putting party above country, working to defeat him for re-election even at the cost of further slowing the economy and possibly tipping it into a second recession.
There are some arguments on the other side, however. Not even down-the-line Keynesians believe that the package of items Mr. Obama has proposed would substantially affect growth and unemployment, even if it were adopted and implemented tomorrow. In addition, there’s a trade-off between policy continuity and narrative force. Republicans are sure to characterize the president’s proposals as a continuation of an approach that hasn’t met expectations so far, and many swing voters are likely to agree.
Finally, Mr. Obama continues to rely on a diagnosis of America’s economic woes that misses the heart of the matter. If financial crises really are different from cyclical downturns – as economists Kenneth Rogoff and Carmen Reinhart have argued – then traditional demand-side policy responses are palliatives rather than cures. (So are the supply-side tax cuts at the heart of contemporary conservative economics.)
If the epicenter of the current stagnation is excessive household debt, which more than doubled as a share of household income between 1982 and 2007, then we face a choice: Either we wait for deleveraging to occur on its own – a slow, painful process that will take another five years – or we can work to accelerate it by attacking household debt at its core. That would mean pressing creditors for reductions in principal amounts as well as interest rates mortgage debtors must pay – a step the administration has thus far rejected.
In the end, the 2012 presidential election will revolve around two key variables – the condition of the economy and the identity of the Republican nominee. Making the most optimistic assumptions, the economy is unlikely to improve enough during the next year to substantially improve Mr. Obama’s prospects.
The White House must therefore hope that the Republicans nominate a candidate that even disgruntled moderate and independent voters cannot stomach, or alternatively, that the rigors of the nominating process force an otherwise acceptable candidate to espouse deeply unpopular positions. It’s never a good sign when your success rests on the folly of your adversary.