Democratic Push for More Stimulus Hits GOP Wall
Policy + Politics

Democratic Push for More Stimulus Hits GOP Wall

iStockphoto/The Fiscal Times

Concerns about the stumbling economy and painfully slow pace of new job creation were front and center Monday, as President Obama promoted employment strategies in North Carolina while the Republican presidential hopefuls gathered in New Hampshire for their first major debate.

Yet a bitter divide, pitting Democrats eager for more economic stimulus against Republicans insistent on deep tax and spending cuts, is making new help for the nation’s unemployed the least likely scenario. 

Last month’s sobering jobs report showing unemployment inching up to 9.1 percent has triggered a spate of new calls by leading Democrats for additional steps to spur economic growth. Harvard professorLawrence Summers, Obama’s former top economic adviser, called for major new government programs to stimulate demand in an op-ed in The Financial Times on Monday.  Summers’ proposals, similar to what other Democrats have been touting in recent days, include stepped up infrastructure investment by the government and private sector, extending and increasing a payroll tax cut for employees, and providing payroll tax cuts for employers.  

“The shortage of demand . . . is a defining characteristic of our economy,” Summers wrote. He also opposed immediate budget cuts to deal with the medium- and long-term budget deficits as part of ongoing negotiations between Congress and the administration.   “The fiscal debate must accept that the greatest threat to our creditworthiness is a sustaining period of slow growth,” Summers said.

Sen. Tom Harkin, D-Iowa, the chairman of the Health, Education, Labor and Pensions Committee, thinks the package, which would be funded by tax increases, has the potential to lower the unemployment rate by two points.

But the call for a new government stimulus program stands no chance of passage in the Republican-controlled House, which is committed in the current debt ceiling talks to winning major cuts in next year’s budget and providing additional tax relief for businesses. The Republicans are also seeking longer-term spending cuts of nearly $2 trillion over the coming decade, which would match the $2 trillion increase in the $14.3 trillion debt ceiling that the administration is seeking to carry it through the next election.

“The answer to this [the jobs crisis] is not government; the answer to this is the private sector,” Tom Price, R-Ga., chairman of the Republican Policy Committee, said on MSNBC on Monday. “Washington has to stop spending money and jobs will flourish.”

Republicans have repeatedly taken the president to task for the $787 billion stimulus program enacted early in his administration, which they claim failed to create jobs. Yet a February 2011 Congressional Budget Office report on the economic impact of the American Recovery and Reinvestment Act estimated that the spending added anywhere from 1.1 to 3.5 percent to overall economic activity; increased the number of people employed between 1.3 million and 3.5 million.

That view was endorsed by Federal Reserve Board chairman Ben Bernanke last month when he told the Senate Banking Committee that “the CBO analysis is a reasonable analysis. My best guess is that the stimulus increased employment.” 

Yet the dismal unemployment reports, which many refer to as structural job losses, and lower economic forecasts continue to plague the administration.  Obama, recognizing a flagging economy poses the greatest threat to his reelection, traveled to North Carolina on Monday to tout his green energy jobs programs. He visited an energy efficient lighting manufacturing plant of Cree Inc. that received a $39 million government tax credit several years ago and added 750 new jobs to become a 2,000-person company in the Tar Heel state.

But unlike in Germany and China, which have invested heavily in alternative energy and are experiencing much more rapid economic growth than the U.S., green jobs remains largely a cottage industry in this country. Even the President’s new Jobs and Competitiveness Council, which traveled with Obama to Durham to visit the plant, focused on more traditional job creation steps in offering its first report.

Writing in Monday’s Wall Street Journal, GE chief executive officer Jeff Immelt and American Express CEO Ken  Chenault, called for increased vocational and jobs training focused on manufacturing, which has contributed significantly to the nearly two  million jobs that have been added to the economy since the depths of the Great Recession. The CEOs also called for eliminating government red tape standing in the way of job creation, such as complex permitting processes; new help for tourism, in part by streamlining the visitor visa system; and easier access to small business loans.

They did see energy efficiency as a potential savior for the nation’s ailing construction industry, which lost two million jobs after the housing bubble burst. “Every city in America has commercial buildings that can be made more energy efficient,” Immelt and Chenault wrote. “Both the private and public sectors can step up to create good jobs and save energy.”

But these steps, which appear to have been carefully crafted to avoid major new drains on federal coffers, seem unlikely to create the quick boost to the economy the president needs. A Wall Street Journal survey of 54 leading economists released Monday predicted the economy would add 2.2 million jobs over the next year, enough to bring unemployment down, but still leaving it at 8.2 percent in June 2012 and 7.9 percent in December of next year.

That level of unemployment should prove fertile political grounds for any of the leading Republican Party presidential  candidates, who on the campaign trail and in last night’s opening debate sounded to varying degrees the longstanding political program of their party: more corporate and individual tax cuts, sharp budget restraint, and regulatory rollbacks to spur demand-side economic growth. Immediate economic stimulus beyond tax breaks is anathema to all the candidates, just as it is for Congress.

Former Minnesota governor Tim Pawlenty foreshadowed his program in a major speech to the Chicago Economic Club in early June, calling for capping federal spending for the Baby Boom retirement years at 18 percent of Gross Domestic Product, which would be below the level of most of the post-World War II era. He claimed such spending restraint would unleash an era in which economic growth equaled 5 percent year after year, even though there were only a few quarters in the past half century when growth reached that height.

Pawlenty also called for slashing corporate tax rates by more than half. from 35 percent to 15 percent, abolishing taxes on dividends and investments, capital gains and estates, and simplifying personal income tax rates. He did allow for curbing the “handouts, carve-outs, subsidies and loopholes . . . to help offset revenue loss.” He also called for major cutbacks in subsidies for ethanol.

Former Massachusetts governor Mitt Romney called for lower business taxes and cutting “bureaucratic red tape” by placing a “hard cap on the impact that federal regulations can have on the economy.” While he endorsed increased job training, his effort to attract primary voters in states where Republicans governor have been at loggerheads with public employees included a vow to make war on “the corrosive influence of union bosses on productive business.” Unionization in the private sector is now less than 7 percent or one in 14 workers.

Herman Cain, the former CEO of Godfather’s Pizza, called for “less legislation, less regulation, lower taxes and business-friendly policies.” Rep. Michele Bachmann, R-Minn., a champion of the Tea Party, linked job creation to her budget-cutting proposal that would “recall the $460 billion in unspent ‘stimulus’ moneys while leaving intact the package’s tax relief and unemployment benefits.”

Newt Gingrich, former speaker of the House, called for trillions of dollars in new tax cuts, including making all the Bush-era tax cuts permanent, eliminating all capital gains taxes, lowering the corporate income tax rate to 12.5 percent and making the 100 percent expensing of capital investment permanent. Former Pennsylvania Sen. Rick Santorum, now a senior fellow at The Ethics and Public Policy Center and the Friday host of Bill Bennett’s “Morning in America” radio program, touted his support for lower taxes and opposed all stimulus programs.

The Republican emphasis on tax cuts and fiscal austerity does not sit well with many mainstream economists, most of whom have ratcheted down their growth estimates in recent weeks. “We have an economy that is losing momentum because the basic problem is insufficient demand,” said Asha Bangalore, an economist at Northern Trust Bank in Chicago. “There are no votes for a stimulus plan, but I think there has to be one as well as a QE3,” further purchases of government bonds by the Federal Reserve Board.

“[Republican] tax cut plans seem to be oriented to upper income households, which are less effective because those folks tend to save more,” added Gus Faucher, chief macroeconomist at Moody’s Analytics. “The Republicans are making supply side arguments when the problem now is lack of demand.”

But John Makin of the American Enterprise Institute, a conservative Washington think tank, cautioned against the Democratic approach of seeking new stimulus measures to pump up demand. “Maybe we should just let the market adjust,” he said. “Maybe [more stimulus] is counterproductive, especially when we should be thinking about reducing the budget deficit.”

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