As I report in this week’s magazine, several current and former advisers to President Obama would like Congress to pass more short-term stimulus, but no one inside is quite saying that publicly just yet. “I don’t have any new policy announcements to make,” White House Spokesman Jay Carney said on Thursday, when asked about one stimulus option, a new cut in the employer-side payroll tax cut. There reason for this public reticence, in the face of persistent 9% unemployment, has two sources: House Republicans are unlikely to pass new stimulus, and American voters have demonstrated that they don’t trust the government to do anything right, especially spend borrowed money.
But there is a narrow path to more stimulus this year, assuming the latest economic data is not a blip but a worrying trend. It’s a long shot, but but here’s how it may play out.
First, it’s important to understand the barriers to new stimulus. The Republican House position was spelled out by Speaker John Boehner on May 9 at the New York Economic Club. “The lesson of the stimulus era is that short-term government intervention is no substitute for long-term economic investment, private initiative, and freedom,” he said. “I believe it’s time to leave that era behind.” In other words, no way. And not only that, but Republicans rhetorically tend to reject the very Keynesian theory behind stimulus: That government should build demand in times of economic stagnation. The other limiting factor is that American voters tend to agree with the Republican rhetoric, even as they desperately demand an improving economy. (Andrew Levison, at the Democratic Strategist, lays out the political problem for Keynesian and Democrats, which is worth a read.)
That said, the Keynesian notion that short term tax cuts and spending increases can more than make up for their cost by helping the economy in the long run remains widely accepted in Washington, not to mention on Wall Street or in academia. The substantive debate tends to be about how much and what kind of stimulus, not whether it works. (Mitt Romney, remember, was for stimulus, just not Obama’s stimulus.) So if the economy continues to struggle, Boehner’s political position will be tested, as will the positions of conservatives within his caucus.
On Thursday, Sen. Orrin Hatch, the top Republican tax writer, said he could foresee supporting a temporary employer payroll tax cut. There is also precedent for such a cut. Late last year, an 11th-hour proposal for a temporary employee-side payroll tax cut passed Republican muster, even though it was clearly designed as a stimulus effort just weeks after Republicans had won the midterm elections by arguing that stimulus doesn’t work.
Which brings us to the narrow window for stimulus this year. First, the economic numbers will have to stay bad between now and late July. Second, there will have to be a public division among Republicans about whether more short-term stimulus, probably based around tax cuts, makes sense. Though they don’t say this explicitly, the third part of this formula involves the White House team doing its homework. Whatever happens with the debt ceiling vote, most of it will happen in the 11th hour. And for this to happen, Obama will need to have some cards up his sleeve, things he is willing to trade away in the long term for more short term help.
Another factor will be the role of the corporate lobbying community. Historically lobbyists wait in the wings on big legislation, and then offer to deliver last minute votes in exchange for their pet projects. One could imagine lobbyists getting behind an employer side payroll tax cut, which would provide lots of new money for small businesses. Lobbyists are already working hard on another foreign profits repatriation measure. If these lobbyists can deliver key House votes at the last minute, few would be surprised if corporate repatriation got thrown into a bill about lowering the deficit.
But will any of this happen? I am still doubtful. The roadblock, in the end, is the House GOP caucus, where a significant number of members believe as a matter of faith what Boehner said at the New York Economic club. For many, this is a matter of political identity. And many Republicans are still living in the shadow of the Bush years, where the House GOP was asked to trade away their identity for political victories. They don’t want to do it again.