Does another fiscal stimulus stand a chance in Congress?
With the supercommittee finished, Washington is turned to the looming expiration of the payroll tax cut and unemployment benefits. But they won’t be alone: By December, Congress will need to resolve the most controversial parts of the 2012 budget, the GOP effort to reverse the defense cuts in the trigger, and the annual “doc fix” to boost Medicare payments to medical providers.
In order to tackle all this before Christmas recess, supporters of these programs might choose to combine some of these competing demands: for example, extending unemployment benefits could be rolled into a 2012 omnibus budget, which must be passed by Dec. 16 to avoid a government shutdown. “It’s the most likely vehicle,” says Stan Collender, a former Democratic House budget aide. It’s also a bill that’s likely to be riddled with its own minefields: House Republicans have insisted on all sorts of policy riders—defanging the EPA, eliminating Planned Parenthood funding, etc.—that have yet to be resolved.
But even Republicans who are willing to support the fiscal supports for the unemployed, for instance, say they must be offset, most likely by additional cuts. “The position of Senate Republicans is that they want the UI and doc fix to be fully paid for,” a Republican congressional aide tells me. What’s more, a growing number of Republicans say they oppose extending the payroll tax cut again—even if they’ve supported it previously—which makes a bargain on such measures even more difficult. A much more expansive payroll tax cut is at the center of Obama’s own jobs bill, which makes it even more important politically for Democrats to get the more modest extension passed—and more unappealing to Republicans.
What kind of offsets, if any, would pass muster with Democrats? It will be tough to demand additional cuts to 2012 discretionary spending, as big, immediate discretionary cuts could arguably defeat the purpose of propping up the economy through unemployment insurance benefits and the payroll tax cut in the first place. Alternatively, Congress could consider taking money out of some mandatory, non-health programs— reducing agriculture subsidies, reforming federal pensions, imposing new fees for government services, etc.—which are ideas that both Republicans and Democrats on the supercommittee put on the table over the past few weeks.
Some Democrats will try to rule out any kind of offsets altogether for these measures. When unemployment has been high in the past, amped-up unemployment benefits have been designated as “emergency spending” that don’t need payfors. “You don’t stimulate the economy and then pay for it by cutting spending at the same time,” says Collender.
Republicans could alternatively try to trade their support for unemployment benefits and the payroll tax cut by insisting that Democrats help them reverse some of the triggered defense cuts. But that could be another non-starter for Democrats, as credit agencies and outside economists maintain that reversing the trigger could prompt another U.S. downgrade. “What kind of signal are you sending to the market?” asks one senior Democratic aide.
So expect a significantly greater sense of urgency in Congress over the next month, as what legislators do or don’t decide to pass could have a significant impact on the 2012 economy. Outside economists aren’t feeling too optimistic that legislators will get the job done, with some already predicting that the unemployment benefits and payroll tax cut won’t be extended. “This week’s failure to come to an agreement probably reduces the likelihood some that those programs get extended, and thus we can expect a noticeable drag from fiscal consolidation early next year,” Michael Feroli, chief U.S. economist for JP Morgan, wrote today in a paper wryly titled, “You can’t always get what you want.”