The incredible shrinking stimulus

December 21, 2012

President Obama's concessions to Republicans on taxes and Social Security have grabbed the headlines, but there's another big area where the White House has shifted considerably in the GOP's direction: direct stimulus to revive the short-term economy.


Bill O'Leary/The Washington Post

In his original offer, Obama asked for $425 billion in stimulus through jobs measures and tax extenders, according to the Committee for a Responsible Federal Budget, including $50 billion in infrastructure spending and other stimulus measures; mass mortgage refinancing to boost the housing market; $30 billion in unemployment extension; a $115 billion extension of the payroll tax holiday; and the extension of a host of business tax breaks known as extenders.

The stimulus measures are intended to counteract the impact of a fiscal cliff that would put major austerity into effect immediately. But they're also meant to counter the fiscal tightening in a fiscal cliff deal, which both Democrats and Republicans have agreed should  promote major austerity in the longer term through deficit reduction.

Republicans, however, have argued that more explicit stimulus right now isn't the answer: House Speaker John Boehner included no explicit stimulus measures in his original offer and has only proposed to extend a handful of business tax breaks since then. It's clearly been a point of contention in the negotiations as Obama's stimulus proposal has progressively shrunk over time: In his third offer, reported Monday, Obama dropped his ask from $425 billion to $175 billion in stimulus, as my colleague Dylan's chart shows below, keeping the federal extension of unemployment insurance, infrastructure spending and some business tax breaks, but abandoning the extension of the payroll tax holiday, among other major measures.


(Source: Dylan Matthews/The Washington Post)

The White House's abandonment of the payroll tax is of particular concern to economists and advocates who believe that more stimulus is necessary while the economy continues to recover — particularly if Democrats and Republicans fulfill their stated promise of passing a major deficit reduction package that will begin some of its austerity in the near term. Of all the parts of the fiscal cliff, continuing unemployment insurance has the biggest "bang for the buck" in terms of boosting the economy, according to Moody's Mark Zandi's calculations of the fiscal multipliers. But the payroll tax holiday would boost the economy even more, as it would benefit far more households. At the cost of $115 billion, it would bolster the economy by $144 billion, according to the Economic Policy Institute. 

Jared Bernstein, a former economic adviser to the White House, calls the payroll tax holiday "one of the most important components" in a potential stimulus package and believes the administration did make an effort to keep it on the table before deciding to give it up in last week's round of negotiations. "I believe they fought hard for the payroll tax holiday, and they concluded it just wasn't possible," says Bernstein. "They completely appreciate the importance of that holiday right now." 

But the concession to Boehner makes it essentially inevitable that taxes on the middle-class will go up in 2013, reducing the average family's income by $1,000. And Obama will be hard-pressed to keep any of the $175 billion of stimulus in a final deal. Boehner has already made clear that he believes any stimulus must be paid for, diminishing the spending cuts that Obama has offered him. 

Bernstein believes that federal unemployment insurance may have some shot of making it into a final bill. Unlike, say, new infrastructure spending, it's already scheduled to expire as part of the fiscal cliff, taking benefits away from 2 million unemployed people.

Obama, moreover, has indicated that it would be a top priority: When Boehner first proposed his Plan B, one of Obama's chief criticisms was that the GOP tax proposal helped the wealthy without insuring that benefits were extended for the unemployed. And the president's very latest offer, reported today, strips away many asks, but still includes federal unemployment benefits. But it's far from a given that they will make it into a final deal.

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