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Economic Policy Is Working, Obama Says
Administration Says Recovery Effort Has Moved From Rescue Stage to Rebuilding

By Scott Wilson and Michael A. Fletcher
Washington Post Staff Writers
Tuesday, August 4, 2009

In public appearances this week, President Obama will attempt to regain the initiative on the economy after what one senior administration official called several "rocky" weeks of declining support for the president and his major policy efforts.

He and his Cabinet advisers will fan out across several swing states to declare that the recovery has moved from the rescue stage to rebuilding, even though unemployment continues to increase and his advisers have been making contradictory statements about whether the administration may need to consider a tax increase for middle-class Americans.

Obama's insistence that the first phase of the recovery is over amounts to a strong defense of his intervention in the private-sector economy -- and of the administration's overall competency -- as lawmakers head into their August recess with the fate of health-care and energy reform still undetermined. But many Republicans and some Democrats say the administration may be misreading the pace of the turnaround and, in effect, celebrating too soon.

"Is this what economists call an inflection point? Probably," said William A. Galston, a senior fellow at the Brookings Institution who served as a domestic policy adviser in the Clinton White House. "To what extent has administration policy contributed to this? I would say substantially in the case of rescue, but not much, if it all, in slowing the rate of decline."

Galston warned that "the administration is sailing into some pretty stiff headwinds," citing the still-sluggish credit markets and, more important, the fact that "households have experienced a shock, even more to their wealth than to their income, that will take some time to get over."

Only a few weeks ago, Vice President Biden acknowledged that the administration had "misread" the depth of the recession upon taking office. Quarterly gross domestic product numbers have since been revised to show a more severe economic slide than was known at the time, but an administration that prefers playing offense has been forced to defend the effectiveness of its $787 billion stimulus measure in the face of rising unemployment.

But on Sunday even Sen. John McCain (R-Ariz.), Obama's general-election rival, conceded on CNN that the legislation has brought "short-term improvement in the economy." The most recent GDP figure showed the economy contracting at 1 percent over the most recent quarter, better than most forecasters anticipated.

"The GDP numbers validated our strategy," said Rahm Emanuel, Obama's chief of staff, sharpening the point made by the administration's top economic policy advisers on weekend talk shows. "If you think about it, the first six months were spent rescuing the economy. Now the president is laying the groundwork for rebuilding the economy."

Obama began making that case Monday when he told an audience of student veterans in Virginia that the tuition aid contained in the new G.I. Bill is "not simply a debt that we are repaying to the remarkable men and women who have served -- it is an investment in our own country."

On Wednesday, the president will travel to Elkhart, Ind., for a repeat visit to the nation's RV manufacturing capital, which he described in his weekly radio address as "hard-hit not only by the economic crisis of recent months, but by the broader economic changes of recent decades."

Emanuel said Obama will highlight the billions of dollars in stimulus grants that will go toward battery cell research for the next generation of electric cars, a sector of the economy he has highlighted for its potential to create jobs.

The stimulus measure contains $21.5 billion for basic research -- the largest one-time spending ever in that area -- and $60 billion for such projects as extending broadband's reach, computerizing health records and creating a smart grid, among other programs the administration has deemed important to developing a new economy.

Biden will be in Detroit on Wednesday to talk about the same subject. And Energy Secretary Steven Chu will travel to North Carolina to promote the research in advanced battery technology.

But with the national unemployment rate still rising, the strategy holds some risk for an administration worried that a recovery in that area may shadow next year's congressional elections.

Some economists predict that the next quarterly report will show growth, ending a recession that officially began in December 2007. But Obama and his senior advisers have been careful to note that the economy will continue to shed jobs, perhaps into next year.

House Minority Leader John A. Boehner (R-Ohio) said Monday in a statement that it is "baffling that administration officials would celebrate a bloated, ineffective trillion-dollar stimulus that hasn't produced the jobs nor the immediate jolt to the economy that they promised."

According to the Labor Department, 144 metropolitan areas reported jobless rates of more than 10 percent in June, a huge increase from the six metropolitan areas that had rates that high the previous year. The national unemployment rate for that month rose to 9.5 percent. Such figures for July are scheduled to be released Friday.

The stimulus plan provided money to extend the time unemployment benefits can be collected, but advocates for the jobless are urging the White House and Congress to grant another extension. Nearly 1.5 million people are likely to run out of unemployment insurance by December, according to new projections by the National Employment Law Project, a nonprofit group that advocates on behalf of workers.

Obama also has yet to outline how he intends to reduce long-term spending, which as of now would require $9 trillion in new borrowing over the next decade. On Monday, his administration appeared to rule out a middle-class tax increase that many economists say is the only way to address the nation's precarious long-term fiscal condition.

The president pledged during last year's campaign not to raise taxes on families making less than $250,000 a year, and White House press secretary Robert Gibbs told reporters Monday that he would keep that commitment. The comments came a day after Lawrence H. Summers, a top Obama economic adviser, said "it is never a good idea to absolutely rule things out no matter what" when asked on CBS's "Face the Nation" whether taxes would go up for middle-class Americans.

"I think the president has backed himself into a corner here," said Marc Goldwein, policy director of the bipartisan Committee for a Responsible Federal Budget. "He wants big spending on health care, energy and education. And you can't get that from taxing only the top 5 percent of income earners. That makes it difficult to do tax policy."

Douglas J. Holtz-Eakin, McCain's former economic policy adviser, questioned whether the economy had responded to the stimulus measure's public spending and tax cuts. Although the economy as a whole contracted more slowly than expected, he noted that some sectors that were expected to benefit most from the legislation continued to suffer.

"We do need to look for future growth from businesses, not households," he said. "But what they are calling 'rebuilding' is only a policy change that fits with what they want to do, not a necessity to fix a broken economy."

Staff writer Amy Goldstein contributed to this report.

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