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Election-year deficit fears stall Obama stimulus plan

By Lori Montgomery
Washington Post Staff Writer
Saturday, June 19, 2010; A01

Barely a week after President Obama tried to re-energize his push for more spending on the economy, his agenda is stalled on Capitol Hill, mired in election-year anxiety about the deficit.

Congress has delivered only about a quarter of the $266 billion in "temporary recovery measures" the president sought in his February budget request and ignored much of the rest. There is unlikely to be another "recovery" check for Social Security recipients. Come December, Obama's "Making Work Pay" tax credit -- the signature initiative he regularly touts as a tax cut for 95 percent of Americans -- will probably be gone.

Even the state aid that Obama last week called critical to preventing the layoffs of hundreds of thousands of teachers and other government workers is foundering. After days of talks, frustrated Democratic leaders in the Senate failed again Thursday to muster the 60 votes needed to approve the cash and left town for the weekend with no clear path forward.

If Congress doesn't provide additional stimulus spending, economists inside and outside the administration warn that the nation risks a prolonged period of high unemployment or, more frightening, a descent back into recession. But a competing threat -- the exploding federal budget deficit -- seems to be resonating more powerfully in Congress and among voters.

Whether or not Obama's directive to spend more now and tackle the deficit later -- which he laid out in a letter to Congressional leaders Saturday -- is the right economic medicine, some lawmakers say it sounds like political doublespeak outside the Beltway. Polls show most people don't think Obama's first stimulus package worked, and they are sending mixed signals about whether Washington should spend more on jobs or start minding the national debt.

Administration officials are forging ahead, theorizing that voters would be even angrier if Washington skipped the additional spending and unemployment began to climb again. The White House is also trying to do a better job of selling the original $862 billion stimulus package, enacted last year, which has gotten high marks from many economists.

"This is an environment in which there's a great deal of jaundice about government and government spending," White House senior adviser David Axelrod. "But it's foolhardy to suggest that we should walk away from the things we need to do to continue recovery efforts as a way to deal with our fiscal problem."

The debate over whether the United States and other developed countries can afford anymore stimulus spending has taken on greater urgency in recent months, especially as the threat of national default in Greece has fueled global fears about the health of countries with outsize deficits.

In recent weeks, the administration has focused on freezing what it calls unnecessary spending, targeting fraud and eliminating wasteful programs. Obama also has a special commission at work on reducing deficits over the long term. But "no intelligent fiscal reform can work without economic recovery," Axelrod said. "You've got to put one foot in front of the other."

The lousy economy was a huge contributor to last year's $1.4 trillion budget deficit. Tax collections plummeted and spending on the poor and the jobless soared. While the stimulus ratcheted the deficit higher, the nonpartisan Congressional Budget Office also credits the measure with helping to ward off disaster. In a May report, the CBO said the much-maligned bundle of tax cuts and new spending preserved as many as 2.8 million jobs through March, preventing the jobless rate from rising as much as 1.5 percentage points higher.

This week, Vice President Joe Biden kicked off a six-week campaign dubbed "Recovery Summer," designed to defend the stimulus and to call attention to a surge in stimulus-funded projects that are finally shovel-ready. Crews are at work on more than 10,000 highway projects, 800 national parks projects and 82,000 home weatherization projects that the White House forecast would preserve an additional 1 million jobs by the end of September.

On Friday, Obama traveled to Columbus, Ohio, the first of more than two dozen stops on the "Recovery Summer" tour. Flanked by road workers in hard hats and safety vests, Obama reminded the crowd how bad things were a year ago when "America was losing 700,000 jobs per month" and "we knew if we failed to act, then things were only going to get much worse." He also offered a brief tutorial on stimulus spending. Not only do construction workers get jobs, Obama said, so do the waitresses in the local restaurants where the workers eat lunch.

But he acknowledged that "a lot of families and communities have yet to feel the effects of the recovery in their own lives." And he did not repeat the urgent plea for more spending he made in the letter to congressional leaders on Saturday.

Given the sour mood in Congress, the White House has all but given up on some of its original proposals for new spending. Administration officials acknowledge, for example, that the expiring "Making Work Pay" tax credit, a campaign staple enacted in the stimulus package, has gotten no traction in Congress. Obama has proposed to extend the tax, which delivers $400 a year to working individuals, through next year.

But other items remain high priorities. For example, White House economists are alarmed by the fiscal condition of state governments, which have laid off 84,000 workers this year. Governors from both parties are pleading for help. In his budget, Obama asked Congress for $25 billion to plug state budget holes. He later added a request for $23 billion to protect public teaching jobs.

In an interview, White House economic adviser Lawrence H. Summers said failure to move forward with such programs "would almost certainly increase the risks to recovery, increase joblessness relative to the spur to growth they would provide and delay the date when the economy is able to rely only on private-sector growth."

Conservatives disagree. With midterm elections approaching, Republicans are vigorously attacking the stimulus, casting it as a boondoggle that increased deficits while failing to create private-sector jobs. Last week, House Minority Leader John A. Boehner (Ohio) sent Obama a letter signed by 100 economists noting that 95 percent of the jobs created in May were temporary posts related to the U.S. Census.

Fiscal stimulus "is not a particularly effective strategy. So let's just stop," said Douglas Holtz-Eakin, a former CBO director who advised Republican Sen. John McCain's presidential campaign.

But economist Mark Zandi, who has advised both the McCain campaign and congressional Democrats, has endorsed Obama's call for more state aid, saying the fiscal condition of the states is "a significant impediment to economic growth."

"In all likelihood, the nation's economy will not backtrack into recession in the coming months," Zandi recently told reporters. "But the odds are too high that I could be wrong."

Senate Democrats say they will try again next week to find 60 votes for the package of state aid, unemployment benefits and tax breaks. But the prognosis is not clear. Meanwhile, House Democrats are looking to slash the money for teachers. And several influential Democrats have suggested that both packages should be "paid for," perhaps by borrowing unspent cash from the original stimulus, a move that would blunt any positive impact on the economy.

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