- The Washington Times - Tuesday, July 7, 2009

Politically and economically, the next three months are critical for Barack Obama’s presidency.

The pace of the economic recovery heading into the fall — electric smooth or diesel rough — will determine whether Mr. Obama can prod Congress on the key features of his agenda with momentum or from a defensive crouch.

Steady economic improvement that is perceptible to the American public would boost his political standing and give him the thrust to get Congress to complete action on his ambitious plans to overhaul health care, attack climate change and put the financial sector under greater government oversight.

But a stumbling recovery would erode Mr. Obama’s currently high approval ratings, a source of much of his political power. At the same time, continued high unemployment might force Mr. Obama to ask Congress for another boost in spending to stimulate the economy — a political challenge that could delay if not undermine his other goals. So far there is little cause for cheer.

Since Mr. Obama signed the $787 billion economic stimulus bill in February, the economy has shed more than 2 million jobs.

Economists and heavyweight Obama backers such as Warren Buffet already are calling for another stimulus, saying the recession proved to be deeper and more devastating than originally believed.

“The economy took away everything they put on the table,” said Lawrence Mishel, president of the Economic Policy Institute, a labor-leaning economic think tank.

“We strongly believe we need another stimulus, and we need it now,” added Thea Lee, policy director for the AFL-CIO.

Republicans don’t agree. “I’m very skeptical that the spending binge that we’re on is going to produce much good and, even if it does, anytime soon,” said Senate Minority Leader Mitch McConnell of Kentucky.

The need for a new stimulus has been a matter of internal debate within the Obama administration, according to people familiar with the talks. White House officials have made no public commitments.

Vice President Joseph R. Biden Jr. said the administration “misread how bad the economy was” but stands by its stimulus package and is sure the plan will create more jobs as the pace of its spending picks up.

Mr. Biden, in an interview broadcast Sunday on ABC’s “This Week,” did not rule out a second stimulus but said it was premature to say whether it would be needed.

Said Mr. Mishel: “Publicly they’ve been quite cautious. Sometimes annoyingly so.”

The conundrum for Mr. Obama is that his health care and climate plans ultimately rely on a strong economy. A weak recovery that falls short of the administration’s forecast of 3.2 percent growth in gross domestic product (GDP) in 2010 would result in lower-than-expected revenue and greater potential deficits over time.

Trying to further prime the recovery, however, would require additional short-term deficit spending, and there’s declining appetite for that in Congress.

“Perversely, you actually have to have higher deficits to generate some growth,” Mr. Mishel said.

Analysts and administration officials say the full effect of the $787 billion is only beginning to be felt. But that initial beneficial shock to the system will dissipate, and if the economy is still sputtering next year, it could become a political danger for Democrats, who control the White House and both chambers of Congress.

“The economy is obviously being supported by significant stimulus,” said economist Mark Zandi of Moody’s Economy.com, who has advised Washington policymakers. “But that’s going to begin to fade by certainly this time next year, right in time for the next election.”

Many of those favoring a stimulus say it should be smaller than the current one. Estimates range from less than $200 billion to up to $500 billion. Advocates say it should contain unemployment assistance and aid to states. While some reject tax cuts as an element, others say it could include a payroll-tax holiday.

Labor intends to make a louder case for a new stimulus. AFL-CIO President John Sweeney on Thursday issued a statement calling on Congress and the administration to “remain focused on stimulus efforts” and issued an international call for governments to increase stimulus spending by 1 percent of GDP.

“The employment numbers are so dire and the long-term prospects so poor that it seems clear to us that additional stimulus is needed and we need to start planning for it now,” the AFL-CIO’s Ms. Lee said.

Beyond unemployment, however, the economy is also hurting the employed, posing an even greater political risk to Mr. Obama and congressional Democrats. Work hours have declined, and wages have eroded, a further drag on the recovery.

“It’s going to constrain the growth of consumption and the strength of any rebound,” Mr. Mishel said.

Complicating the calculus for the administration is the role deficits might play. Martin Regalia, chief economist for the U.S. Chamber of Commerce, maintains there is a 1-in-5 chance that deficits will drive up interest rates and that the economy will dip into recession again sometime next year.

“You don’t have to have a whole lot of dissipation in the growth in order to see a return to declines in the economy,” Mr. Regalia said.

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