The “mini-stimulus”

A prophet in his own house

The president’s push for more stimulus hits the buffers

Washington, dc

BARACK OBAMA’S plea to stimulate economic growth now and cut deficits later got a mixed response from world leaders at the G20 summit in Toronto last weekend. And the reception back home was a lot worse.

On June 24th Democratic leaders in Congress withdrew a stimulus plan after failing, for the third time, to get the necessary 60 votes in the Senate to proceed. The defeat was all the more humbling because the bill had already been fiercely pared back. In his February budget Barack Obama had proposed $266 billion of new stimulus measures over the next few years. The “American Jobs and Closing Tax Loopholes Act” that Democratic leaders in Congress unveiled in May contained only $79 billion-worth: extended unemployment benefits, health-insurance subsidies for the unemployed and Medicaid grants to the states. (The entire bill would have added $134 billion to deficits because of extensions to expiring tax breaks and Medicare payments for doctors.) It was then repeatedly whittled down, finally to just $34 billion, in a vain attempt to win over a few Republicans.

The package failed for several reasons, including opposition from business groups (and Republicans) to its increased taxes on multinationals and on the carried interest of private-equity fund managers. But the main reason is that record deficits and the sovereign-debt crisis in Europe have heightened the political price of any new borrowing, even as the graver threat of future entitlement spending goes unmet. “We’ve reached a new political equilibrium—you can’t add to the deficit but you can’t cut it either,” notes Andy Laperriere of ISI Group, a brokerage.

These days Mr Obama needs at least a few Republican senators to pass almost anything, but recent primary battles have shown deep antipathy among Republican voters to any increase in spending, deficits or taxes. So while a stand-alone extension of unemployment benefits may eventually pass, the prospect of any sizeable new stimulus has faded. The pre-mid-term gridlock means that even an extension of George Bush junior’s tax cuts, which expire this year, is not assured, even for America’s middle class. That would be a big blow to the president.

The latest defeat comes at a pinched time. The winding down of most of last year’s $862 billion stimulus package (the price grew in the spending from the original $787 billion) has already factored substantial fiscal tightening into the economic outlook as aid to states dries up and temporary tax cuts end. JPMorgan Chase estimates that these will subtract 1.8 percentage points, at an annual rate (see chart), from growth in the first half of next year, though it reckons there will be enough underlying momentum in the recovery to keep growth above 3%.

Without a mini-stimulus bill, though, the drag increases to 2.4 points. A failure to renew Mr Bush’s tax cuts would add another percentage point to that. So if underlying growth flags even a little, that fiscal tightening could be enough to tip the economy back into recession. A surprise plunge in consumer confidence in June was the latest reminder that this gloomy scenario cannot be ruled out.