U.S. Economy: The Case for More Stimulus

The worst thing about the uptick in hiring? It could undermine a second wave of federal spending that may be needed to stave off a double-dip recession

By Peter Coy

Illustration by Julie Teninbaum

President Barack Obama would have been forgiven a few high-fives on Apr. 2 after the Labor Dept. announced the U.S. economy generated 162,000 jobs in March. Instead he was cautious. At a speech in Charlotte, N.C., Obama did say, "We are beginning to turn the corner," then added that the job numbers "leave us with a lot more work to do." Chief economic adviser Christina Romer was even more circumspect, issuing a statement that said, "the American labor market remains severely distressed." And over the weekend, National Economic Council Director Larry Summers drove the point home on CNN, saying, "We've got a long way to go."

It's not modesty, false or otherwise, that's making the Obama Administration so reticent. It's reality. With 10 million Americans out of work, Obama's team knows that the employment growth in March (a quarter of which was driven by the hiring of federal Census workers) actually makes its mission over the next year or two more difficult.

Here's why: The positive jobs report reduces the political urgency for fixing the U.S. economy. If voters and lawmakers decide the economy is healing on its own, it becomes harder to justify more infrastructure spending, aid to stressed states, extended unemployment insurance, and the like. Even before the report, the Administration had begun to focus on smallish fixes like the $14 billion HIRE Act, which encourages hiring of the unemployed, and new measures to discourage foreclosures. "Stimulus has become a dirty word in Washington," says Augustine Faucher, macroeconomics director of Moody's Economy.com (MCO).

That's understandable, but it could be a problem if the economy begins to sputter. The nonpartisan Congressional Budget Office estimates that as of the end of 2009, last year's $787 billion stimulus package had created 1.4 million to 3 million full-time-equivalent jobs that wouldn't have existed otherwise. In other words, the recession would have been even worse without it. Now that stimulus is going away; by September, 70% of the funds will have been spent, the government estimates.

While most forecasters see gross domestic product growth of 3% this year and next under current policy, there remains a risk that without more support, the U.S. economy will sink into Japanese-style torpor. David Rosenberg, chief economist of investment manager Gluskin Sheff + Associates in Toronto, predicts U.S. growth will slow from 3% this year to 2% in 2011 and just 1% in 2012. He sees a 35% chance of a relapse into recession at some point. Says Mizuho Securities USA Chief Economist Steven Ricchiuto: "Since the [March] payroll data came out the growth optimists are taking a victory lap. But the risk of a double dip remains significant."

All this puts the Obama Administration in a tricky spot. The President wants to continue priming the pump, at more modest levels. The 2011 budget requests $266 billion to fight the slump—$166 billion for extended unemployment insurance, more aid to states and localities, etc., and the rest for targeted jobs programs. "We are very much of the mindset that more needs to be done," says Jared Bernstein, Vice-President Joe Biden's chief economic adviser.

Yet Obama also wants to reassure voters and the markets that he's serious about deficit reduction. That's the purpose of the new deficit commission and the scattered tax hikes in the 2011 budget. There's a risk of coming down in the muddy middle and achieving neither goal. The conservative Orange County Register editorialized in February that in conveying his dual message, Obama sounds like the young St. Augustine, who prayed: "Give me chastity and continence, but not yet."

As a student of the Great Depression, Christina Romer studied what happened in 1937-38, when ill-conceived fiscal and monetary contraction killed a fairly strong recovery, sending the economy back into a slump that didn't end until World War II. As the current recovery begins, Romer says she continues to worry whether private demand will come back strongly enough as federal spending falls. "We are on track for normal trend growth, but we need much more than that. When you're down so much in jobs, you need a period of very rapid job creation," she said in an Apr. 6 interview.

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