Delicate economic summer crucial to Obama's agenda

Associated Press | 7/8/2009, 5:32 a.m.

“The economy is obviously being supported by significant stimulus,” said economist Mark Zandi of Moody’s Economy.com, who has advised Washington policy makers. “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 Lee said.

Beyond unemployment, however, the economy is also hurting the employed, posing an even greater political risk to 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,” 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,” Regalia said.

(Associated Press)