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In a press conference this morning to address the dismal June jobs report, President Obama said he would consider extending his payroll tax cut another year. That tax break, which reduces the Social Security levy on all workers by two percentage points, keeps an extra $1,000 per year in the typical worker's wallet. It represents our last best hope for stimulus in the sputtering recovery.
It also represented one of our first hopes. In February 2009, Sen. John McCain revived an idea from the campaign trail to replace the Recovery Act with another multi-hundred-billion plan grounded in ... a payroll tax cut. Republicans lost that debate. Democrats' stimulus plan instead focused on state aid and a $800 across-the-board tax break called Making Work Pay.
Two years later, Sen. John McCain has faded from the economic news cycle, but his idea has taken center stage. Many liberals, moderates and conservatives agree: a second payroll tax cut might be the only good arrow left in Washington's quiver worth firing.
And so it is that Year-2011 Barack Obama's best shot to help the recovery might be to steal a page from year-2009 John McCain.
The case for stimulus is dead. Who killed it? Some blame the I-95 corridor, the thin artery between New York media and Beltway power, and its obsession with deficits. Some blame the inherent failure of the Recovery Act. I blame the housing crisis.
My favorite metaphor for the stimulus, like many things, comes from sports. In baseball, the Recovery Act would be a seven-run seventh inning for a team losing by ten runs. It was a big inning, but not enough to pull ahead. The housing crisis was the ten-run deficit. Not only did it freeze the real estate industry, but also it stunned businesses and families who had spent the former decade powering the economy with debt and credit. Today we're dealing with the big freeze.
Like the metaphor? Hate the metaphor? It doesn't matter. In politics, where perception is reality, the perceived failure of the stimulus is indistinguishable from actual failure. Even before the 2010 election turned the House deep red, the case for more spending had been poisoned not only on the right, but among moderates of the Democratic Party, and across the country, as polls indicated. In an off-the-record Treasury event for reporters, one top official conceded to me that the economy was horrible but "nothing was possible," because the case for more spending had been killed by the slow recovery.
The spending side argument has disappeared, replaced with a very McCain-ish sounding plea for government to live "within its means" today, even with unemployment stuck at 9 percent. The only acceptable stimulus left comes from taxes. For better or worse, we are witnessing a profound Republicanization of Washington economic policy.
It's of limited use to ask the White House what the president "wants" today. The universe of things he can achieve is confined to how a majority in the conservative House and super-majority in the moderate Senate will vote. Even inside a $4 trillion deal to reform the budget over the next ten years, there is scant enthusiasm for plowing money into infrastructure or state relief in the next few years.
President Obama's last chance to save the economy in 2011 is to do a spot-on impression of Sen. John McCain from 2009. That is to combine payroll tax breaks and corporate tax incentives, to go along with his extension of the entire Bush tax cuts. This doesn't look much like liberal economics. Then again, liberal economics had its moment in February 2009. Maybe the stimulus was underfunded or poorly designed. For whatever reason, the recession steamrolled it.
Two years ago, nearly the entire budget was a canvas for stimulative action. We're left with the payroll tax. Thus the deepest recessions make conservatives of us all.
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