The White House is stuck.
There's no reason for consumer spending to grow now, demand for financial instruments is high, businesses won't lend, the official unemployment rate remains short of 10 percent, and the White House seems to have run out of big ideas. After November, Democrats and Republicans will debate the wisdom of extending the Bush-era tax cuts to the wealthy. But no other major policy proposals are percolating. The economy is job one, but the tool box is empty.
The administration worries that economic growth will remain anemic for years but feels boxed in by a political atmosphere that considers government spending to be toxic. The Federal Reserve acted tepidly this week, recognizing that the economy needs more money but that enough Fed governors remain worried about rapid inflation to prevent any drastic action by the monetary policy body. There will be no large Fed purchases of Treasury bonds or securities. As demand is further crimped by expectations turning to deflation, inflation of some sort is desperately needed.
Officials are dipping into already appropriated pools of money, like overflow from the TARP bailout, to expand programs aimed at fixing mortgages and keeping people from losing their homes. In the lame duck session, Democrats will try to extend the Bush-era tax cuts for families earning less than $250,000, resulting in a tax increase for those earning more. But the market, and corporations, already expect these measures, and their hiring and employment forecasts aren't getting sunnier. Centrist Democratic money types believe that businesses won't begin to hire until policy-makers provide certainty about deficit reduction. President Obama's task force won't report its recommendations until the end of the year.
A strange thought-fellow coalition has an idea: a payroll tax holiday. Different groups have different forms of the proposal: some of them would exempt different amounts of income from the Social Security tax, which is 6.2 percent on a worker's first $106,800 of income; some would go into effect immediately and last for a year, and others, for just six months. It would be stimulative, easy to implement, popular and would encourage job creation.
The White House declined to comment on whether economic advisers were considering such an idea, although an economist who consults with White House experts said that several officials are thinking through its implications.
Some economists doubt the multiplier effect from a payroll tax holiday would be significant; it would certainly be less so than straight stimulus, but Congress won't consider another "stimulus package" of appreciable size anytime soon. The liberal Center for Politics and Budget Priorities calculates that most of the money would be saved, not spent, and the tax holiday appears more progressive than it actually is. Robert Reich, the Clinton labor secretary, envisions a break for the first $20,000 in income, helping poorer workers and potential employers alike. (Here's an argument that it will help workers but not employers.)
Paring back the money that goes into the Social Security trust fund would ordinarily be a political non-starter, but if the White House were to make the proposal's adoption contingent on long-term Social Security reform, it might be more palatable for a Congress that will be less liberal.
The Social Security trust fund, an accounting device, is technically solvent through 2036, when the money that it pays out to current beneficiaries will exceed the revenue it accrues from payroll taxes. Democrats talk about Social Security as an iron-clad guarantee, part of a compact between the government and senior citizens, one that is sacrosanct and needs to be preserved. Republicans and some Democrats want to modify the program, either by raising the retirement age, cutting benefits, or by allowing individuals to invest part of the money they contribute. It is politically untenable to oppose the program itself, so many Republicans who do say their modifications are efforts to shore up its long-term solvency.