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Where's the stimulus, Obama?

November 29, 2012: 10:22 AM ET

Yes, the "s" word may be toxic in Washington right now, but many economists believe that won't stop it from happening.

By Tory Newmyer

obama-stimulusFORTUNE -- The White House should be pleased. So far, the fiscal cliff negotiations are going pretty much exactly the way administration officials thought they would when planning for the post-election period started over the summer.

The Republican wall of opposition to any new tax revenue is crumbling; business leaders, so frequently Obama antagonists in the first term, are helping make his case for a balanced approach to deficit reduction; and the White House is marshaling the muscle of progressive groups to mount its outside-in strategy for selling a deal to Congress.

This would seem like the moment for the White House to introduce what has been its other big priority for these talks: Major new investments in infrastructure and other stimulus spending designed to shore up the recovery while meeting some long-deferred needs with cheap money. The to-do list of those spending proposals comprises the American Jobs Act, a $447 billion bill that debuted last fall and has remained the backbone of Obama's jobs plan since. But Obama didn't give it much love on the campaign trail and has uttered barely a word about it following his reelection.

What gives?

It's possible that Team Obama has decided that its chess game against Congressional Republicans over the shape of a budget deal is complex enough without making it three-dimensional. Insisting on upfront spending in the context of a debate over the deficit would certainly muddy the administration's message about the need to raise taxes from the wealthy to spread the austerity burden equitably. And the White House has made clear that its first priority in the fiscal cliff standoff is to strike a big deficit deal, on its own terms.

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Plus, the urgency of giving the economy an expensive new shot in the arm may be waning as the recovery shows signs of gaining traction. The unemployment rate is on an unmistakably downward trajectory. The housing market, long an economic millstone, is now helping to power the turnaround. Consumer confidence just hit a post-recession high. And the economy grew at a better than expected rate of 2.7% in the third quarter.

"At this point, the best stimulus would be getting a bipartisan deal that doesn't deliver too much austerity too quickly," says Mark Hopkins, a senior economist with Moody's Analytics. His outfit is taking a sunnier-than-consensus view: Assuming such a deal gets cut, they see plodding 2% growth next year, followed by significant pickup -- 3.9% in 2014, then 4.2% in 2015.

Others aren't as confident. Jared Bernstein, who served as Vice President Joe Biden's chief economic adviser until last year, holds that sluggish growth has owed to structural factors and that new investments in public goods are as necessary as ever. A big budget deal would be great, Bernstein says, "but let's not lose sight of what's under our nose here -- an economy that finally has a bit of momentum but the bicycle remains wobbly."

Moreover, with the payroll tax holiday and unemployment insurance set to expire at the end of the year, adding no new stimulus for 2013 would result in a net fiscal drag. Bernstein says he believes the "Keynesian impulse" is alive and well among White House economic brains. It's just competing with the politics of the moment, which happen to be oriented toward belt-tightening. "That makes this a lot harder, but this is quite a lousy time to be letting up on the accelerator," he says.

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Obama has feinted toward the need for new investment. And on Monday, Alan Krueger, who chairs Obama's Council of Economic Advisers, told reporters that the "best way to strengthen the economy is through a mix of policies that support the economy in the near term, like the President proposed in investing more in infrastructure, as well as putting us on a sustainable fiscal path." The White House followed up on Tuesday by renewing a call for some $30 billion in new tax breaks, aimed at encouraging companies to hire and invest.

Perhaps that's just an opening bid. (The White House did not respond to a request for comment.) For reference, though, consider this: Nearly five years ago, when the economy was first showing signs of sputtering, the same Congressional leaders in place today negotiated a $168 billion stimulus package, steered it through both chambers with wide majorities and got it signed by a Republican president.

The political dynamic was admittedly very different. That bill came before emergency government spending ballooned our debt-to-GDP ratio, spawning a populist anti-spending movement in the process. But the economics were different, too -- though the economy was contracting for the first time since the dot-com bubble burst, unemployment was still around 5%. That Bear Stearns and Lehman would collapse in the months ahead would have been hard to fathom.

And putting aside what level of new stimulus the economy might need now, our crumbling roads, bridges, schools and the like aren't going to repair themselves. "A plan that allowed the federal government to take advantage of the fact it can borrow for free is almost a no-brainer," Hopkins says. "It's a marriage of Keynesian demand-style stimulus combined with a hard-headed business understanding that we need investment and the time for investment is now."

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