More spending, less spending
-- Obama's dilemma

[December 04, 2010]  WASHINGTON (AP) -- In less than three hours, the extraordinary forces tugging at Barack Obama's presidency -- and the Republicans who will soon take more control of Congress -- came into sharp relief: a sky-high jobless rate, an out-of-control deficit and pressure to keep taxes down.

Together, they illustrate the difficulty of balancing immediate, costly fixes for the economy with the long-term austerity needed to control the nation's debt. What's more, Obama must show that his handling of those challenges has been deft enough to earn him four more years in the White House.

To be sure, the competing demands create a conundrum for all of Washington -- Democrats and Republicans alike. But it is the president who has claimed the mantle of honest broker and the price would ultimately be paid by him.

Between 8:30 a.m. and 11 a.m. Friday, the Labor Department announced first that November's unemployment rate climbed to 9.8 percent, then a majority of the president's deficit commission backed tough penny-pinching measures to slash $4 trillion from the budget over the next 10 years. In between, Democrats and Republicans continued to struggle for a compromise that would extend Bush-era tax cuts.

In one bright spot, the Obama administration sealed a trade agreement Friday with South Korea, further opening the 12th-largest economy as a market to American goods. The final deal, which eluded the president during his recent trip to Asia, is the largest since the North American Free Trade Agreement with Canada and Mexico negotiated under President Bill Clinton.

The competing obligations were evident even while the president attended to yet another demand -- a deadlier war in Afghanistan. As news of the unemployment rate hit, Obama was in the air on a secret visit to the troops, one year after expanding the U.S. military presence there.

"Jobs and growth are our most urgent need," Obama said, in thanking the deficit commission for its work. "But if we want an America that can compete for the jobs of tomorrow, we simply cannot allow our nation to be dragged down by our debt. We must correct our fiscal course."

The answers to both may seem contradictory. The long-accepted response to a recession, advocated by early 20th century British economist John Keynes, is for government to prime the economy with short-term spending that adds to the deficit. Ideally, an economic recovery then generates revenue that can offset those initial expenses.

So even as the administration welcomed the deficit commission's work, the White House made a case that if taxes were going to remain low for even the highest-earning taxpayers, then spending to help middle income taxpayers and unemployed workers needed to be extended as well.

Obama and congressional leaders appointed a negotiating team to work out a compromise on the tax cuts. Discussions center on whether to extend them for one to three years and whether to include unemployment assistance. Officials said the deal could also include raising the debt limit, drawing yet more attention to the nation's borrowing.

Administration officials on Thursday presented a menu of jobless benefits and tax credits totaling $150 billion for one year. Republicans insist that any spending be offset by reductions elsewhere, a step the White House opposes.

"Republicans arguing that we should immediately pay for emergency measures like unemployment insurance but we do not need to pay for a high income tax extension does not make any policy sense," said Austan Goolsbee, the chairman of the White House Council of Economic Advisers.

But Republicans are rejecting that response.

"To restore American exceptionalism, we must end all this Keynesian spending and get back to the practice of free market economics," Rep. Mike Pence of Indiana, a leading House Republican, said this week.

The political consequences are evident to all.

A wave of voter anger over the economy last month shifted control of the House from Democrats to Republicans and narrowed the Democratic majority in the Senate.

The restlessness in the electorate grew not only from the weak economic recovery but also from a perception that the government was spending too much and not showing results.

Both political parties immediately seized on the unemployment rate. Republicans said it illustrated the failure of Obama's policies, while Democrats said it demanded greater spending to protect workers and prime the economy.

Vice President Joe Biden declared the unemployment number "disappointing" and said it underscored the need for Congress to approve an extension of unemployment insurance to jobless workers.

The unemployment setback came as the White House was trying to draw public attention to signs of economic improvement. Obama last month highlighted the resurgence of the auto industry with a trip to a Kokomo, Ind., Chrysler plant.

Administration officials also point to the ever decreasing taxpayer cost of the $700 billion financial rescue that became a public symbol of government intervention and bailouts. Earlier this week, the independent Congressional Budget Office lowered its estimated cost of the program to only $25 billion.

But those successes, even as they mount, get trumped by lingering unemployment, the last economic indicator in a recovery to show improvement.

The task ahead is the equivalent of turning on one spigot with the left hand while turning off another with the right.

Eleven of the 18 deficit commission members backed the austere measures proposed by its two chairmen -- former Clinton chief of staff Erskine Bowles and former Republican Sen. Alan Simpson of Wyoming. But the commission would have required 14 supporting votes to force Congress to consider the plan.

Democratic Sen. Kent Conrad of North Dakota, a member of the commission and the chairman of the Senate Budget Committee, said the pressure is now on Obama's administration.

"They are not at the table," he said. "We need the administration at the table."

At the White House, economist Goolsbee cautioned:

"You want to lower the deficit in the medium and long run. That's the deficit challenge we face. That's totally different than saying, 'Let's go yank the belt as tight as it will go right now.' That would be highly detrimental."

[Associated Press; By JIM KUHNHENN]

Associated Press writer Julie Pace contributed to this report.

Copyright 2010 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.