Obama's stimulus killers
The president's two big legislative goals for the fall could put new burdens on a weak economy.
NEW YORK (Fortune) -- Barack Obama promised universal health care and a mass conversion to green energy when he launched his presidential campaign. On that frigid February day in 2007, the economy was growing at a 2.8% clip. Obama stuck to the same promises a year later when he won Iowa, as the housing market was slumping into recession. And energy and health care were the twin pillars of his acceptance speech in Denver, 18 days before Lehman Brothers collapsed.
As one of the most disciplined, on-message politicians of our time, President Obama hasn't wavered from his audacious plans to remake entire business sectors. But when wavering is what the U.S. economy seems to do best these days, the President confronts a new question: Does his own agenda threaten to choke off the economic recovery that he also promises -- and that will define much of his legacy? Both of his legislative campaigns for the fall, health-care reform and the cap-and-trade plan to curb carbon emissions, could put new burdens on a weak economy. Even supporters of the initiatives fear a GDP hit. "It's a big gamble," says Mark Zandi of Moody's Economy.com, a proponent of health-care reform, about that initiative's impact on growth.
Obama is running against the clock on two political realities every new President faces: the need to act while his personal popularity remains high and a midterm election next year that will further politicize an already contentious Capitol Hill. But Obama also proclaims himself a pragmatist, a believer in tuning in to the feedback loop. Right now, it shows an economy that's unlikely to rebound to anywhere near the 3.2% growth rate in 2010 that underpinned the first budget Obama submitted to Congress. Most economists predict a far more anemic recovery and double-digit unemployment even as the economy begins to grow. Into this fragile tableau Obama remains determined to insert health-care reform, likely to be funded by tax increases, and a cap-and-trade law that critics and supporters agree will raise energy prices.
Obama officials insist we "can't afford not to" fix the health-care system and wean the nation off fossil fuels. "I don't see how anyone can look at the excessive growth rates [in health-care costs] and believe that can be sustained with a healthy economy," says Larry Summers, Obama's top economic adviser. Or as Zandi puts it, "Nothing is more important to the country's long-term fiscal outlook than health-care reform, and he only gets one bite at it. Investors know this, so they'll bid up interest rates" if reform isn't done right.
"Done right," of course, is in the eye of the beholder. Zandi argues that reform needs to be "credibly paid for" -- ideally by limiting the tax deduction for employee-paid plans -- and it needs to contain costs. While the first question remains under debate in Congress, on the second, the nonpartisan Congressional Budget Office warns that evolving legislation could bust the budget.
While the right kind of health-care reform has the potential to boost the economy and lessen the entitlement burden on the budget, the same cannot be said of going green, which economic models are showing will reduce growth and create job losses. The cap-and-trade bill that barely passed the House will reduce the purchasing power of households by an average of $730, rising to $830 by 2030, according to an analysis by the Boston-based consulting firm CRA International. "It's a complete myth that the economy and jobs will grow as a result of making energy 10% to 20% more expensive," says CRA economist Anne E. Smith. "You have to look at this through the lens of an economist, not through the lens of wishful thinking."
Even if Congress passed a cap-and-trade bill, however, the costs wouldn't start kicking in until 2015. Politically that lightens the load for Democrats like Obama who might be worried about reelection. But economically Obama officials had better hope the recovery is strong enough by then to shoulder the bills. If not, the fourfold increase in Google searches for the words "economic depression" that Summers cited as an indicator of last winter's gloomy mentality could turn into a surge in searches for the words "economic stagnation."