Can Democrats Anchor Unemployment Without Doing More Damage to the Deficit?

With the unemployment rate soaring alongside the U.S. budget deficit, the Obama Administration and congressional Democrats are struggling to solve the nation's problems before next year's midterm election.

But they may be struggling in vain.

Since 1945, the party that has controlled the White House has lost an average of 16 House seats in the president's first midterm election, according to the Cook Political Report, a nonpartisan publication in Washington. However, losses for the Democrats could be far steeper next year if they fail to put unemployed Americans back to work.

Then-U.S. President Bill Clinton and the Democrats lost 52 House seats in 1994.

"Unemployment is the leading economic indicator when it comes to politics," Democratic pollster Peter Hart told The Wall Street Journal. "Anytime unemployment hits double digits, it's hard to see the party in control having a good election year."

Right now, polls are showing that the majority of Americans list jobs as their top concern. And rightfully so.

The economy unexpectedly shed 263,000 jobs last month as the jobless rate soared to a 26-year high of 9.8%. And many economists expect the unemployment rate will reach 10% by the end of the year and peak at about 10.5% next summer.

Lawmakers are scrambling to staunch the bleeding, but that process has been made difficult by an escalating budget deficit.

The government ended its 2009 fiscal year in September with a total deficit of $1.4 trillion, the Congressional Budget Office (CBO) said. That equates to 9.9% of gross domestic product and is the largest deficit since 1945.

Government spending rose by 18% in the year, with the bailout of the financial industry, which alone required $245 billion. The spending increases and tax cuts included in the economic stimulus package approved in February added almost $200 billion to the 2009 deficit, the CBO said.

The Obama administration's $787 billion stimulus plan, which was touted as a catalyst for job creation, has been criticized for its slow progress and ineffectiveness.

Only about a quarter of Obama's stimulus, or $164 billion, has been paid out. About half, nearly $400 billion, will be paid out over the next 12 months in the build-up to mid-term elections, and the remainder will be disbursed in 2011.

In January, the administration claimed the stimulus package would keep unemployment below 8% and push it below 7% by the end of 2010 – a fact that has already been seized on by Republican opposition.

"We'll continue to remind Democrats of their failed promises that led to what is now, at best, a jobless recovery," said National Republican Congressional Committee (NRCC) spokesman Paul Lindsay told The Journal.

President Obama said in his Saturday radio address that he would "explore additional options to promote job creation."

But with a growing perception that the stimulus has failed and a deepening concern about the nation's snowballing deficit, the White House has bristled at talk of a second stimulus package.

"This is not a discussion of second fiscal stimulus," Jen Psaki, the senior White House economic spokeswoman told the Financial Times. "The president and his economic team have continued to look at a wide number of policy options to create new jobs and ease the burden of those who cannot find employment but any notion that we are any farther along than preliminary discussions about new proposals is wildly inaccurate."

In particular, the administration is hoping to extend such stimulus measures as the $8,000 tax credit for first-time homebuyers.

When it expires on Dec. 1, the homebuyers credit will be responsible for nearly 400,000 sales of new and existing homes, out of total sales of 1.4 million, Mark Zandi, chief economist at Moody's, told The New York Times. That's roughly in line with estimates from the National Association of Realtors (NAR).

Zandi, who formerly advised Senator John McCain, recommends extending the credit through August 2010. Legislators are also considering extending the credit to current homeowners.

The administration may also consider expanding the federal transportation funding program, which comes up for renewal every six years. That 2003 program expired on Sept. 30 and is currently operating under a 30-day extension period.

Obama is also expected to push for an extension of the "Making Work Pay" middle class tax cut that accounted for about a third of the February stimulus.

Extending these programs could cost the government tens of billions of dollars in tax revenue.

For example, congressional analysts estimate the cost of the current homebuyer credit at about $1 billion a month. Expanding the credit through next August could cost as much as $30 billion, according to Moody's Zandi.

That, in turn, could lead to another large run-up in the budget deficit, which in the last year was exacerbated by dwindling tax revenue. Individual income taxes, the biggest source of tax receipts, fell by 20%, and corporate income taxes dropped by 54%, the CBO said.

"There may not be anything we can do," a Democratic Congressional leadership aide conceded to The Times. "Under any circumstances, it's going to take a while for jobs to recover."

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