With the agreement between House and Senate negotiators on an economic stimulus bill, the young Obama administration won a hard-fought and much needed victory. The compromise, which cut the overall cost of the legislation to $789 billion, pared back items dear to both liberals and the business community. And it revealed a political reality that House Democrats are loathe to accept: with Senate Democrats short of a 60-seat majority and most Republicans staunchly opposed to the administration's initiatives, Senate procedures put a handful of Republican moderates in the driver's seat.
The Congress had to grapple, as well, with one of the consequences of our federal system: state and national policies often work at cross-purposes. State constitutions require balanced annual budgets, which forces state government to cut spending and raises taxes during economic downturns. Unless the federal government acts to prevent this, state austerity measures can negate national stimulus efforts. Many members of Congress believe that state governments spend too much during times of prosperity and fail to provide adequately for the inevitable recessionary periods. And writing checks to the states to maintain current services doesn't allow members of Congress to claim credit for individual projects and new programs. There are, as well, differences of principle between the parties: for example, even moderate Republicans wonder whether school construction is a federal responsibility. So the final agreement included less for the states than the House and Obama administration wanted (but more than the Senate was initially willing to provide) while eliminating a separate line-item for school construction.
Throughout these negotiations, the administration has insisted that a stimulus bill of roughly $800 billion would "create or save" between 3 and 4 million jobs. Because the American public, while hoping for the best, remain skeptical about government's ability to improve their lives, the president would be well advised to dramatize the implementation of the bill. Through the spring, he should appear every week at a site where stimulus money is making it possible for "shovel-ready" projects to get started. The language of long-term investment is too anodyne for the moment: the mantra must be jobs, jobs, jobs if average Americans are to begin regaining their faith in the future.
While the stimulus bill is a necessary condition for economic stabilization and recovery, it is hardly sufficient - and probably not the most important component of the overall program. As the lesson of Japan in the 1990s shows, fiscal stimulus without financial rescue yields stagnation - at best. Treasury Secretary Geithner's initial sketch of a financial package failed to inspire confidence, either in Congress or in the markets. Serious observers believe that recovery cannot begin until we acknowledge that losses in the financial system amount to some trillions of dollars, rendering many institutions insolvent. The temptation will be to muddle along, hoping that these institutions can gradually regain strength without putting massive amounts of taxpayers' money at risk. If we go down that road, we are likely to ended up with zombie banks whose balance sheets are riddled with near-worthless investments - banks that cannot lend to credit-worthy customers and who cannot trust one another.
Sooner or later, the administration will have to level with Congress and the people, and then make the case for a financial rescue package the magnitude of which will make the stimulus package look like pocket change. However hard it may have been to get the stimulus to the finish-line, it will prove to have been easy in comparison to the task that lies ahead.