Job Gains Ease Urgency in Talks on Deficit Reduction

Photographer: Ty Wright/Bloomberg

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Photographer: Ty Wright/Bloomberg

An employee welds an end cap onto an aluminum pontoon in Elkhart, Indiana.

An improving jobs picture and soaring stock market are likely to ease pressure on President Barack Obama and congressional Republicans to resolve a budget standoff, even as both sides prepare for a long struggle.

A U.S. Labor Department report yesterday showed the unemployment rate last month dropped to 7.7 percent, the lowest since December 2008 -- the month before Obama took office. The report sent the Dow Jones Industrial Average to another all-time high.

The signs of economic strength “take away the sense of urgency” to settle the deficit stalemate just as automatic spending cuts are enacted across the government, said Tony Fratto, former assistant Treasury secretary for public affairs under Republican President George W. Bush.

Businesses and the stock market shrugged off both the $845 billion budget deficit the Congressional Budget Office projects this year and the automatic spending cuts that began March 1. Private forecasters anticipate the spending cuts, referred to as sequestration, will reduce economic growth this year by 0.5 percentage points, based on the median response in a Bloomberg News survey of economists.

Republicans have focused on the size of the deficit and government spending levels as impediments to business confidence and private-industry hiring, while the White House has said that sequestration will depress economic growth.

Survey’s Timing

Alan Krueger, chairman of the White House Council of Economic Advisers, stressed in a statement that the employment report, which showed the economy exceeding forecasts by adding 236,000 jobs in February, is based on a survey taken before the spending cuts started.

“The administration continues to urge Congress to move toward a sustainable federal budget in a responsible way,” Krueger said.

House Democratic Leader Nancy Pelosi of California applauded “signs of progress,” though she said “our economic growth is now threatened by the indiscriminate, across-the-board spending cuts caused by Republican obstruction.”

House Speaker John Boehner, an Ohio Republican, said the drop in unemployment was “positive news,” though “without a plan to control spending and balance the budget,” prospects “for long-term economic growth will dim.”

Dow Closing

The Dow increased 65.74 points, or 0.5 percent, to 14,395.23 at 4 p.m. yesterday in New York. The broader benchmark Standard & Poor’s 500 index rose 0.4 percent to 1,550.97 after climbing as much as 0.5 percent earlier.

The White House and congressional Republicans are at loggerheads over how to bring down budget deficits, with Obama demanding higher taxes on the wealthy in return for any cuts to entitlement programs such as Social Security and the Medicare and Medicaid health insurance programs. Republican refuse to consider any higher levies and demand spending cuts, particularly on the entitlement programs.

The automatic spending cuts -- $85 billion this year and $1.2 billion over the next nine years -- kicked in March 1 after efforts at compromise failed. Obama and Republican congressional leaders haven’t met for negotiations since the sequestration began, though the president held discussions over dinner March 6 with 12 Republican senators and met for lunch March 7 with House Budget Committee Chairman Paul Ryan, a Wisconsin Republican.

Strengthening Obama

Better-than-expected growth in the economy inevitably strengthens the president, particularly in negotiations on financial issues, said Geoff Garin, a pollster who consults with congressional Democrats.

The public already trusts Obama more than Republicans on economic matters, he said. While that advantage has recently slipped -- in Garin’s view because of the atmosphere of crisis during the run-up to sequestration -- the strengthening jobs situation and new stock market records will be “a pretty effective restorative for the president,” he said.

A Quinnipiac University Poll taken Feb. 27 to March 4 showed Americans trusting Obama over the Republicans on handling the economy by 44 percent to 40 percent, compared with a 47 percent to 41 percent advantage for the president a month earlier.

“Positive economic news may grease the skids a little bit for getting to a bigger deal,” Garin said. “On the one hand, the president can make an argument to Democrats that have been reluctant that we are in a better position than we’ve been to address the deficit, and he’ll also be in a better position to persuade Republicans to move off their no-revenue position.”

Less Painful

A pickup in economic growth and employment -- if sustained -- would make deficit-cutting choices on taxes and spending a little less painful, said Stan Collender, a former Democratic congressional budget analyst and now a partner at Quorvis Communications, a Washington-based communications firm.

“One month doesn’t a trend make,” Collender said. If the faster pace of job growth continues, “the deficit would be significantly lower than previously anticipated, but isn’t going to solve the deficit problem by itself,” he said.

Trent Duffy, a Republican public affairs consultant and former Bush White House deputy press secretary, said the favorable economic news is most likely to spur only “some readjustment in rhetoric.”

Obama will argue that any economic improvement vindicates his “balanced approach” of deficit reduction through spending cuts and tax increases, Duffy said. Republicans will say that spending cuts on the horizon bolster business confidence and a stronger economy reduces the need for support through government spending, he said.

“Each side will claim credit for what’s happening and use economic strength to bolster their argument,” Duffy said. “That’s what politicians do.”

To contact the reporter on this story: Mike Dorning in Washington at mdorning@bloomberg.net

To contact the editor responsible for this story: Steven Komarow at skomarow1@bloomberg.net

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