So Much for Stimulus

While tax hikes on the affluent have gotten most of the attention in the fiscal cliff deal, an equally important story is how proposals for further stimulus spending died a quiet death in Washington over recent weeks.

Obama's original fiscal cliff offer included $425 billion in stimulus funds for job creation measures, infrastructure spending, mortgage refinancing assistance, a further extension of unemployment beneifts, and a continuation of the payroll tax holiday. While unemployment benefits were extended, none of the other stimulus spending survived.

And it wasn't just Republicans who killed stimulus. Obama's last fiscal cliff offer, before he left for Hawaii, shrunk the stimulus ask to $175 billion and didn't include extending the payroll tax holiday. And as a result of ending that holiday, nearly every worker in the U.S. will have less spending money starting later this month. That doesn't make sense with unemployment still near 8 percent. 

Yes, Congress suspended the sequestration cuts, but an austerity mindset continues to prevail in Washington. Meanwhile, as Forbes' Abram Brown suggests, more evidence is emerging from abroad about the failure of austerity policies. In England, unemployment has stayed at around 7.9% since David Cameron was elected in 2010. GDP is at its lowest level since before he took office. The problem is not the workers or supply, as economist Adam Posen argues, but demand: "Workers were not less productive than they used to be. They merely needed some help from the government and the central bank—rather than budget cuts—to close the output gap." 

In America, this help could have come from the original $425 billion stimulus plan.