Two very different philosophies on how to tackle unemployment are about to collide in Washington, D.C.
President Obama has his ideas, but they don't match those of the newly elected Republican majority. While Republican lawmakers argue that economic stimulus does not work and have pledged to cut spending, Obama says pumping more money into the economy is the solution.
Over the next two years, the Republicans and Democrats will have two choices: Do nothing or work together.
'Triangulation' Strategy
In 1995, when Republicans retook control of Congress, Bill Clinton's economic team, led by Laura Tyson, had to scramble to figure out how to work with the new Republican majority.
"Initially one of the very first things that happened after the new Congress is that the new Republican majorities said they were willing to work with the president on … the financial crisis in Mexico," Tyson tells host Guy Raz.
But within a few weeks, the Republicans had walked away.
"That created a kind of sense ... that they really weren't going to negotiate," she says.
Throughout the entire spring and summer, Tyson says, the White House tried to work with the majority to come up with a balanced-budget plan, but it was repeatedly threatened with a government shutdown, making negotiations much more difficult.
One of the ways President Clinton was able to achieve a budget surplus while in office was by embracing some reforms that were not popular with the more liberal wing of his party.
Tyson says Obama is using Clinton's "triangulation" strategy to create economic policies that have bipartisan support, particularly within the business community. He has proposed a payroll tax holiday, as well as making the research and development tax credit permanent.
When Tyson was in the White House with Clinton, working with the Republican majority was easier because the economy was improving.
"I'm really quite concerned that's not the case this time around," she says.
To combat slow growth and high unemployment, she prescribes more fiscal stimulus now and a deficit-reduction package for the long term.
"The odds of getting those two things in a gridlock Congress are just about zero," she says.
Incentivize Business
Many top economists agree with Tyson. They say the first stimulus was not big enough, and there's got to be more spending if the U.S. wants to reduce unemployment. But Greg Mankiw, who was President George W. Bush's top economic adviser, disagrees.
"I'm somewhat skeptical of that because I think it's very hard to come up with ways to spend hundreds of billions of dollars quickly and wisely," Mankiw tells Raz.
Mankiw says there are two challenges for the U.S. economy: the short term and the long term. To address the short-term economic slump, he thinks incentivizing business investment is the way to go. He says tackling the long-term problem is going to be a bit trickier.
"There's going to be difficult choices that [are] going to either involve tackling the major spending programs like the entitlements or substantial increases in taxes, which obviously the Republicans aren't going to want," he says. "But if you really want to preserve the social safety net we have now in the form we have it now, you're going to have to raise taxes to levels that we've never seen in U.S. history, comparable to what we see in much of continental Europe."
For Mankiw, raising taxes to levels similar to those in Germany or France would be detrimental to the economy.
Just as raising taxes won't go over well with most Republicans, cutting spending for programs such as Social Security will upset the Democrats. So it looks like Obama is going to have to come up with some fancy footwork over the next two years to please both sides.
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