Why Obama is pushing for stimulus in 'fiscal cliff' deal

How about a little government economic stimulus? That may sound incongruous considering the budget deficit and the push from Republicans to cut government spending. But President Obama’s first offer to avoid going over the "fiscal cliff" holds out the hope of at least some stimulus. This would include extending the 2 percentage point Social Security payroll tax cut, boosting a tax incentive to businesses, establishing a $50 billion bank for long-term infrastructure projects, and extending unemployment benefits. RECOMMENDED: 'Fiscal cliff' 101: 5 basic questions answered The total bill: about $255 billion out of the federal government's pocket – an amount the GOP would likely say needs to be offset by spending cuts elsewhere. The argument in favor of such stimulus? The tax measures, at least, could minimize the drag on the economy from Mr. Obama's proposed tax increases on the wealthy. “The increases in the top two income tax brackets would put a drag on consumption, so I think, from the Obama point of view, the spending or tax cuts are designed to offset that drag to consumption,” says Michael Brown, an economist at Wells Fargo Securities in Charlotte, N.C. But to some budget experts, Obama’s list seems more like an opening round of negotiations, where he has asked for a lot more than he will get. “It looks to me like these are bargaining chips,” says Pete Davis of Davis Capital Ideas, which advises Wall Street firms. “Even most Democrats had given up on the prospect of getting the payroll tax cut extended.” Mr. Davis considers the odds of most of the stimulus proposals passing Congress “very low.” What's needed most, say others, is just buckling down and negotiating an end to the fiscal cliff. “Cancelling the fiscal cliff is economic stimulus,” says Stan Collender, a budget expert and partner at Qorvis Communications in Washington. If Obama's stimulus were passed, however, here is a look at the impact the four elements might have. SOCIAL SECURITY PAYROLL TAX CUT The largest chunk of the Obama plan is the extension of the payroll tax cut. This is the money that comes out of an individual’s paycheck as a contribution to Social Security. Two years ago, in an effort to stimulate the economy, Congress decreased the individual contribution from 6.2 percent to 4.2 percent. The employer’s contribution of 6.2 percent remained unchanged. The Obama administration estimates extending the cuts would cost the government as much as $115 billion in revenue. The argument for extending the tax cut is that it helps lower-income workers who live paycheck to paycheck. “The difference in the paycheck might be the ability to pay the electric bill for someone or the chance to go to a sit-down restaurant once a month,” says Chris Christopher, an economist at IHS in Lexington, Mass. The argument against continuing the cut is that it is weakening the Social Security Trust Fund. In order to make up for the loss of contributions, the government taps the general tax revenues, says Pamela Tainter-Causey, a spokeswoman for the National Committee to Preserve Social Security and Medicare.