I have to admit, this scenario does make a lot of sense:

In a word, yes. Back in August 1993, President Clinton passed the largest tax increase in history – the Omnibus Budget Reconciliation Act of 1993 (OBRA) – and made it retroactive to January of that year.

It was challenged in court, and the court held that retroactive tax increases were legal. This was not the first time this sort of chicanery had been pulled. (You can read more on the topic of retroactive taxes by clicking here.)

Why am I so confident this trap is being set? Nancy Pelosi herself tipped her hand on the retroactive tax plan when she said last January she wanted Congress to repeal Bush’s tax cuts well before their scheduled expiration date. An early repeal of the Bush tax cuts was also one of President Obama’s campaign promises.

The administration and its allies have since gone quiet on its intentions. But that’s only because they want to avoid triggering a stock selloff before the end of 2009. That all changes once the ball drops in Times Square this coming New Year’s Eve. At that point, it will be too late to escape.

Me: Perhaps this is how Team Obama means to help pay for the second stimulus, assuming they don’t intend just to borrow it all.

Get ready for Stimulus 2.0 — Extreme Jobs Edition. Yes, the U.S. labor market is slowly healing. The declining number of monthly job losses and weekly initial unemployment claims show that. Yet President Obama still felt the need to announce a ‘jobs summit’ at the White House next month.

That’s compelling evidence that the White House doesn’t believe the job market is mending nearly fast enough to keep unemployment from trending higher — or Democratic electoral prospects in 2010 from trending lower.

The summit is likely a table setter for Obama to announce Stimulus 2.0 (though he surely won’t use the word ’stimulus’) at his State of the Union address in January. Indeed, Harry Reid is already cooking up a plan in the Senate.

How much money are we talking about? Alec Phillips of Goldman Sachs calls $250 billion over three years a “conservative” estimate. And what might be in the bill? Look for more highway spending, more aid to state and local governments and some sort of business hiring tax credit.

All this represents a sharp departure in message from the White House, which has previously counseled patience. Let the $787 billion American Recovery and Reinvestment Act work, Team Obama kept saying. Even as the unemployment rate blew past 8 percent — a level of joblessness that the stimulus was supposed to prevent — the White House stuck to its guns and dismissed the need for significant new job creation efforts.

On the political side, there were fears that a new package would be tantamount to admitting Stimulus 1.0 was a failure and that it would distract from healthcare reform. On the economic side, many advisers wanted Obama to pivot toward deficit reduction as soon as possible and not spend more on stimulus.

(Indeed, the summit news came as the idea was floated that the administration might use unspent TARP funds for deficit reduction. Obama may also use the January address to announce a commission to deal with the long-term fiscal deficit as well as near-term limits on discretionary spending. Not only is the White House trying to appease bond vigilantes, but also moderate Democrats.)

But economic anxiety and impatience proved lethal for Democrats in the New Jersey and Virginia gubernatorial races, and may cost the party again in the 2010 midterms. That and the surge to double-digit unemployment changed the White House calculus. And don’t think David Axelrod didn’t notice that Republicans have overtaken Democrats 48-44 in the generic congressional ballot.

The new emphasis on jobs might be too late. Indeed, “new” is the appropriate word since the first package was not geared toward creating jobs so much as increasing economic output, as Lawrence Summers recently clarified. Temporary income tax cuts and credits, for instance, have a poor record of generating jobs.  As it is, some economists are looking for unemployment to hit 11 percent in 2010. David Rosenberg of Gluskin Sheff doesn’t see 13 percent as out of the question.

But better for the White House, from its perspective, to take the initiative and adjust their 2010 agenda now — so long cap-and-trade –  than have Speaker John Boehner do it for them in 2011.

Joel Kotkin has a great piece on how Obama can still save his presidency. The bit on jobs is particularly good:

The key rule of Chicago politics is delivering the spoils to supporters, and Obama’s stimulus program essentially fills this prescription. The stimulus’s biggest winners are such core backers as public employees, universities and rent-seeking businesses who leverage their access to government largesse, mostly by investing in nominally “green” industries. Roughly half the jobs saved form the ranks of teachers, a highly organized core constituency for the president and a mainstay of the political machine that supports the Democratic Party.

The other winners: big investment banks and private investment funds. People forget that Obama, even running against a sitting New York senator, emerged as an early favorite among the hedge fund grandees. As The New York Times’ Andrew Sorkin put it back in April, “Mr. Obama might be struggling with the blue-collar vote in Pennsylvania, but he has nailed the hedge fund vote.”

The Chicago approach works better in a closed political system controlled by a few powerbrokers than in a massive continental economy like the U.S. Health care and education, which depend on government largesse, are surviving.

But the critical production side of the economy that generates good blue-collar jobs – like agriculture, manufacturing and construction – is getting the least from the stimulus.

These industries need more large-scale infrastructure spending, as well as more focused skills training and initiatives to free capital for politically unconnected entrepreneurial businesses. Instead, productive industries face the prospect of more regulation while capital for small businesses continues to dry up.

Those in post-industrial bastions tied to speculative capital – think Manhattan and the Hamptons – are the ones most benefiting from Obamanomics. College towns like Cambridge, Mass., Madison, Wis., Berkeley, Calif., and Palo Alto, Calif., will also prosper, becoming even richer and more self-important. It seems, then, that Obama has done best for elite graduates of Harvard and Stanford and other members of the “creative class.”

The rest of America, however, is still waiting for a real sustained recovery. Industrial and office properties remain widely abandoned not only in Detroit but Silicon Valley. The future sustainability of our economy depends mostly on what happens to those who previously staffed these facilities – those who produced actual goods and services – not just on a relative handful of people working at Google or the national laboratories. In other words, we need jobs for machinists, welders and marketers as well as scientists with Ph.D’s.

First, Geithner on the dollar and deficits:

“I believe deeply that it’s very important to the United States, to the economic health of the United States, that we maintain a strong dollar,” Geithner said in a meeting with Japanese reporters at the U.S. embassy.  “We bear a special responsibility for trying to make sure that we are implementing policies in the United States that will sustain confidence … in investors around the world that as growth recovers and growth strengthens that we’re going to bring our fiscal position back to a sustainable balance,” he said.

Now, Harry Reid on job creation:

Senate Democrats will take up a new job-creation bill in the wake of the 10.2 percent unemployment rate, Majority Leader Harry Reid told his colleagues Tuesday. … House Democrats have signaled openness to a tax credit for each new hire companies make, but lawmakers have yet to introduce a bill proposing it.

Me: Look, it is going to be jobs first, deficit second with the ObamaCrats. I would not be surprised if Obama’s State of the Union address paired a near-term jobs bill with some commission to deal with the longer-term deficit so as to not freak out the bond vigilantes. A jobs bill would also leapfrog past cap-and-trade, which is starting to look like a 2011 issue.

Scott Grannis, the Calafia Beach Pundit, outlines a different “stimulus path”:

Meanwhile, though, the unemployment rate is going to remain uncomfortably high, especially for all those politicians who argued so fervently early this year that dumping a trillion dollars of tax rebates, transfer payments, make-work projects and general government largess into the economy over a period of years would guarantee a quick economic turnaround. As the evidence accumulates, we see instead that it would have been far better to just let the economy follow its own course. Better still, we could have used the money in a much more intelligent fashion by making permanent cuts in marginal tax rates that would have quickly resulted in more work and more investment.

Now they tell us. A new NBER paper from Harvard’s Alberto F. Alesina and Silvia Ardagna (”Large Changes in Fiscal Policy: Taxes Versus Spending”) makes the case for tax cuts over spending as stimulus:

As we well know a very large portion of the current astronomical 12 percent of GDP deficit is the result of bailout of various types of the financial sector.  … But part of the deficit is the result of the stimulus package that was passed to lift the economy out of the recession. About two third of this fiscal package is constituted by increases in spending, including public investment, transfers and government consumption. According to our results fiscal stimuli based upon tax cut are much more likely to be growth enhancing than those on the spending side. In this respect the US stimulus plan seems too much based upon spending.

Needless to say when considering a single episode many other factors jump to mind, factors which are difficult to capture in a multi country regressions. For instance, American families were saving too little before the crisis. An income tax cut might have just simply been saved and might have had not a big impact on aggregate consumption. However, more saving might have reinforced the financial sector, think of the credit card crisis for instance. In addition, one could have though of tax cuts that stimulate investment. Also, given the gravity of the crisis an increase in the generosity of unemployed benefits seems quite warranted both in terms of social justice and in terms of sustaining aggregate demand, since the unemployed probably save very little anyway. The benefit of infrastructure projects which have “long and variable lags” is much more questionable.

Watch CEA chair Christina Romer manage voter expectations:

Consistent with the recent cyclical pattern, the unemployment rate is predicted to continue rising for two quarters following the resumption of GDP growth. Whether this happens and how high the unemployment rate eventually rises will obviously depend on the strength of the GDP rebound. …  With predicted growth right around two and a half percent for most of the next year and a half, movements in the unemployment rate either up or down are likely to be small. As a result, unemployment is likely to remain at its severely elevated level.

Listened to an interesting talk today by Jared Bernstein, chief economist to Vice President Joe Biden, at a New America think-tank conference on job creation. A few observations:

1) If Bernstein’s talk was any indication, don’t look for much public celebration by the White House if we get some good 3Q and 4Q GDP numbers. As he put it, “Absent robust job growth, it is not a true economic recovery.” He stressed this point several times. I don’t even think you will hear an administration official use the word “recovery” in 2009.

2)  Bernstein trotted out several interesting slides — which I am hoping to get hold of — that displayed the severity of the job market’s woes. It really seems like the big problem is not so much layoffs as it is a lack of hiring. Thus the high numbers of long-term unemployed.

3)  He didn’t hint at much appetite for the grander second stimulus ideas like a job investment tax credit. (CBO would probably score such a plan as costing $75 billion a year or so, according to an earlier speaker.)

The new Japanese government is redirecting the country’s stimulus plan (WSJ):

The Japanese government said Friday it will scrap part of the previous Cabinet’s stimulus package, freeing up 2.926 trillion yen ($32.38 billion) so that it can redirect the money toward more effective projects to stimulate growth.

Me:  For the cost of the remaining stimulus program in the US, you could cut the cap gains rate by 25 percent for a decade. (Plus it likely wouldn’t cost nearly that much.) Just an idea …

Moody’s Economy.com economist Mark Zandi likes the stimulus (via Fox News) but still thinks unemployment is headed higher. In his own words:

10.5 percent is a very reasonable expectation for the peak in unemployment, but I think it would be measurably higher if not for the stimulus package. The stimulus in my view is working. It’s just gotten overwhelmed by the magnitude of the economic crisis.

Which, of course, brings us to the idea of a second stimulus.  Marc Ambinder gives the rundown:

1) Extend the first-time home buyer credit

2) Create a new credit for companies who hire

3) Extend jobless benefits in every state, or just particularly distressed states, or every state but even more in particularly distressed states.

4) Give tax refunds to struggling companies

5) Institute a payroll tax holiday

6) Pass another stimulus but call it something like “State Rescue Plan” and send most of the money to state governments