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(Adds proposal to reduce unemployment aid in next-to-last paragraph.)

By Brian Faler

June 15 (Bloomberg) -- Voters are forcing Democrats into an election-year equation they may be unable to solve: How to spend more money to create jobs and at the same time reduce the federal deficit.

Democrats have abandoned billions of dollars in proposed jobs initiatives to avoid adding to the deficit, risking that a pending bill may seem ineffective to the 15 million unemployed. To further cut costs, they added more than $50 billion in taxes on buyout managers, oil companies and other businesses, seized upon by Republicans as job killers.

Yet there are few signs Democrats’ contortions to avoid adding to the deficit are winning over voters, especially when the savings are compared with this year’s $1.5 trillion budget shortfall.

“We’re in a vise,” said Representative Gerald Connolly, a Virginia Democrat who is president of his party’s freshman class in the House. “It’s a real dilemma.”

Private payrolls rose last month by just 41,000, the government reported, a fraction of what economists predicted and one-fifth the prior month’s total. About five people are vying for each job opening, more than twice as many as when the recession began in December 2007, according to the Labor Department.

Senate Races

With a 9.7 percent national unemployment rate in May, lawmakers likely will face voters in November with the worst Election Day jobless rate since it topped 10 percent in 1982. Half of the 14 most competitive Senate races are in states with unemployment rates of at least 10 percent, including Nevada, where Senate Majority Leader Harry Reid is fighting for re- election amid 13 percent joblessness in April.

Democrats, who call job creation their top priority, enacted an $18 billion plan in March offering companies a payroll tax break to hire people out of work at least 60 days. Lawmakers acknowledged the effort was modest while promising to follow up with more jobs bills.

President Barack Obama urged Congress June 12 to spend almost $50 billion to avoid layoffs of teachers, firefighters and police and help states pay for health care for the poor. “We must take these emergency measures,” he said.

Lawmakers have been stymied by polls showing voters increasingly hostile to the costly initiatives that would do more to bring down unemployment.

“There is no reasoning with the public right now,” said Thomas Mann, a congressional scholar at the Washington-based Brookings Institution.

Well-Being

Connolly said the contradictory views show voters’ anxiety over their financial well-being.

“They are less well-off in terms of wealth and financial security today than they were when the recession began in ‘07, so therein lies continued anxiety and uncertainty and consumer hesitation and anger,” he said. “I don’t think that’s irrational.”

The demands whipsawed House Democratic leaders, who last month cut $80 billion from an almost $200 billion jobs plan following complaints from some party members that it would add too much to the deficit. The bill passed 215-204 and is pending in the Senate.

Representative James McGovern, a Massachusetts Democrat, accused colleagues of killing important initiatives in the name of “symbolic” savings. Those seeking a real effect on the budget should focus on issues such as Social Security, he said.

‘Good Luck’

“Good luck in going home and saying, ‘no, no, no, look we need to focus on the long term, not the short term -- don’t worry about that,’” responded Connolly. “We’re in a political situation right now that doesn’t allow for that.”

The jobs plan before the Senate has been assailed for costing too much and doing too little. To cut costs, the House refused to extend a 65 percent subsidy to help the unemployed buy health insurance. Many will lose coverage without the subsidy, say unions such as the AFL-CIO.

“It would be devastating,” said Senator Bob Casey, a Pennsylvania Democrat. A family insurance policy costs on average $1,137 per month, according to the Kaiser Family Foundation, more than three-quarters of the average $1,340 in aid to unemployed people.

Economist Mark Zandi said lawmakers should send states between $30 billion and $40 billion. A Senate plan to provide them $24 billion for Medicaid health care for the poor is the minimum needed to “make absolutely sure that the economic coast is clear,” he said.

Odds ‘Too High’

Without the money, which the House cut from its bill, states will probably have to fire another 300,000 employees and the economy may tip back into recession, Zandi said. “The odds are just too high, I think, to take that chance,” he said.

Lawmakers such as Senator Ben Nelson, a Nebraska Democrat, are threatening to oppose the plan because of the cost.

“We can’t just keep borrowing money,” he said.

Nelson’s support is critical to getting any bill through the Senate, which Democrats control with 59 votes. Lawmakers are considering a proposal by Senator Jon Tester, a Montana Democrat, to cut weekly unemployment benefits by $25, to an average $310, a move he estimated would save $6 billion.

Pat Griffin, the Clinton administration’s chief liaison to Congress, said the debate leaves Democrats “neither fish nor fowl” on jobs and the deficit. “They’re self-imposing these constraints and I don’t think anybody thinks they’re getting any benefit,” he said. “I want to know who the winners are.”

--Editors: Laurie Asseo, Don Frederick

To contact the reporter on this story: Brian Faler in Washington at bfaler@bloomberg.net

To contact the editor responsible for this story: Mark Silva at msilva@bloomberg.net