Can Obama’s stimulus package turn the US economy around? :Can Obama’s stimulus package turn the US economy around?


The package :The package $787 billion package is the largest US government fiscal measure since the Second World War Size of the plan and the speed of its acceptance indicate how the economic crisis has changed expectations of what the US government can and should do regarding the economy. Plan consists of both spending (64 per cent of the total) and tax breaks (the remaining 36 per cent) Spending includes both government purchases, such as infrastructure projects, and direct payments to individuals, such as extended unemployment benefits Combines short- and long-term measures About three-quarters will be spent by 2010.


Will the plan will achieve its stated objective – to spur economic recovery and create jobs? :Will the plan will achieve its stated objective – to spur economic recovery and create jobs? Mainstream view (Financial Times): Bill is ‘sprawling and incoherent’, but…‘It may be the best that could be done, and is a great deal better than nothing. Even if it cannot be admired, it deserves a qualified welcome.’ Administration’s financial stability plan will be very important – the amount of support is likely to be in the trillions, and thus exceed the size of the fiscal stimulus package


Will stimulus package be as effective in righting the broad economy as many assume? :Will stimulus package be as effective in righting the broad economy as many assume? US (and world) economy faces its biggest challenge since at least the early 1980s, and possibly since the Great Depression of the 1930s Package is likely to alleviate some of the worst effects rather than fully reverse the downturn Impact is likely to be larger than the dollar amounts per se, via knock-on effects (the so-called ‘multiplier effect’) But US economy is also very large (about $14 trillion in GDP annually) Most importantly: stimulus spending and tax cuts do not address the underlying problems of the real economy that are at the root of the crisis.


Credit-fuelled consumption :Credit-fuelled consumption In recent years US economy has relied on credit expansion to fund growth in consumption and other economic activities Credit-related crisis means that the economy must undergo an unwinding or ‘deleveraging’ of this credit expansion If credit-fuelled consumption will no longer be the economic driver, new sources of growth and job creation are required if there is to be a sustained recovery.


Stimulus package falls short :Stimulus package falls short Against this important need, the stimulus package falls short: Little is designed to support innovations in industry Most spending will go towards programmes already in existence Where new areas are addressed, the amounts are relatively small – e.g. spending related to alternative energy $4.5 billion targeted for rebuilding the electric grid to use energy more efficiently sounds impressive – but about $165 billion are actually needed to modernise the grid


US industry is outdated and unproductive :US industry is outdated and unproductive Too much of US industry is outdated and unproductive - requires restructuring if it is to be profitable e.g. ‘Big Three’ automakers, who have already received government bailout money. Obama administration is faced with potential demise of GM and Chrysler (and related auto supply industries) – now coming back for more bailout money. Stimulus plan does not address fundamental problems of productivity: there is a consensus on the need to keep the economy from totally collapsing but it may delay necessary restructuring process by propping up otherwise unprofitable and bankrupt operations Stimulus is necessary as a stopgap measure but is storing up problems for the future


Public-sector debt is creating a heavy burden :Public-sector debt is creating a heavy burden After cost of package and the financial stabilisation plan is accounted for, US government budget deficit is likely to increase to an estimated 13.5 per cent of GDP in 2009 – more than twice the previous postwar high of six per cent under Ronald Reagan in 1983 Hope that the upturn will provide sufficient surplus to pay off the debt But scale of the deficits, severity of the downturn and debt deflation mean increase in public-sector debt is creating a heavy burden that will be a drag on future growth


Greater tensions in international relations :Greater tensions in international relations Programme also holds out the possibility of greater tensions in international relations Clearest in ‘Buy American’ protectionist features in the stimulus plan, whereby suppliers for certain items must be American-headquartered companies Watered down in the final version of the bill, but they still remain Threat of trade war or other conflicts between nations is implicit Inherent contradiction between seeking to bolster one’s own economy and international cooperation. This matters because the economic crisis is global in scope, and ultimately cannot be fully resolved solely by national measures.


Return to the role of government in the economy :Return to the role of government in the economy Striking aspect of the Obama plans: represent a major return to the role of government in the economy But no ideological rationale provided for this intervention Since the Reagan-Thatcher era: prevailing assumption has been that the state generally represents a constraint on growth, and that a free market works best This has been more of an ideal than a reality - the state’s economic function has actually continued to increase over time, even before the latest recovery initiatives But ‘pro-free market’ was nevertheless the prevailing view that informed policy.


Lack of ideology a problem :Lack of ideology a problem Today the laissez-faire outlook is understood as being too ideological = extreme and rigid In contrast, Obama often praised for his lack of ideology and his pragmatic approach to problems On the economy, Obama said to favour ‘what works’ Approach appears sensible but has its shortcomings: Plan was thrown together in a hodgepodge manner Pragmatic approach can mean lack of direction E.g. financial stability plan announced by treasury secretary Timothy Geithner was slammed by all sides for vagueness, lack of detail The rest of the world sees uncertainty, indecision and inconsistency.


Obama has time to turn things around :Obama has time to turn things around Obama currently has tremendous support (60 -70% approval ratings) New spending projects will expand his base Polls show most people will give him a long time – up to two years – to turn things around But despite talk of new era of hope, there is much fear, uncertainty and little expectation


Success = ‘less bad than what went before’? :Success = ‘less bad than what went before’? This passive outlook provides Obama with a lot of political room to manoeuvre in the short term But it won’t be enough to save him if the economy doesn’t ultimately rebound As Obama and his administration find that economic reality is harder to overcome than the lame Republican opposition, don’t be surprised if they start to define success as simply ‘less bad than what went before’.