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Obama’s stimulus package
Stopping the slump?
EVEN BEFORE taking over the US presidency, Barack
Obama was forced to grapple with the deepest economic crisis since the
Great Depression of the 1930s. Shocking unemployment figures released in
January revealed a sharp decline in the US economy and the onset of a
deep and most likely prolonged recession. A million jobs disappeared in
November and December, bringing total losses for 2008 to 2.6 million.
In a major speech on the economy on 8 January, Obama
outlined his stimulus package to create three million jobs and
jump-start renewed growth. As millions travelled to Washington DC for
the inauguration, Democrats in the House of Representatives presented
their American Recovery and Reinvestment Bill. What is the character of
this package, and can it prevent a prolonged slump and revive growth?
The Democrats are proposing an economic stimulus
package of $825 billion over two years, though it is widely expected
that the total could creep up towards a trillion dollars as the bill
progresses through Congress. About $275 billion (40%) will be tax
rebates for ‘middle-class’ families and businesses. Around $550 billion
will be for Keynesian-type public spending. This will include over $100
billion aid to the states (state governors say they need $100-150bn to
avoid sacking public employees and avoid implementing savage cuts in
social spending).
Extra funds will go to unemployment insurance, food
stamps, Medicaid, etc. Obama also proposes to fund subsidies for health
insurance contributions. There will be extensive investment in public
facilities and infrastructure: roads, bridges, public transit,
libraries, the electricity grid, public broadband networks, energy
conservation, solar and wind power projects, etc. There is a fiscal
frenzy as state governors and mayors are quickly proposing ‘shovel
ready’ projects. If implemented fully, this will be the biggest state
spending package, apart from World War II, since Roosevelt’s New Deal in
the 1930s.
Obama has also announced a review of the second part
of the bank bailout programme, the so-called Troubled Assets Relief
Program, with $350 billion of the original $700 billion left. Obama
promises to draw on this cash to help working families, helping
homeowners to avoid foreclosure, and relieving the burden of other debts
(auto loans, consumer debt, student loans, etc). As yet, however, he has
not put forward any detailed proposals to cancel or modify predatory
mortgages, even though more than two million homeowners currently face
foreclosure.
The Democrats are aiming to pass the legislation by
mid-February, and are counting on majorities in both the House
and the Senate. Nevertheless, the package, in its current form, faces
opposition from both the right and the left. Many Republicans – and also
conservative ‘blue dog’ Democrats – oppose another stimulus package on
principle, especially increased public spending (as opposed to tax
cuts). This partly reflects electoral calculation.
There is still widespread anger at the $700 billion
taxpayers’ handout to the banks and financiers – the profit-seeking
moguls who triggered the crisis. There will undoubtedly be suspicions
that a large slice of another rescue package will find its way into the
hands of big business and the wallets of politicians. Opposition from
the fiscal conservatives also reflects doctrinaire adherence to the idea
of ‘free-market’ solutions – in spite of the present free-market
financial meltdown – and opposition to government deficits.
However, in the face of a deep financial and
economic crisis, which raises fears of social upheaval and class
radicalisation, the leading representatives of capitalism have abandoned
the ultra-free-market economic orthodoxy that prevailed after Ronald
Reagan’s presidency. "In a severe crisis", the Federal Reserve chairman
Ben Bernanke said recently, "orthodoxy can prove to be a very bad
strategy". (Financial Times, 4 January)
Despite the prospect of a huge federal government
deficit and the danger, later, of explosive inflation, the strategists
of the US ruling class support a massive stimulus package to save their
system from collapse. Obama is acting in their interests.
There are left Democrats, however, who are critical
of the existing package because 40% ($275 billion) will take the form of
tax cuts. Of this, around $150 billion will go to ‘middle-class’
taxpayers ($500 each), while about $100 billion is earmarked for
businesses. Most personal rebates are saved in the bank or used to pay
off debts, as was shown by the $168 billion tax-rebate package passed by
George Bush in February 2008. Unlike public spending, tax rebates are
much less effective for increasing demand for goods and services or
creating jobs.
Obama may well be thinking that tax cuts are always
popular and will sweeten the stimulus package with public opinion. Apart
from this, he is clearly seeking to appease Republican critics in
Congress, attempting to muster bipartisan support. (Strangely, while
opposing deficits, fiscal conservatives never object to tax cuts, which
reduce government revenue and invariably increase deficits.) Commenting
on Obama’s proposed tax cuts for the middle class and business, Keith
Olbermann (on MSNBC’s Countdown) said: "… the president elect is
proposing [tax] cuts that in total might make George Bush blush".
(Washington News, 6 January)
Even so, many commentators believe that the tax-cut
element of the bill will grow even more as the Democrats try to win over
more Republican support. Another prominent Keynesian, Joseph Stiglitz,
warns: "Tax breaks for business may prove to be a sink-hole as bad as
the troubled assets relief programme. Particularly worrisome are rumours
that companies will be allowed to set off their losses against profits
made in the past five years to get tax rebates – a big gift to those who
mismanaged risk, including banks such as Citibank". (Financial Times, 15
January) Public spending on infrastructure, education and technology,
argues Stiglitz, is an investment in assets and, like increasing
unemployment benefits, stimulates growth.
Though it is the biggest stimulus package since the
New Deal, some left Democrats doubt whether it will be enough to revive
economic growth. Fervent Obama supporter, Paul Krugman, who has been
forcefully urging him to implement a Keynesian spending package, now
refers to Obama’s "somewhat disappointing economic plan… which falls far
short of what’s needed". (New York Times, 8 January)
"Our economy could fall $1 trillion short of its
full capacity [over 2009-10]," declared Obama in his 8 January speech.
As Krugman points out, however, the Congressional Budget Office
estimates the output loss at $2.1 trillion, double Obama’s figure. When
only about $500 billion of Obama’s package is for Keynesian-type public
spending, the plan may not be enough to avert "a prolonged slump".
Obama has been spelling out that there are going to
be huge – and rising – federal government deficits, implicitly making
the point that he has inherited a dire situation. The deficit for fiscal
year 2009 is likely to be $1.2 trillion (8.3% of GDP) – a post-second
world war record – even before Obama’s package is implemented.
A government deficit is itself a stimulus in that
government debt finances a share of employment and spending that would
otherwise not contribute to economic growth. However, a prolonged
deficit gives rise to a growing burden of national debt. Bush has left a
deficit of $455 billion, the result of huge tax cuts for the super-rich,
a huge increase in military spending, and the bailout of bankrupt banks
and financial institutions. "Guns, butter and tax cuts", as David
Walker, a former federal government auditor, puts it, arises from the
bailout of the banks and finance houses. (Financial Times, 14 January)
If Obama’s stimulus package is implemented over the
next two years, it will push the annual federal government deficit up to
about 10% of GDP. The ratio of the accumulated national debt to GDP will
rise from 36.9% to 54.2%, a record apart from the second world war
period. According to some Republicans, this is already a fiscal
disaster, and Obama will make it worse.
For the strategists of the ruling class, however,
Obama’s plan is a necessary evil – to bail out their floundering system.
They recognise that deficit spending on a massive scale will saddle
future generations with colossal debts. However, they will later offload
the burden onto the working class through new taxes and cuts in social
spending.
For 30 years, capitalist leaders upheld monetarist
orthodoxy, condemning inflation as the plague. Now, when their system is
threatened by crisis, they are ready to support the government printing
money to bail out the banks, counteract deflation and (at least partly)
finance spending. The role of the dollar as the world’s de facto reserve
currency means that US capitalism has more scope than other major states
to print money (in contrast, the prospect of a ballooning government
deficit and future inflation in Britain has brought a massive fall in
the value of the pound).
Inevitably, printing money today raises the spectre
of inflation tomorrow. But under the headline, The Printing Press Cure,
a New York Times editorial concludes that "the Fed is doing the right
thing". (23 December 2008) Later, they will turn back to the kind of
savage monetarist policies applied under Reagan in the 1980s, which
restricted public spending and increased the real cost of debt for
workers.
Obama himself has hinted at the price that will be
paid by workers in the future: "I’m not out to increase the size of
government long-term", he told the New York Times (9 January). Obama
says an important part of his budget will be ‘repairing’ major
entitlement programmes, Social Security, Medicare (healthcare for
retirees), and Medicaid (healthcare for the poor). ‘Repair’ means cuts:
higher payroll tax contributions, a later retirement age, and reduced
health benefits. Obama has already announced a ‘fiscal responsibility’
summit for February to discuss ‘entitlement reform’: "We’ve kicked this
can down the road and now we are at the end of the road. We need to send
a signal that we are serious". (Financial Times, 15 January) Columnist
David Brooks aptly commented that the stimulus package "is not an
attempt to use the crisis to build a European-style welfare state". (New
York Times, 9 January) Keynesian spending is for an emergency, to try to
prevent economic collapse and political upheavals. Afterwards,
capitalist leaders will attempt to return to fiscal conservatism.
Will Obama’s package prevent a prolonged slump and
revive growth? Despite the scale of state intervention (the cyclical
deficit, plus the bank bailout package, plus the proposed stimulus), it
is still limited in comparison to the economic forces that have been
unleashed by the US and global downturn. Obama plans to create three
million jobs, but there are already eleven million unemployed, and it
will get worse.
In reality, the most favourable scenario for US
capitalism is that Keynesian-type intervention will cushion the
recession and prevent the onset of a depression. Even this, however, is
not guaranteed. A further crisis on the US and global financial system,
a collapse of the dollar, and other convulsions in the world economy,
could all exacerbate the crisis of US capitalism.
Even if it averts a prolonged slump, Keynesian state
spending in itself will not necessarily jump-start the economy,
producing self-sustaining growth. That would require renewed, extensive
capital investment by big business – and the capitalists will only
invest if they are assured an acceptable level of profitability. A big
proportion of the toxic debt and industrial overcapacity, given current
levels of money-backed demand, will have to be squeezed out of the
system before there can be any return to broad-based growth.
The current recession is likely to continue in the
US and globally for some time, and a recovery, when it begins, is likely
to be slow and uneven. Even if Keynesian measures soften the impact of
recession, the working class will pay a heavy price for the capitalist
crisis, through low wages, mass unemployment, and poverty. Keynesian
measures will not overcome the anarchy of market forces or cure the
capitalists’ lust for profit.
At the same time, attacks on workers will provoke
mighty struggles, a questioning of the capitalist system, and a search
for a real alternative. At best, Keynesianism offers a temporary
palliative for capitalist crisis. The idea of democratic socialist
planning, on the other hand, will gain more and more support as the only
way of harnessing science, technology, and productive forces to meet the
needs of society as a whole.
Lynn Walsh
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