Obama’s patched up plan
IN DENVER on 17 February, Barack Obama signed his
ambitiously titled American Recovery and Reinvestment Act. It was only
three weeks after formally taking over the presidency, though over a
year since the onset of a severe economic downturn, which Obama himself
has warned could turn into a ‘catastrophe’ unless checked.
The $789 billion package is unprecedented in scale –
around 5.8% of GDP, spread over two years, compared with Roosevelt’s New
Deal package of between 1-2% of GDP. However, the Congressional Budget
Office estimates that the ‘output gap’, the difference between the
capacity of the US economy and its likely actual output, will be £2.9
trillion over the next three years. The CBO comments that the impact of
the package will be ‘uncertain’.
Out of the package, $281 billion is tax cuts, partly
to ‘working families’ but including substantial tax concessions to
business and around $70 billion (9% of the total) to adjust the
alternative minimum tax (AMT) threshold, to prevent this tax affecting
upper-middle-class families. This has nothing to do with economic
stimulus, and was inserted under pressure from Republicans, although the
AMT would clearly have been amended anyway in the coming months.
Additional government spending (repairs of bridges
and roads and other infrastructure projects) is to be allocated $308
billion. Included in this is just over $50 billion of additional aid to
state governments, though this is a tiny amount given the tax shortfall
of many states. California alone has a £42 billion deficit, and the
Republican governor, Arnold Schwarzenegger, is imposing massive cuts and
public-sector layoffs.
Just under $200 billion of the package is increased
benefits, for instance, food stamps, and the extension of unemployment
from 26 to 36 weeks. While infrastructure spending will take time to
work through to the economy, additional benefits to the unemployed and
low-income families will have a much more immediate affect. But there is
no provision in the package to ensure that any jobs created will pay
union rates or for an increase in the minimum wage. These measures would
be far more effective than tax rebates in rapidly boosting demand for
goods and services.
Republicans in Congress fought to increase the tax
cut element and reduce the additional public spending, despite Obama’s
attempt to involve them in bipartisan negotiations. In the House of
Representatives, where the Democrats have a clear majority, no
Republicans voted for the package. In the Senate, Obama managed to win
the support of three Republicans, on the basis of concessions, thus
avoiding the danger of a filibuster by Republicans. Congressional
Republicans are still clinging to neo-liberal ideology, still asserting
that tax cuts for the wealthy are the magic remedy for all economic
maladies. In contrast, a majority of Republican state governors, who
have to grapple with the crisis, have supported Obama’s package.
A number of Senate Democrats successfully inserted
clauses into Obama’s legislation imposing restrictions on the pay and
bonuses of banks and corporations receiving any funds under the TARP
bank-bailout programme. This new provision prohibits cash bonuses and
almost all other forms of incentives for the five most-senior officers
and the 20 highest-paid executives at large companies receiving money
under TARP. Although Obama recently denounced the recklessness and
irresponsibility of top bankers, calling for a curb on bonuses, the
president and his Treasury secretary, Tim Geithner, actually opposed
this measure!
Obama claims that his package will create four
million jobs. Most economic commentators, however, estimate that it will
create between one and three million jobs at most.
But even four million jobs saved or created –
Obama’s ‘bottom line’ – would be a very limited cushion for millions of
unemployed workers. The jump of over half a million job losses in
January brought the number of jobs lost since the beginning of the
recession in December 2007 to 3.6 million. This means 11.6 million
unemployed workers (7.6% of the workforce), but if part-time workers who
need full-time jobs and jobless workers who have given up looking are
included, the total rises to 21.7 million workers (13.9% of the
workforce).
Reflecting protectionist pressures, House Democrats
inserted a ‘Buy American’ clause into the stimulus bill. This is mainly
aimed at ensuring that US-made steel will be used in infrastructure
projects. Steel makers’ organisations in Canada and Europe immediately
protested at this ‘beggar-thy-neighbour’ policy. The clause was softened
in the Senate, with language that the protectionist provision should be
"applied in a manner consistent with the United States’ obligations
under international agreements". But as Jagdish Bhagwati, an adviser to
the WTO, warned, it is still possible for the US to restrict trade
within WTO rules: "I would bet everything I have on a trade war breaking
out within WTO-consistent rules", he said. There is little doubt that,
if serious restrictions are imposed on the use of imported steel, other
steel-producing countries will retaliate with similar measures.
The ‘biggest imponderable’ about Obama’s package is:
"Will the plan work?" (The Washington Post, A Fiscal Gamble, editorial,
13 February) It is not only left-Democrat, Keynesian commentators who
are sceptical about the likely effectiveness of Obama’s plan. For
instance, in a note to their clients, the business analysts, High
Frequency Economics, comment: "We remain firmly of the view that the
package now in Congress is the bare minimum required. It will ultimately
prove too small".
Obama’s package, despite its size, is a hastily
improvised patch-up job. The stimulus plan does not significantly
increase expenditure on healthcare or education. There are no measures
which will significantly raise the general income levels of workers and
no measures to enhance the trade union rights of workers. Apart from the
time-lag before most of the stimulus measures will have an effect, the
package has to counter a deepening global downturn and the continuation
of the credit crunch.
The first instalment of TARP, implemented by George
Bush and Hank Paulson, has so far prevented a domino-like collapse of
financial institutions but has not overcome the paralysis of bank
lending. Obama has proclaimed that TARP 2 (the second $350 billion
instalment) will be much more effective, but so far Geithner’s
announcements remain extremely vague. One way or another, the bulk of
the debt mountain will be shifted from the private sector to the public
sector, with the cost being imposed onto the working class.
Fifty billion dollars or more will be used to try to
prevent housing foreclosures, but this is primarily an indirect form of
support for banks facing a rising number of mortgage defaults.
Increasing negative equity (already about 28% of home buyers) and a
tsunami of unemployment will mean more and more defaults and
foreclosures. The only way to prevent this would be for the Federal
government to impose a moratorium on all foreclosures and to subsidise
the refinancing of mortgages or a switch to renting at affordable rates.
Obama’s huge package will have some cushioning
effect, but whether it will actually stimulate renewed growth remains to
be seen. One thing is certain, however: the Federal debt will balloon
over the next few years. The Congressional Budget Office estimates that
(including the current debt plus the cost of TARP and the stimulus
package) Federal government debt will rise from 41% of GDP in 2008 to
70% of GDP by 2011.
The CBO estimates that after that the annual budget
deficit will fall to 2% of GDP. But this estimate is based on extremely
optimistic projections: a 4% a year average GDP growth 2011-14 and
minimum growth of public spending in line with inflation. If the global
slump continues beyond 2010, budget deficits would continue to soar.
This would make it much more difficult for the US to finance its debt on
global financial markets.
Lynn Walsh
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