Wednesday, December 24, 2008

Big - and getting bigger and bigger

Business Times - 25 Dec 2008

Big - and getting bigger and bigger

Consensus seems to be that long-term consequences can wait; things need fixing now


BARACK OBAMA will be inaugurated as the next US President on Jan 20. Yet, if you happen to read the headlines in the major American newspapers or watch television news regularly, you would probably conclude that Mr Obama has been occupying the White House for quite a while, as he and his aides have been bombarding the media and the public through statements and leaks with their continuously changing programmes for fixing the American economy - which tend to be confused with the old and new plans proposed by the current president, George W Bush, for, well, fixing the American economy.

The only thing one could be certain about these days is that this American economy is continuing to plunge just as both the departing and arriving presidents are adding billions - no, change that to 'trillions' - of US dollars to bring it back to life, energise businesses, add new jobs, save this or that industry, reform the healthcare system, deal with the environment, and fight in several wars overseas, among many other things.

Indeed, Mr Obama seemed to have more than tripled the size of the economic stimulus package that he had embraced during the presidential campaign. Top aides to Mr Obama, including Vice President-elect Joseph Biden, told reporters over the weekend that they are anticipating rising rates of unemployment, and that the Obama administration was preparing the biggest economic stimulus in US history that could range in size from US$800 billion to US$1.3 trillion - more than what the US had spent on the Iraq War (US$597 billion) or on the Korean War (US$454 billion) - and that the president-elect was hoping to save or create at least three million jobs over the next two years.

The new Democratic-controlled Congress is scheduled to convene in early January, and most observers expect that the House of Representatives and the Senate would be able to agree on and approve a stimulus package before or shortly after Mr Obama takes office. Democratic lawmakers have expressed the hope that Congress will pass an initial stimulus package of between US$600 billion and US$850 billion, although the number could change as economic conditions continue to worsen. Moreover, Congress could end up embracing other new spending measures to stimulate the economy later in 2009.

The news comes as reports indicated that about 1.9 million American jobs were lost in 2008 and that economists were predicting that the unemployment rate could rise above 10 per cent as the economic recession continued to deepen. Public opinion polls indicate that a majority of Americans support the passage of such large economic stimulus packages and the Democrats are certainly confident that they would be able to pass them, although a coalition of Republican and conservative Democrats in Congress could try to oppose this large spending spree by the federal government, which - together with the costs of the quantitative-easing measures adopted by the Federal Reserve - could raise the budget deficit to new heights.

In addition to paying about US$150 billion for the costs of tax relief for the poor and the middle class, the stimulus package will fund a variety of federal and state programmes to develop 'green' jobs, including by promoting energy created by solar and wind power, and infrastructure projects to repair America's roads and bridges, to upgrade computers in public schools and government agencies, etc. The consensus among most economists is that in order to prevent the current economic recession from turning into a full-blown depression, Washington has no other choice but to pump the economy through an expensive fiscal programme that together with the Fed's monetary measures could revive the economy.

But sceptics have expressed concern that the stimulus package would create incentives for interest groups representing various industries as well as state and local governments to use their political power to receive slices of the federal spending cake to support their own pet projects.

Moreover, it is not clear how these huge federal spending programmes will affect the economy in the long run. Tax rebates and public works projects are not going to necessarily encourage consumers to spend their new income since they recognise that these programmes are temporary.

At the same time, the spending on infrastructure and other public works projects does not really create new jobs but only funds temporary employment. Hence, when a local government completes building a road, the temporary workers return to the ranks of the unemployed or the government is forced to subsidise them by continuing to fund unnecessary public projects. As a result, these programmes tend to create enormous waste and distort government spending priorities without fixing the structural problems facing the economy, and in many ways worsen them by creating massive deficits on the federal, state and local levels and delaying reforms.

But at this stage of the economic crisis, it is clear that notwithstanding these and other reservations, policymakers and lawmakers in Washington have decided that the benefits of what could turn out to be a short- term stimulation of the economy outweigh the long-term costs in the form of waste and deficits.

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