A lot riding on the stimulus package

Business Times - 29 Jan 2009

A lot riding on the stimulus package


ON THE same day that Timothy Geithner was sworn in as the new US Treasury Secretary, several major US corporations, including Home Depot and Caterpillar, announced that they would be cutting more than 75,000 jobs in the US and worldwide. The news about the layoffs, not to mention the never-ending reports about crumbling banks and home foreclosures, served as a depressing backdrop for the start of the workweek for the man who was about the fill the shoes that had been worn for the first time by one of America's Founding Fathers, Alexander Hamilton.

The bets are that Mr Geithner will either emerge as one of the most important Treasury secretaries in US history - if he succeeds in re-energising the stagnant financial markets and presides over an economic recovery - or that he will be recalled as America's top economic official who ended up going under, defeated and doomed, together with the entire US economy.

Muddling through a long economic recession, in the same way that the Japanese economy did in the 1990s, is probably not going to be an option for Mr Geithner and for the American economy. Hence he could find himself out of a job unless consumers and businesses start seeing the light at the end of the economic tunnel by December.

Ironically, if it were not for the mounting economic problems that have produced a sense of national emergency, Mr Geithner may not have been confirmed by the Senate, where the disclosures about his US$34,000 in tax delinquencies have hurt his personal and professional reputation (since, after all, the Treasury secretary is in charge of the Internal Revenue Service).

Many lawmakers are also not impressed by his untidy performance as the president of the Federal Reserve Bank of New York, during which he played a leading role in dealing with the financial crisis and in lobbying in support of the government's bailout programmes. That explains why 34 senators, including three Democrats, voted against his nomination.

So Mr Geithner and his boss, President Barack Obama, have their work cut out for them as they try to press forward an ambitious but controversial fiscal spending programme, the so-called economic stimulus package. And all this before the two have started to discuss the administration's plans to inject more taxpayer money into the financial markets!

Indeed, leading the campaign to support his proposed US$825 billion stimulus plan, Mr Obama met on Tuesday with Congressional Republicans on the eve of a vote in the House of Representatives on the programme and just after the New York- based Conference Board reported that its Consumer Confidence Index fell to 37.7 in January - the lowest level since it started issuing the index in 1967.

While the Democratic leaders on Capitol Hill are confident that the stimulus package legislation will be ready for President Obama to sign next month, the majority of Republicans as well as a few conservative Democratic lawmakers have expressed opposition to many of the elements in the programme. Among other things, the critics contend that many of the provisions in the package would not be put to use soon enough to revive the economy.

But Peter Orszag, Mr Obama's budget director, said last week that most of the money in the package would be spent in 2009 and early next year.

Mr Obama has pointed to the layoffs as a reason to approve his stimulus package. 'These are not just numbers on a page,' he said. 'As with the millions of jobs lost in 2008, these are working men and women whose families have been disrupted and whose dreams have been put on hold.'

But critics of the plan are concerned that the money that would be spent by state and local government fixing the infrastructure could end up creating incentives for waste and political corruption, not to mention the fact that it would create more debt and increase the budget deficit.

Mr Obama and his advisers insist that the majority of both liberal and conservative economists support the need to pass a large government spending programme. 'We're all Keynesians now' has been the common refrain promoted by editorial page writers and think-tank analysts, who suggest that increasing spending to where it was during the economic boom of the pre-recession era is the only realistic way to bring the US out of the economic downturn.

But this conclusion and the ensuing policy prescriptions are challenged by some conservative economists who believe that it was excessive money growth - driving asset prices up and interest rates down - that was responsible for the current crisis; allowing asset prices to fall would help return spending to sustainable levels and create the conditions for economic recovery.

From that perspective, more government spending may be the problem - and not the solution.

Economist Peter Schiff, president of Euro-Pacific Capital, a brokerage firm, warned that over the last decade the US became a bubble economy that needed unlimited credit to keep from collapsing. But that process was not sustainable and that the only way to prevent a total collapse of the US economy would be for the US government to stop printing more money and for Americans to cut their spending and live within their means. He added: 'In fact, such a contraction is long overdue and the government should not do anything to interfere.'

Hence the government should not try to 'revive the spending spree that has led us to this disaster', Mr Schiff concludes.

That is clearly a minority view these days when the consensus seems to shift towards the Keynesian direction. The question is whether it is going to work. And the answer to this question will help determine the fate of the American economy as well as that of Mr Geithner's career.

Copyright © 2007 Singapore Press Holdings Ltd. All rights reserved.


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