Wednesday, January 21, 2009

New President and a New-New Deal

Business Times - 21 Jan 2009

New President and a New-New Deal

Obama takes office and will bring a new approach to tackling economic issues


THE coming days, weeks, and months could prove to be the best of times, and the worst of times for US President Barack Hussein Obama.

After being sworn-in today as the 44th president of the US and as the first African-American to occupy the highest political office in the land, this young, intelligent and charismatic man will enter the White House with a huge groundswell of support from the American public and enormous goodwill from people around the world, all of whom are wishing, hoping and praying that President Obama's 'audacity of hope' that had helped him overcome so many personal obstacles and setbacks in his life, will also help him set the United States on the road towards political, economic and civilisational renewal.

Indeed, most Americans, including those who didn't vote for him in the presidential election, are optimistic about the next four years under an Obama presidency and are confident that the new president would make real progress in the economic and foreign policy fronts, according to a New York Times/CBS opinion poll published this week.

Add to that the fact that the Democratic Party now controls both the US Senate and the House of Representatives while the Republican opposition is in deep doldrums, and it becomes clear that President Obama and the members of his impressive economic and national security team should be ready and set on Day One to get going.

Hence, expect Congress to confirm ASAP Mr Obama's nominees for the top positions in Cabinet, and that includes Tim Geithner as Treasury Secretary and Hillary Clinton as Secretary of State.

Also, Congress is going to approve Mr Obama's demand that it release the second half of a US$700 billion package, the Troubled Assets Relief Program (TARP), that is needed in order to save the collapsing financial sector. The lawmakers will also probably agree to back up the first instalment of the economic stimulus package, which should come to about US$800 billion as part of Mr Obama's ambitious fiscal policy aimed at reviving the depressed economy.

But even the upbeat news stories about the inaugural celebration in Washington DC could not overshadow the reports about more bankruptcies and foreclosures, growing unemployment, big bank losses - Circuit City, the bellwether American retailer just went out of business; Citigroup and Merrill Lynch are reporting huge losses; Detroit's car industry begging for government welfare. And there are no signs that the Fed's monetary policy is bringing the financial markets back to life or that the government's growing spending has made any big difference as far as American businesses and consumers are concerned. If anything, pumping up the economy with more cash risks adding to the economic gloom by expanding the deficit, weakening the US dollar, and igniting inflation pressures.

So, despite the growing list of foreign policy crises, the new president is going to focus most of his time and energy during his first months in office on the economy. And like Franklin Delano Roosevelt who was elected president in the aftermath of the 1929 Wall Street crash and the ensuing Great Depression, Mr Obama is expected to integrate the many policy proposals he is considering into a coherent vision of change, arguing the need to replace the laissez faire paradigm of the Reagan-Thatcher years with an approach that places the role of government at the centre of economic policy. If Mr Reagan had argued that government was a problem that was slowing economic growth, Mr Obama contends that only government could help prevent an economic slide.

Mr Obama's New-New Deal will include four components.

Firstly, on the fiscal side, he will promote a series of economic stimulus packages, much of which will cover the cost of programmes to be managed by the states as they try to fix America's breaking infrastructure and massive government spending on two long-term programmes: Designing a national healthcare system and helping create the foundations for new 'green' industries. In addition, the government is going to pump money into various industries that are in financial distress, such as the car companies.

Secondly, in order to counteract the effect of this massive government spending on the deficit, Mr Obama is expected to call for major reform of the national pension programme (Social Security) and for large cuts in the many costly entitlements and in the defence budget as well as for finding ways to reduce other forms of government waste.

Thirdly, he will continue working with the Treasury and the Fed to stabilise and revive the financial markets, and as part of that policy, to bail out failing financial groups. In addition to calling on Congress to release the rest of the TARP money, the new administration is expected to provide even more financial resources to the troubled financial institutions that most pundits believe will continue to absorb another US$1 trillion in losses in addition to the US$1 trillion they had already reported losing. The new economic team will come under pressure to introduce a more coherent strategy of bailing out financial institutions instead of continuing to apply the current haphazard approach.

Finally, Mr Obama and his aides will also introduce a plan to overhaul the regulation of the financial markets.

The New York Times/CBS polls indicated that most Americans don't believe that these and other policy changes to be introduced by President Obama in the coming months will bring about immediate improvement in the economic conditions. Americans seem to be patient but they expect Mr Obama to deliver some the changes he had promised sooner or later. It took FDR about six years before the economic recovery got into full speed. The countdown for the implementation of Obama's New-New Deal starts today.

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