Monday, January 12, 2009

Obama gets taste of business as usual

Business Times - 13 Jan 2009

Obama gets taste of business as usual

Despite his efforts, it's unlikely that he'll be able to get an economic stimulus package approved before February


AGAINST the backdrop of the worst economic crisis since the Great Depression, there was concern in Washington and Wall Street that with President George W Bush about to leave town and President-elect Barack H Obama not being here yet, the perception that 'no one was in charge' would take hold and would have a downbeat effect on the depressed financial markets.

But once again, Mr Obama has dumbfounded the bearish sceptics through his success in filling the political vacuum during the Interregnum and thus demonstrating to policymakers and investors that while he is not yet occupying the White House and making decisions, he is still able to help set the economic policy agenda and shape national sentiment.

In a series of media events, Mr Obama introduced the leading members of his economic team.

At the same time, Mr Obama presented his strategy to deal with the economic crisis in which the federal government would be playing a leading role by embracing a fiscal stimulus plan that could reach US$1 trillion. It would involve spending on a numerous New Deal-like economic and social programmes, such as a huge plan to fix up America's decaying infrastructure, and other projects in the areas of healthcare, education and alternative energy sources.

By pumping money into the economy, the Obama administration would be following Keynesian principles and hope to revive the confidence of consumers and businesses and re-energise the economy, or at least prevent a long and large recession.

In general, the response from most economists to Mr Obama's personnel choices and economic plans were quite upbeat, and the general consensus in Washington has been that when Mr Obama enters the White House, he would have both an economic team and an economic plan in place and would be ready to go.

And no one seemed to have any doubts that a US Congress, dominated by a clear Democratic majority would approve the Obama nominations and programmes, and ASAP. In fact, some pundits speculated that Congress would approve an approximately US$775 billion emergency stimulus package before Inauguration Day and President Obama would find it on his desk on Day One, would sign it, and start stimulating the economy.

But that is not going to happen. As the newly elected Congress arrived in Washington last week, the early euphoria over Mr Obama's economic stimulus plans seemed to start dissipating, creating new concerns that the confidence of consumers and businesses could be hit hard if the administration and Congress do not move rapidly to approve a meaningful stimulus package.

Welcome to Business-as-Usual Washington. Once again, the never-ending political and legislative game that takes place between the White House and Capitol Hill, where interests and ideologies compete for influence, is going to make it difficult for a new president to advance his agenda.

Hence, notwithstanding Mr Obama's impressive win last November and the devastating economic crisis, it is unlikely that he will be able to get a stimulus package approved before February, and perhaps even later.

In what amounted to a pre-emptive strike aimed at Congress, Mr Obama warned last Thursday that the economic recession could grow 'dramatically worse' and last for several years unless 'bold' policies were enacted in Washington to reverse the current downturn. He expressed concern that unemployment could rise to double digits and the economy could lose US$ 1 trillion of its capacity unless the government took immediate action. And the president-elect made these comments in a week dominated by more bad economic news that made it clear that the economic recession was here to stay.

The unemployment rate jumped to 7.2 per cent in December from 6.8 per cent in November and 5 per cent last April with more than 11 million Americans being unemployed now (a figure that does not account for many who had stopped looking for jobs - which could put the level of real unemployment at about 13 per cent).

There are also no signs that the Bush administration's financial rescue programme has done anything to unfreeze lending markets or that the monetary strategy pursued by the Federal Reserve is having any major effect on the economy.

Under such conditions you would assume that lawmakers - especially those who belong to the liberal and pro-government-intervention wing of the Democratic Party - would be cheerleading Mr Obama's plans to use the federal government as part of an aggressive expansionary fiscal programme.

But interestingly enough, some of the earlier criticism of the general outlines of Mr Obama's stimulus package has come from liberal Democrats who do not like the idea of including in such a plan a US$300 tax cut for the middle class. Mr Obama has pointed out he had promised such a plan of tax cuts during the election campaign and denied that it had been included in the stimulus package to win the support of Republican lawmakers.

And while Mr Obama has stressed that he will not permit the stimulus bill to include any Congressional spending projects favoured by individual lawmakers and interest groups, it is very doubtful that members of Congress will refrain from inserting such so-called 'pork-barrel' items in the stimulus legislation.

And, indeed, delaying approval of such a bill will provide lawmakers and interest groups allied with them even more time to lobby for their pet projects and force them into the package.

But some of the major opposition to the size of the stimulus reflects concerns on Capitol Hill over the expanding federal budget deficit which, according to the projections of the Congressional Budget Office (CBO) which were released last week, is expected to increase to US$1.2 trillion in the current fiscal year.

This size of the deficit represents 8.3 per cent of GDP - the highest share of the economy since 1945. Moreover, based on the analysis by the CBO, a stimulus package of about US$800 billion would increase the 2009 deficit to above US$2 trillion.

Overall, the CBO calculated that federal spending in 2009 will be about US$3.54 trillion - a number that includes the spending on the financial rescue programme but not the US$24 billion Washington is expected to spend in Iraq this year.

Overall, the federal deficit could reach the number of US$1 trillion in 2010 at a time when the American economy would be expected to recover.

It is not only Republican lawmakers who are warning of the spectre of a US deficit that could be rising to the stratosphere and threatening the economic security of the nation; many conservative Democrats are also worried about the idea of stimulating the economy into financial bankruptcy and are putting pressure on Mr Obama to signal his long-term commitment to fiscal responsibility.

Mr Obama acknowledged during his address last Thursday that his stimulus plan will increase the federal deficit even beyond US$1.2 trillion, but insisted that government spending was the only route to prevent the economy from slipping over the proverbial cliff.

'But equally certain are the consequences of doing too little or nothing at all, for that will lead to an even greater deficit of jobs, incomes and confidence in our economy,' Mr Obama said. The president-elect stressed that his plan to cut wasteful government and to reform the government-backed pension programme (Social Security) could help reduce long-term government spending and, by extension, the federal deficit.

But many lawmakers who are familiar with the political and bureaucratic reality in Washington remain concerned that a rapid approval of a gigantic economic stimulus package will almost by definition lead to more government waste and perhaps fraud.

After being rushed by the Bush administration to approve the US$700 billion financial rescue plan that ended up 'rescuing' a few big investors in Wall Street but has done very little to improve the economic conditions of struggling homeowners, Congress wants to get more information from Mr Obama and his economic aides about an even larger economic stimulus package.

Lawmakers want to know who exactly will be benefiting from the many new federal spending programmes and would like to ensure that Congress will be able to oversee its implementation. But they are confident that they will approve some sort of package before Congress leaves for a short recess on Feb 16.

Adding to the anxiety among lawmakers is the recognition of what Washington will be doing: trying to use the power of the federal government to save the American economy from crashing. It has not been tried since the 1930s New Deal, and certainly not since Ronald Reagan stated in the early 1980s that government was not the solution to America's economic problem, but that 'government was the problem'. Mr Obama will try to prove Reagan wrong.

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

1 comment:

Edward said...

Quite helpful piece of writing, thanks for the post.