Monday, February 16, 2009

A stimulus victory for Obama

Business Times - 16 Feb 2009

A stimulus victory for Obama

Now, even a slight economic improvement in the coming months will raise his clout to ask for more help from Congress


IF A WASHINGTON political or economic pundit had predicted a year or two ago that the US Congress would pass a package of spending and tax cuts totalling US$787 billion, he would have been seen as suffering from hallucination. Or perhaps that he was confusing 'billion' with 'million', or was thinking about US$7.87 billion and just forgot to put a dot in the right place?

That Congress - including the Senate, where the ruling party did not have a filibuster-proof majority (61) - would consent to approve such a colossal spending and tax-cutting package proposed by a new president who had been in office only 24 days (and let's not forget that the president was an African-American whose middle name was 'Hussein') would be considered as part of a plot drawn up by a science fiction author with too much imagination.

But when President Barack Obama, following the passage of the economic stimulus bill last week, signs the legislation into law tomorrow in Denver, he will be live on television and he will be making history - as opposed to starring in a sci-fi film.

Indeed, some observers have compared Mr Obama's spectacular political and legislative achievement to that of President Franklin Delano Roosevelt who, a day after his inauguration (March 4, 1933), won Congressional approval of a plan for a 'bank holiday' - considered the first step towards overhauling the then ailing financial system

This historical analogy is certainly not far-fetched. FDR, not unlike BHO, was elected to the presidency just as the American economy was sliding into a long and painful slump - failing banks; a bearish stock market; home foreclosures; rising unemployment. It was a time when the depressing economic reality, with businesses not investing and consumers not spending, created the conditions for a revolutionary transformation in economic thinking and policy making. The dominant laissez faire approach gave way to strategy based on government interventionism in the economy.

And, indeed, Mr Obama is hoping that his First 100 Days in office will one day be compared by future historians to that of FDR who from March 9 to June 16, 1933, sent Congress a record number of 'pump-priming' (that is, federal spending) bills, including a relief programme for the unemployed and a massive government-led industrialisation, all of which passed easily - and came to be known as the New Deal - that helped deliver the country out of the Great Depression.

During a radio address last Saturday, President Obama hailed the Congressional approval of the stimulus bill - the Senate passed it, 60-38, late on Friday, after the House of Representatives voted for it, 246-183 - as a 'major milestone on our road to recovery.'

The scale of the programme in the 1,100-page bill is impressive and, indeed, historic. The stimulus plan - which is split into 36 per cent for tax cuts and 64 per cent in spending - includes a massive amount of direct payments to individuals, led by an increase of US$50 billion in federal medical assistance and US$69 billion in tax credit payments; and several huge government spending projects, including grants to states for education and other budget needs, that should cover projects to upgrade the nation's ageing infrastructure, overhaul healthcare record-keeping and invest in alternative energy research.

'I will sign this legislation into law shortly, and we'll begin making the immediate investments necessary to put people back to work,' Mr Obama said in his Saturday address. At a time when the jobless rate is creeping up to 8 per cent, President Obama and his aides are predicting that the stimulus plan will help save or create more than 3.5 million jobs over the next two years.

But even if these forecasts about the effect of the plan on employment are realistic, not even the most enthusiastic proponent of the stimulus is certain that the programme will help give the 'jolt' that the weakening economy needs to bring it back to life in the form of renewed confidence among consumers and businesses, and lead to more spending and investment.

After all, it took several years for FDR's spending programmes to start getting the US economy out of the depression and to bring down the unemployment rate, which was at the 25 per cent level when he entered office in 1933. The hope in Washington is that the effect of Mr Obama's stimulus programme on consumer demand and perhaps on the level of employment will become apparent only in 2010 and 2011.

Moreover, the stimulus bill is bound to disappoint America's trading partners since it contains a watered-down version of the 'Buy American' measures that place restrictions on US companies on buying foreign-made iron, steel and manufactured goods if they take part in a project financed by the stimulus, although the legislation reaffirms the need to ensure that such steps are not in violation of international trade accords. And while the passage of the fiscal plan will probably help provide a short-term political boost to President Obama, the bipartisanship rancour that the debate over the stimulus has exposed - not even one Republican lawmaker voted in support of the plan in the House and only three Republican Senators joined the Democratic majority in passing it in the Senate - raises serious doubts about the ability of the White House to mobilise support on Capitol Hill for what could turn out to be a series of plans to use taxpayer money to pay for new stimulus packages as well as for new programmes to bail out the financial system (in addition to the more than US$700 billion bailout plan approved by Congress last year). The costs of all these programmes could reach US$5 trillion by the end of Mr Obama's first term (and that doesn't include the annual budget of the federal government).

Indeed, while Congress was debating the administration's fiscal programme, Treasury Secretary Tim Geithner laid out in an address in Washington a very general outline of the plan to fix the financial system. His presentation failed to impress lawmakers in Washington and investors on Wall Street, who complained that it was too disjointed and lacking in details. And it seemed to be ineffective in responding to growing concerns that many of the country's top banks were insolvent and could require extensive recapitalisation and perhaps even the nationalisation of many of them - moves which in turn could force the administration to ask Congress for more bailout funds in amounts ranging to about US$2 trillion.

The political and economic bottom line is that, against the backdrop of the divisions in Congress and the anti-Wall Street sentiment around the country, the Obama administration is not in a position to make such a request to Congress - the expectation being that most Republicans plus a large group of populist Democrats will probably reject it. It's possible, as some experts suggest, that Mr Geithner's idea of 'stress-testing' the banks through an audit that is bound to conclude that they indeed require recapitalisation, could be part of a step-by-step strategy aimed at creating the political conditions for a new bailout request from Congress.

And even a slight improvement in the economic situation in the coming months as a result of the stimulus - for example, the rate of unemployment not going up - could provide Mr Obama with the political momentum he needs to press forward a more detailed, dramatic and costly plan to repair the financial system. But if he fails to deliver such a plan, he could end up sharing the pantheon of presidents with George W Bush - not with FDR.

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

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