Wednesday, December 09, 2009

Tackling joblessness vs federal debt

Business Times - 10 Dec 2009

Tackling joblessness vs federal debt

Obama has to decide which is his administration's main priority in the coming months


FACING public discontent over continuing high unemployment, which stands now around 10 per cent, US President Barack Obama is now trying to demonstrate his commitment to tackling the problem that could endanger Democratic control of Congress if economically distressed Americans decide to vote for Republicans in the midterm elections next year.

Touting the success of his stimulus and economic recovery efforts, Mr Obama laid out what sounded like a new stimulus-style jobs programme. Speaking at the Brookings Institution, a Washington-based liberal think tank on Tuesday, Mr Obama proposed a set of new ideas, including tax cuts for small business, new infrastructure spending on highways and rail, and a so-called 'cash for caulkers' programme that would give rebates to people who retrofit or 'weatherise' their homes to be more energy efficient.

In many ways, these and similar ideas raised by Mr Obama could be described as extensions of proposals that were included in his US$787 billion stimulus package earlier in the year and demonstrate the Keynesian approach of the Democratic Administration in dealing with the economic downturn.

Mr Obama and other officials stress that while the economy seems to be on the way to recovery, unemployment remains a lagging indicator in that process and hence the need for more public spending that needs to last longer than the actual downturn. But then someone would have to pay for Stimulus II; and in the current political atmosphere in Washington, it is doubtful that the president could win support on Capitol Hill for another spending spree that could cost about US$50 billion or more.

And if he does get some of these proposals approved by lawmakers, Mr Obama would still face an even more troubling dilemma: as the administration tries to spend its way out of the recession - and while the Fed continues to inject more liquidity into the financial markets, the costs of these massive fiscal and monetary policies are raising the spectre of expanding deficits and an unsustainable federal debt - and the possibility of a government default.

Topping the list of Mr Obama's proposals is a new effort to provide assistance to small businesses - which have been responsible for creating roughly 65 per cent of all new jobs in America in the past 15 years - that would probably win support from both Democrats and Republicans. Owners of small businesses have been complaining that while Washington has been bailing out the failed banks on Wall Street, it has failed to provide any assistance to the struggling small companies on Main Street.

In addition to proposing increased loans to small businesses, Mr Obama also suggested eliminating capital gains taxes on small business investments and extending write-offs to encourage them to receive more money and hire more workers. In that context, Mr Obama endorsed a popular idea - providing tax incentives for companies that begin hiring again.

The second set of ideas promoted by Mr Obama involved spending more money on infrastructure projects for highways, railways, bridges, tunnels, airports and seaports that are designed to absorb unemployed workers. Mr Obama explained that the government would be able to use some of the money left from the first stimulus package for that purpose.

The third item on Mr Obama's spending agenda had to do with providing incentives for the use of 'smart energy'. More specifically, Mr Obama wants to encourage homeowners to spend by offering them credit to retrofit their homes to become more energy efficient. This would help these homeowners cut energy costs while contributing to resolving the environmental problems of climate change.

Mr Obama also called for extending aid and health insurance assistance for the unemployed, which are the kind of steps that Congress is expected to approve in the coming weeks.

Preempting criticism that continual use of federal money to revive the economy would swell the federal deficit to dangerous levels, Mr Obama and his economic aides as well as Congressional Democrats have proposed using the money left over from the government's bank bailout to help in creating new jobs and assisting small businesses.

They hope that the idea of tapping into the US Treasury's so-called Troubled Asset Relief Programme (TARP) funds - helping Main Street by spending money that was originally supposed to go to Wall Street to save the financial system from collapse - in a way that seems not to increase the deficit would win the approval of the general public.

Some of the money in TARP has already been used to support the ailing auto industry.

Indeed, with the leading banks beginning to repay some of the money that the government had lent them, this unexpected windfall could help pay for Stimulus II. But Republicans in Congress and other critics question the economic logic behind the idea, noting that borrowing less on the TARP bailout could help reduce the deficit and should not be a source for new government spending.

While unemployment is the main public concern, opinion polls are also suggesting that a majority of Americans are also worried about deficit spending by the government. So the debate between the Democrats and the Republicans over the possible use of the unused TARP funds to pay for Mr Obama's new job-creation programme could focus on whether Washington's main priority in the coming months should be fighting unemployment or reducing the deficit.

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

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