Monday, September 12, 2011

Will Obama's plan save US jobs - and his own?

Business Times - 13 Sep 2011

Will Obama's plan save US jobs - and his own?

If the Republicans try to torpedo plan, that could ironically help Obama in the 2012 poll


US PRESIDENT Barack Obama is hoping that the US$447 billion mix of tax cuts and spending that he proposed during a televised address to the politically divided Congress and the economically distressed American people last week would 'restart' the slow economic recovery and avert a double-dip recession. No doubt, he must also be hoping that it will revitalise his limping presidency, regain the support of the electorate and ensure that he get to serve a second term in the White House.

Indeed, as Mr Obama delivered his 30-minute-long speech - challenging lawmakers to pass his job plan as soon as possible - both the American economy and the Obama presidency seemed to be heading into dangerous territories. With the unemployment rate stuck at 9.1 per cent while consumer confidence remains low and the housing market is still in a mess, there are growing concerns in Washington and Wall Street that a vicious circle in which consumers are not spending and businesses are not hiring could result in another economic downturn that could spell disaster for the American and global economies.

Adding to the growing sense of economic gloom has been the failure of Washington to embrace an effective strategy to control the ballooning federal deficits that pose long-term threats to America's global economic standing and endanger its credit rating and damage the value of the US dollar. The responsibility of drawing the outlines of a plan to put US fiscal house in order is now in the hands of a 'super' bi-partisan Congressional committee. But the ideological differences between Republicans (cut spending; no taxes) and Democrats (cut some spending and tax the rich) reduce the chances that Congress would agree on a long-term deficit-cutting plan before the 2012 election.

At the same time, these economic problems that have been aggravated by the crisis in the eurozone and instability in the energy-rich Middle East, have been reinforcing Mr Obama's political troubles. His approval ratings have fallen under 50 per cent as he fails to win any brownie points with independent voters, while losing support even among members of his own electoral base. With the presidential election only 14 months away, it seems quite likely that Mr Obama could lose his second race to the White House.

In fact, recent opinion polls indicate that either of his two main potential Republican challengers - the Tea Party favourite Governor of Texas Rick Perry and the more moderate former Governor of Massachusetts Mitt Romney - could beat him in the election in November 2012.

Indeed, Mr Romney and Mr Perry have emerged as the main Republican presidential contenders during a televised debate between the main presidential candidate that took place last Wednesday (and forced Mr Obama to postpone his address from Wednesday to Thursday). Mr Romney, Mr Perry and the other Republican candidates blamed Mr Obama for the current economic stagnation and high rate of unemployment. In particular, they insisted that Mr Obama's efforts to grow the economy through fiscal stimulus programmes have failed and have actually worsened the economic problems.

The Republican message is that the only way to revive the economy is by cutting taxes on households and businesses while eliminating various regulations on the private sector.

Yet Mr Obama decided to introduce what amounted to his third economic stimulus package that, like the two earlier ones, includes both tax cuts (US$245 billion or 53 per cent of the total package) and targeted government spending on infrastructure and aid to states (US$140 billion or 31 per cent of the total), plus US$62 billion to help the unemployed until they find a job.

It is possible that the economic recovery could be re-energised if Congress approves his package right away. While his US$447 billion job-creation programme falls short of the grand fiscal stimulus plans advocated by Keynesian economists, it could in theory make some difference. Hence the tax cuts Mr Obama proposed would reduce the amount that employees and employers contribute towards retirement as part of the government-backed national insurance programme (Social Security).

In a way, Mr Obama's plan extends an existing programme that cuts workers' contribution and applies it also to the payments that employers are required to make (by matching their employees' contributions). The theory is that employees will now have more money to spend. That in turn raises demand and provides incentives for businesses to use additional money they gained from the tax cuts to hire more workers.

The problem is that there are no guarantees that either employees or employers are going to use the extra money in their disposal in the way that the Obama Administration hopes they would. Instead of spending the money on new cars or other purchases, employees could end-up saving it or using it to pay off their debts. And if consumers are not spending on their products, why would businesses use the extra money to invest in hiring new workers to make the products that no one is going to buy?

The US$140 billion in government spending on retaining and rehiring teachers and police and fire-fighters, modernising public schools, rehabilitating vacant property and rebuilding America's infrastructure (through a national infrastructure bank), could have a more immediate effect by, for example, preventing the lay-off of up to 250,000 teachers and keeping policemen and firefighters on the job.

But the approval and implementation of funding for constructing highways and airports takes a long time. And in any case, there is no reason to expect that the Republicans who control the House of Representatives as well as some of the conservative Democrats in the Senate are even going to approve the spending package that Mr Obama is proposing.

Even under the best case scenario, under which the Federal Reserve also adopts new monetary policies to stimulate the economy, the chances for a dramatic reduction in the unemployment rate before the 2012 election are not very good, which means that Mr Obama's jobs plan is probably not going to create or even save a lot of jobs.

But if, as expected, the Republicans will try to sabotage even the modest programme the White House is proposing, Mr Obama will be in a better position to blame the Republicans for the slow economic growth and high unemployment. If he succeeds in doing that, he may yet save his own job.

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