Saturday, February 28, 2009

The Patched Up Obama Stimulus Plan

Feb 27, 2009

By Lynn Walsh
In Denver on February 17, Barack Obama signed his ambitiously titled American Recovery and Reinvestment Act. It was only three weeks after formally taking over the presidency, though over a year since the onset of a severe economic downturn, which Obama himself has warned could turn into a ‘catastrophe’ unless checked.

The $789 billion package is unprecedented in scale – around 5.8% of GDP, spread over two years, compared with Roosevelt’s New Deal package of between 1-2% of GDP. However, the Congressional Budget Office estimates that the ‘output gap’, the difference between the capacity of the US economy and its likely actual output, will be $2.9 trillion over the next three years. The CBO comments that the impact of the package will be ‘uncertain’.

Out of the package, $281 billion is tax cuts, partly to ‘working families’ but including substantial tax concessions to business and around $70 billion (9% of the total) to adjust the alternative minimum tax (AMT) threshold, to prevent this tax affecting upper-middle-class families. This has nothing to do with economic stimulus, and was inserted under pressure from Republicans, although the AMT would clearly have been amended anyway in the coming months.

Additional government spending (repairs of bridges and roads and other infrastructure projects) is to be allocated $308 billion. Included in this is just over $50 billion of additional aid to state governments, though this is a tiny amount given the tax shortfall of many states. California alone has a $42 billion deficit, and the Republican governor, Arnold Schwarzenegger, is imposing massive cuts and public-sector layoffs.

Just under $200 billion of the package is increased benefits, for instance, food stamps, and the extension of unemployment from 26 to 36 weeks. While infrastructure spending will take time to work through to the economy, additional benefits to the unemployed and low-income families will have a much more immediate affect. But there is no provision in the package to ensure that any jobs created will pay union rates or for an increase in the minimum wage. These measures would be far more effective than tax rebates in rapidly boosting demand for goods and services.

Republicans in Congress fought to increase the tax cut element and reduce the additional public spending, despite Obama’s attempt to involve them in bipartisan negotiations. In the House of Representatives, where the Democrats have a clear majority, no Republicans voted for the package. In the Senate, Obama managed to win the support of three Republicans, on the basis of concessions, thus avoiding the danger of a filibuster by Republicans. Congressional Republicans are still clinging to neo-liberal ideology, still asserting that tax cuts for the wealthy are the magic remedy for all economic maladies. In contrast, a majority of Republican state governors, who have to grapple with the crisis, have supported Obama’s package.

A number of Senate Democrats successfully inserted clauses into Obama’s legislation imposing restrictions on the pay and bonuses of banks and corporations receiving any funds under the TARP bank-bailout program. This new provision prohibits cash bonuses and almost all other forms of incentives for the five most-senior officers and the 20 highest-paid executives at large companies receiving money under TARP. Although Obama recently denounced the recklessness and irresponsibility of top bankers, calling for a curb on bonuses, the president and his Treasury secretary, Tim Geithner, actually opposed this measure!

Obama claims that his package will create four million jobs. Most economic commentators, however, estimate that it will create between one and three million jobs at most.

But even four million jobs saved or created – Obama’s ‘bottom line’ – would be a very limited cushion for millions of unemployed workers. The jump of over half a million job losses in January brought the number of jobs lost since the beginning of the recession in December 2007 to 3.6 million. This means 11.6 million unemployed workers (7.6% of the workforce), but if part-time workers who need full-time jobs and jobless workers who have given up looking are included, the total rises to 21.7 million workers (13.9% of the workforce).

Reflecting protectionist pressures, House Democrats inserted a ‘Buy American’ clause into the stimulus bill. This is mainly aimed at ensuring that U.S.-made steel will be used in infrastructure projects. Steel makers’ organizations in Canada and Europe immediately protested at this ‘beggar-thy-neighbor’ policy. The clause was softened in the Senate, with language that the protectionist provision should be "applied in a manner consistent with the United States’ obligations under international agreements". But as Jagdish Bhagwati, an adviser to the WTO, warned, it is still possible for the US to restrict trade within WTO rules: "I would bet everything I have on a trade war breaking out within WTO-consistent rules", he said. There is little doubt that, if serious restrictions are imposed on the use of imported steel, other steel-producing countries will retaliate with similar measures.

The ‘biggest imponderable’ about Obama’s package is: "Will the plan work?" (The Washington Post, A Fiscal Gamble, editorial, February 13) It is not only left-Democrat, Keynesian commentators who are skeptical about the likely effectiveness of Obama’s plan. For instance, in a note to their clients, the business analysts, High Frequency Economics, comment: "We remain firmly of the view that the package now in Congress is the bare minimum required. It will ultimately prove too small".

Obama’s package, despite its size, is a hastily improvised patch-up job. The stimulus plan does not significantly increase expenditure on healthcare or education. There are no measures which will significantly raise the general income levels of workers and no measures to enhance the trade union rights of workers. Apart from the time-lag before most of the stimulus measures will have an effect, the package has to counter a deepening global downturn and the continuation of the credit crunch.

The first installment of TARP, implemented by George Bush and Hank Paulson, has so far prevented a domino-like collapse of financial institutions but has not overcome the paralysis of bank lending. Obama has proclaimed that TARP 2 (the second $350 billion installment) will be much more effective, but so far Geithner’s announcements remain extremely vague. One way or another, the bulk of the debt mountain will be shifted from the private sector to the public sector, with the cost being imposed onto the working class.

Fifty billion dollars or more will be used to try to prevent housing foreclosures, but this is primarily an indirect form of support for banks facing a rising number of mortgage defaults. Increasing negative equity (already about 28% of home buyers) and a tsunami of unemployment will mean more and more defaults and foreclosures. The only way to prevent this would be for the Federal government to impose a moratorium on all foreclosures and to subsidize the refinancing of mortgages or a switch to renting at affordable rates.

Obama’s huge package will have some cushioning effect, but whether it will actually stimulate renewed growth remains to be seen. One thing is certain, however: the Federal debt will balloon over the next few years. The Congressional Budget Office estimates that (including the current debt plus the cost of TARP and the stimulus package) Federal government debt will rise from 41% of GDP in 2008 to 70% of GDP by 2011.

The CBO estimates that after that the annual budget deficit will fall to 2% of GDP. But this estimate is based on extremely optimistic projections: a 4% a year average GDP growth 2011-14 and minimum growth of public spending in line with inflation. If the global slump continues beyond 2010, budget deficits would continue to soar. This would make it much more difficult for the U.S. to finance its debt on global financial markets.

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