From the January 11, 2009 Sunday Times (London)
January 12, 2009
by Irwin Stelzer
Any lingering opposition to Barack Obama’s stimulus plan melted in the face of Friday’s report that 2.6m workers lost their jobs last year, 1.9m in the past four months alone. The official unemployment rate jumped from 6.7% to 7.2%, the highest since January 1983.
If we count those who have dropped out of the workforce, are involuntarily working part-time or on reduced hours, 13.5% of American workers are in distress.
So it makes sense to assume that the two-year, $775 billion stimulus package for which Obama rallied congressional and public support in Thursday’s speech at George Mason University will become a $1 trillion package by the time it is finalised. Indeed, congressional Democrats are calling for a $1.3 trillion stimulus. Trillion is the new billion.
It is also a lot of money, allowing the president and Congress to promise something for everyone. Republicans want tax cuts? Fine, here is $150 billion for middle income and poor families, and more than $100 billion in tax breaks to encourage businesses to hire and invest. Want to help “the struggling states” cover their budget deficits without cutting their bloated spending? Here are a couple of billions for governors to dispose of. Want to rebuild “crumbling roads”, bridges, airports and build a new smart grid? Here is $300 billion for infrastructure.
Obama is disappointed that the legislation won’t be ready for his signature on inauguration day, January 20. Every day lost is another job lost, another dream shattered, argued the president-elect in his speech on Thursday. But congressional leaders say they want to get it right the first time, and will need until mid-February to put a bill on Obama’s desk for his signature.
Transparency is to be the order of the day. Rahm Emanuel, Obama’s chief-of-staff-designate, has promised “a Google-like search function to show every programme funded by the stimulus package, whether it is coming in under or over budget, whether it is meeting its intended purpose, and how many jobs it is creating”, according to ABC news.
And if you doubt that a new president who has never managed even a corner candy store, and who could not organise a single meeting of the Senate subcommittee he chaired, can efficiently spend billions, there is a new chief performance officer to look after things — Nancy Killefer, who was a Treasury official in the Clinton administration.
It will be her job to make sure that efficiency trumps politics and bureaucratic lethargy.
Of course, if you are one of those old-fashioned deficit hawks, you are now grounded for years to come. The deficit George Bush is leaving to Obama already tops $1.2 trillion, at 8.3% of GDP far above the postwar record of 6%, and “we’ve got trillion-dollar deficits for years to come, even with . . . economic recovery”, says Obama. Remember, that in addition to his stimulus package there are bailouts for banks, car companies, students, mortgagees and others from the $350 billion remaining in the $750 billion Troubled Asset Relief Program (Tarp).
And if you are not worried that all this will trigger inflation and a run on the dollar, don’t forget that the Federal Reserve Board has announced that it will lend and lend and lend, including its latest plan to buy $500 billion of mortgage bonds, printing money to do so. The big worry is that inflation will take off, and foreigners will be unwilling to buy all those government IOUs unless interest rates go up, offsetting the stimulating effect of Obama’s spending. But for now at least, the world seems to regard Treasury IOUs as islands of safety in a sea of economic woe, and to be willing to buy all of these promises-to-pay that the government offers for sale.
Obama knows that the stimulus can’t make up for the slack in the private sector in the long run. If it succeeds in persuading consumers that an end to the recession is in sight, prospective homeowners that falling mortgage rates have put a bottom under house prices, banks that it is safe to lend again, and businesses that it pays to invest in plants to turn out stuff consumers will buy, it will have succeeded in priming the pump, as the old saying went. If not, America will end up burdened with debt and at the beginning of a long hard road to a sustainable recovery, which in the end will depend on the private sector.
Meanwhile, the Obama teams are getting acquainted with their new jobs. On the surface, it is centrists replacing centrists. But just one notch below the surface, change is indeed in the offing. Obama’s appointees to the energy and environmental regulatory agencies will work to prevent new coal plants from being built, and to arrange financial and regulatory subsidies for wind and solar power. Pressure on the car industry will be unrelenting and irresistible. In hock to the government, the big three Detroit automakers will have to respect the wishes of congressmen who have never sold a car, and produce green cars in which consumers have shown little interest. Change there will be, but whether it will contribute to economic recovery and long-term growth, or impede it, is an open question.
There is reason for optimism. By including tax cuts, some for businesses, Obama has shown that he is willing to make Democrats unhappy to gain bipartisan support for his programme and, it must be said, to do the right thing. Otherwise, so well regarded a conservative economist as Harvard’s Marty Feldstein would not have signed on to the Obama plan. Most important, Obama recognises that he has to tackle long-term drivers of budget deficits even as he spends money to reverse the current economic decline.
Give the man credit: he has a clear view of what he wants to accomplish, of the tools he has available, of his inability to turn the economy round immediately, and has a team that understands how a modern economy works.
Just how much of a slip there will be between cup and lip will depend on whether his star-studded team is as competent in action as it seems to be on paper. Let’s hope so: competence has been in short supply in Washington in recent years.
Irwin Stelzer is a Senior Fellow and Director of Economic Policy Studies for the Hudson Institute. He is also the U.S. economist and political columnist for The Sunday Times (London) and The Courier Mail (Australia), a columnist for The New York Post, and an honorary fellow of the Centre for Socio-Legal Studies for Wolfson College at Oxford University. He is the founder and former president of National Economic Research Associates and a consultant to several U.S. and United Kingdom industries on a variety of commercial and policy issues. He has a doctorate in economics from Cornell University and has taught at institutions such as Cornell, the University of Connecticut, New York University, and Nuffield College, Oxford.
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