President Obama's New Stimulus Packages - $50 billion will not transform an economy of $10 trillion

Written by Warwick Lightfoot Monday, 13 September 2010 14:43
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President Obama’s proposed fiscal stimulus package should be judged against several criteria.

These are:

Is it necessary in demand management terms?
Does fiscal policy work?
Are the President’s precise proposals likely to be effective?

Warwick is the author of the forthcomng tittle 'Sorry, We Have No Money - Britian's Economic Problem'

The US economy is recovering, but the pace of recovery has been slow and the performance of the labour market has been weak.

The IMF and OECD are probably right in thinking that there is some scope for further stimulus in the US economy. The most obvious way to do that is to maintain loose monetary conditions and for the central bank to continue to make use of quantitative easing to increase bank and financial market liquidity.

Fiscal policy may well have a role in immediately boosting demand directly and because it supplements monetary policy at a time when the monetary policy does not have the traction that it normally has as a policy instrument given the continued weakness of bank balance sheets. 

There is a tension between the potential stimulus arising out of a larger budget deficit and any adverse reaction that the bond markets may have in terms of higher interest rates offsetting the direct fiscal stimulus and potential changes in saving behaviour by the private sector in anticipation of a higher future tax burden.

The US Government enjoys an unusual position as a borrower, because it borrows in its own currency, which is a reserve currency. Investors worldwide whatever they may say currently choose to use it as a safe heaven, which means the short term costs of borrowing in terms of higher interest rates are unlikely to be great. Fiscal stimulus by governments in smaller open economies tends to be disappointing, because demand leaks out into imports and ends up stimulating foreign economies. It is only effective for European economies when most governments are acting in a similar fashion as they did between 2008 and 2009.

The US is in a different position because it is a much larger transcontinental economy and although it is now more open than it once was  there is much less leakage than most other OECD economies.

The details of any proposed fiscal policy should be tested against the three Ts: 

They should be targeted for maximum effect in raising demand in a swift and timely fashion and they should be temporary. Fiscal measures should not permanently increase public expenditure or lower taxes. It is too early to form a proper judgement about the effectiveness of the fiscal stimulus measures taken by the Bush and Obama administrations in 2008 and 2009. There were, however, many features of the 2009 Obama fiscal package that plainly did not meet those criteria and represented little more than a discretionary increase in domestic public expenditure programmes. One of their principal defects appears to be that many of the measures  were neither timely not well targeted on immediately raising demand. The 2009 Package was not properly focused.

President Obama’s latest proposals appear to be a conflation of different policy objectives.

The first is to further stimulate the economy and the other is to ‘transform’ American economic performance. Infrastructure spending over the next ten years may be desirable but it does little to address the immediate demand problem. Moreover if infrastructure investment is to be worthwhile it has to be carefully and rigorously costed. If the proposed projects are anything like the Hodge podge of spending measures set out in the 2009 package mush of it would be a waste that would yield little long-term benefit for the economy. There is also a problem with the President’s rhetoric. 

$50 billion will not ‘transform ‘an economy of $10 trillion.



Last modified on Sunday, 18 September 2011 12:16

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