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Opinion
Can the US Stimulus Plan Save America?
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US stimulus package underscores ideas of Keynesian economics and some sort of protectionism, (Reuters photo) |
On Tuesday Feb. 17, US President Barack Obama signed into law $787 billion stimulus package, a measure he described as "the most sweeping economic recovery package in our history."
Almost 38 percent of the spending bill contains various tax cuts to individuals and businesses, with the remaining 62 percent mostly in the form of spending, although direct spending is smaller than 40 percent of the overall package.
Governments use economic stimulus packages in order to boost their economies by spending on infrastructure, which in turn can create new jobs.
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| Figure 1 breaks down the percentage spending in the bill by major categories. Click here. |
Tax cuts encourage short-term spending while spending related to energy is intended to provide a one-time jolt with the goal of making energy costs cheaper in the long run.
Similar arguments could be made about the portion of the stimulus plan related to health care.
But, what lead to this massive spending stimulus? Current Gross Domestic Product (GDP) numbers show the US economy is shrinking at an annual rate of 3.6 percent.
Adding to the grim news is the finding that US manufacturing activity fell to its lowest level in nearly three decades coupled with the fall in global manufacturing.
Keynesian Economic Ideas
| The idea here is very close to Keynesian economics which underscore that it is the government's job to smooth out the dips in a business cycle. |
The US unemployment rate now stands at 7.6 percent, the highest level in the past 15 years, and is expected to go up as high as 8 or 9 percent by the end of 2009.
In 2008, 2.6 million Americans lost their jobs, the highest number in over half a century. This has led to slow down spending in the private sector, leaving the US government as the only entity that can borrow and spend.
Borrowing will inevitably lead to more debts and deficit. However, the expectation is that this sort of deficit spending will ease unemployment and stimulate a slowing economy.
The idea here is very close to Keynesian economics which underscore that it is the government's job to smooth out the dips in a business cycle by intervening in the form of infrastructure spending and tax breaks.
But, can such a spending program actually work? No one can provide a definitive answer. The best one can do is to learn from history as this economic downturn started like the Great Depression of the 1930s.
When President Franklin D. Roosevelt (FDR) took office in 1933, the US unemployment rate was a staggering 25 percent. Acting on his campaign promise of a "new deal" for Americans, FDR passed banking reform laws and enacted work relief programs.
Not only did GDP rise, but also by 1939, FDR was able to cut the unemployment rate by half from the high percentage he faced when he was elected as the president.
President Obama expects this history to repeat itself.
However, there are already many concerns about the efficacy of the current stimulus plan.
Plan's Shortcomings
| Another concern about the bill is its "buy American" clause that requires materials purchased with funds from the bill to be only US made. |
For starters, the scale of the plan is much lower than comparable stimulus plans being offered by China, which in Nov. 2008 announced a $586 billion-spending-package (4 trillion Yuan).
The Chinese plan amounts to 20 percent of China’s GDP while, in contrast, the Obama plan is about 8 percent of US GDP.
The next concern stems from the spending allocation of the stimulus package.
According to a study by Moody's Economy, tax cuts have the least impact on stimulating a sagging economy.
Things like food stamp or infrastructure spending provide the most bang for the buck.
The Obama stimulus plan devotes almost $4 out of every $10 to tax cuts, which is a serious shortcoming of the bill.
The inclusion of tax cuts was a necessary compromise in order to get the minimal Republican support needed to pass the bill in the US Congress— only 3 Republican Senators voted for the bill.
Another concern about the bill is its "buy American" clause that requires materials purchased with funds from the bill to be only US made.
To mitigate the obvious protectionist tendency of this clause, the bill requires that the "buy American" clause be implemented in a manner that is consistent with US international trade obligations.
Proponents say that the current provision is similar to the 1982 highway bill that called for federal highway projects to use only American steel.
Given that all of the stimulus money will have to be borrowed, lawmakers looked to get the biggest bang for their buck by keeping the stimulus money circulating in the US economy as much as possible.
America in Debt
| Although the United States remains the largest economy of the world with a GDP of over $ 14.3 trillion, it is also reeling from record national debt of $ 10.8 trillion. |
The fear is that this provision could lead to trade wars, making a bad recession even worse. Stephen Harper, the prime minister of America's biggest trading partner Canada said, "We want to avoid protectionism in this economic slowdown."
During his recent visit to Canada, President Obama tried his best to reassure Canada and the rest of the world that the United States would comply with all its international trade-related treaty obligations.
The fact that all of the stimulus bill will have to be paid using borrowed dollars is a grave concern because it will add more debts to the ever-growing national debt.
Although the United States remains the largest economy of the world with a GDP of over $ 14.3 trillion, it is also reeling from record national debt of $ 10.8 trillion.
28 percent of US foreign debts are being held by Japan, China, the United Kingdom, Brazil, and the oil-exporting countries of Saudi Arabia, the United Arab Emirates, Qatar, and the like.
In addition, the US budget deficit, which is the difference between what the US government brings in through taxes and what it spends, stands at nearly $ 455 billion, and is expected to be over $1 trillion (some estimates projecting 2 trillion) in 2009.
Increases in international borrowing bring small, but not insignificant, prospect that the United States could default on its international debts by triggering a global financial meltdown, which— as some economists believe— made President Obama limit the size of the stimulus plan to be under $1 trillion.
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| Figure 2 shows the impact of FDR's New Deal on the US economy.Click here. |
Nobel Prize laureate and economist Paul Krugman believes that the stimulus plan leaves a nearly $1.2 trillion spending gap.
A CNN poll shows that 53 percent of Americans think that the stimulus package will improve economic conditions, while 44 percent think it will not.
The stimulus package is not the only massive spending program being enacted by Obama's administration.
The Treasury Department and Federal Reserve have committed more than $1 trillion in financing loan purchases aimed at injecting financial stability into a jittery financial sector.
In addition, President Barack Obama introduced a $275 billion homeowner relief program to stem the foreclosure crisis and prop-up the sagging housing sector.
It will be years before anyone can definitively say if these massive government interventions will work.
Will Keynesian economics rescue the United States? Or will it witness the beginning of an epic economic upheaval?
Concerns about the economy have replaced all other fears. America's new intelligence chief Dennis Blair said that the global economic crisis could topple governments, trigger waves of refugees, and undermine global security.
The current economic crisis shows how the fate of different communities and societies are increasingly dependent on the well-being of others.
In an increasingly globalized world, it is hard to separate the happiness of one group from that of others.
The current economic crisis is certainly dangerous, but like the Chinese symbol for risk, the economic crisis also provides an opportunity to forge new alliances and develop a more multi-lateral framework towards addressing global challenges from climate change to economic perils.
If nations and societies seize this opportunity, then out of the ashes of this economic crisis, a new economic order that is more equitable and sustainable for all people could emerge, which is a hope we can all believe in.
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Dr.Parvez Ahmed is an associate professor of finance at University of North Florida. With Seth Anderson, he co-authored the book "Mutual Funds: Fifty Years of Research Findings" (Springer 2005). In addition, he is a frequent commentator on the American Muslim experience. You can read his articles on his blog.
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