Friday, September 9, 2011

Obama's Plan will keep US from recession

Stimulus insures against downturn

If President Barack Obama's economic proposals get through Congress - and that is a very large if - they will go a long way towards sustaining a stuttering economy during 2012.
The headline price for the total package is $447bn, about 3 per cent of gross domestic product, of which about $400bn or so would hit the economy during 2012. Mr Obama's first stimulus package was slow and spread out, so fiscal support for the economy in 2012 would be no less than in 2009 or 2010.
"I think what it does do is allow the economy to continue to grow at a low rate - say 2 or 2.5 per cent - and keeps us from dropping back into recession," said Steve Blitz, senior economist at ITG, New York. "It keeps the economy afloat for long enough to let the household sector continue with its deleveraging."
What the package would not do is impart a large new impetus to growth. Much of it extends or replaces previous measures - last year's payroll tax cut or infrastructure spending from the first package - that are now winding down. It would reduce fiscal drag rather than add a fiscal push.
The stimulus effects will also be heavily discounted until it becomes clear whether they will pass Congress. Households, for example, are unlikely to start spending more in anticipation of the payroll tax cut until they know whether it will happen.
The stimulus plan, therefore, is an economic insurance policy. It will be ready and waiting for Congress to pass in full, and the worse the economy becomes, the more of it is likely to get through. Many of the measures should be fairly palatable to Mr Obama's Republican opponents in the House of Representatives.
The design of the policy leans heavily on tax cuts, often seen as less stimulative than spending because some of the money goes to people who will save rather than consume, but which reach the economy quickly.
$175bn of the total cost is for extension and expansion of employees' payroll tax cuts. For employers, payroll tax cuts are limited to the first $5m of payroll and any increase in their payroll bill, limiting the cost to $65bn. That tries to answer a serious objection - that much of the benefit goes to companies that would have created jobs anyway.
On infrastructure, the administration went for highly visible schemes - $25bn of school repairs, $50bn of transport infrastructure and $15bn of refurbishment for blighted properties. These have good potential to create jobs.
A group of researchers, including former administration adviser Jared Bernstein, estimate that construction and building repair create 9,000-10,000 jobs per billion dollars spent<>. Repair is highly labour intensive, whereas new building requires more materials and equipment.
The push for a strong fiscal stimulus is all the more important, because while the Federal Reserve signalled its willingness to consider more monetary easing on Thursday, there is little sign that it is gearing up for radical action.
Ben Bernanke, Fed chairman, said on Thursday the Fed "will certainly do all it can to help restore high rates of growth and employment". In a speech in Minneapolis<>, he did nothing to push against rising market expectations that the Fed will act at its next meeting, starting on September 20. An option being discussed internally by Fed officials is a balance sheet rejig, called a ''twist". Its investments would be moved into longer-term bonds to try to drive long-term interest rates even lower.