Tuesday, February 24, 2009

Buy America, Lose the World

Can we go back to the future?

From The Statesman

Creating hope for the hopeless, saving home for the homeless, that’s what President Barrack Obama has been doing during his first month in the White House. He is keeping America thinking and moving in a new direction, diplomatically, economically and culturally. Americans are economically down, but underneath the pall of gloom there is quiet confidence, especially among the die-hard optimists, that the country would get out of the slump, albeit gradually; but as it does, it would be a renewed and re-organised America, though no one knows what it will be like. Never has the future been so raw, so uncertain. To have his $787 billion stimulus package passed by Congress, Mr Obama logged thousands of miles for face to face, town hall to town hall, meetings with the people who have been adversely affected by the recession and also reached millions of others through his blogs and social networking. It is his way of bypassing the gatekeepers and power-brokers and bringing the American people directly into what is happening in Washington DC.

His political style is closer to that of Ronald Reagan and Franklin D Roosevelt, which means reaching out to people for support for his political and economic programmes. No one can underestimate the political capital he built during his masterful presidential campaign using all forms of persuasion, rhetorical and technological. But what is its worth if it cannot be used?

After much haggling, Democratic majority Congress passed the package, however, without the bipartisan support Mr Obama had been asking for; which of course was a great disappointment. So the President has been trying to transcend the divided Congress by going directly to the constituents who could put pressure on their elected leaders.

No sensible politician or economist is against the need to stimulate the economy; but Republicans want to manipulate a different set of economic levers in order to first stop the downward spiral and secondly to pull up the economy. The Republican stimulus emphasis is upon major tax cuts so that American businesses and investors could re-invest to fuel the economy. They argue that the Obama stimulus plan will lead to wasteful pork-barrel spending rather than trigger long turn growth of the economy.

Economists don’t agree whether tax cuts or spending creates more jobs. But since the stimulus package includes both tax cuts and spending, the impact on the economy could be substantial unless there are other factors that we don’t understand. One of the provisions of the package is that a family earning up to $150,000 a year will get $800 tax credit. But if this amount is given to a family as a lump sum, the amount might go into its saving account with no impact upon the economy. That is what happened with the Bush stimulus packages. The Obama package gives Americans money back in their weekly, biweekly or monthly paychecks. If a family gets $16 extra in its weekly paycheck, the amount is more likely to be spent rather than go into a saving account. The increased consumer spending, little by little, week by week, will have tremendous multiplier effect upon the economy. That’s how some smart economists argue, but can you trust any economic theory today?

To my simple mind it seems that like stars in heaven, the marketplace is another universe and our learned economists with their computer-generated mathematical models are no different from our astrologers with their heavenly charts. No wonder Mr Obama has been careful in raising any excessive hope of a quick recovery. As he said, this is a step in the right direction to “set our economy on a firmer foundation.” Unfortunately the market, which seems like a parallel universe running on its inscrutable logic, has not been listening to his hum-ho rhetoric of hope and change. Dow plunged again and again, and one does not know where the bottom is. Another stimulus might be needed, depending upon the progress. “Nor does it constitute all of what we have to do to turn our economy around,” Mr Obama cautioned at the time of the signing ceremony, which took place in Denver, Colorado, far from the maddening crowd of Washington. “But today does mark the beginning of the end, the beginning of what we need to do to create jobs for Americans scrambling in the way of layoffs.”

Mr Obama’s plan aims to create 3.5 million jobs for the next two years, though the most urgent need today is stopping job losses that are occurring daily. Last month alone, 598,000 Americans lost their jobs. Since the beginning of the recession in December 2007, total job loss has been 3.6 millions. More painful is the fact that half of these jobs vanished during the last three months, according to the US Department of Labour. The package includes financial aid for first-time home-buyers and those who are struggling to pay their mortgages and facing foreclosures. But with the threat of unemployment looming over everyone’s head, incentives to buy homes or keep paying for homes whose value has plunged may not work to the extent they are supposed to work. It may be the beginning of the end of the recession as Mr Obama hopes, but how long will it take before we go back to where we were two years ago? Or with the prospects of bank nationalisation and creeping “Buy America” to keep jobs at home sentiments, will this be the end of free market capitalism and globalisation as we know it?

(ND Batra is professor of communications at Norwich University)

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