Can Obama Save the U.S. Economy?
What measures will bring a lasting recovery to the U.S economy?
January 29, 2009
The halls of Congress are filled with excitement these days, as a new Administration takes over. This is especially so, because there is a generational, racial and ideological break with the past, one rarely experienced and most often triggered by a deep national crisis. Indeed, the state of the union is in peril and the threats the United States faces are multifaceted. They extend from national security and global ecology to social inequity.
But most pressing, is the state of the U.S. economy. The financial sector crisis that originated in the housing bubble was caused by chronically low interest rates and enabled by unhealthy lending practices — as well as by the creation of ill-conceived financial instruments.
This crisis has migrated from Wall Street to Main Street and back to Wall Street, setting into motion a self-perpetuating vicious cycle. While "first responders" in the U.S. Treasury have been trying to save the banks that ventured to climb the Kilimanjaro without oxygen tanks, ordinary men and women are suffocating in an economy that is drowning.
In the previous feature, I have offered a proposal to aggressively address the crisis on Wall Street in this new "Era of Responsibility." That proposal centered on the approval of an Emergency Regulation Act or ERA I. In that feature, I also noted that such an act would need to be accompanied by a comprehensive plan to deal with the crisis on Main Street, to be detailed in an Economic Reconstruction Act, or ERA II.
ERA II is not designed to be a stop-gap measure or stimulus package with the primary aim to inject short-term disposable income for consumption. Instead, its purpose is to initiate broad-based structural change in the U.S. economy.
The Economic Reconstruction Act seeks to achieve the narrow goals of reinvigorating economic growth and creating jobs in the short term, while having lasting and benign effects on the nature of such growth and job creation in the long-term.
In fact, the immediate and almost unprecedented economic challenges facing President Obama offer him the lasting and almost unprecedented opportunity to realize many of the key objectives of his political agenda with one stroke of his law-enacting pen within the first 30 days of his presidency. Such objectives include putting more than one million hybrid cars on the road by 2015, creating millions of green collar jobs, emphasizing early childhood and infant education and building a modern 21st century-style transportation network.
In order to succeed, ERA II must meet certain conditions. First, the plan must reach deep and wide. I propose a four-year program of up to $2 trillion, heavily front-loaded. Thus, $750 billion should be spent in Year 1, $500 billion in Year 2, $450 billion in Year 3 and the remaining $300 billion in Year 4.
In other words, far more is needed than currently considered in the $825 billion American Recovery and Reinvestment Plan or ARRP. This clumsy coinage of the plan attached by Democrats oddly implied some continuity with the Bush-initiated tarnished $700 billion Troubled Asset Relief Program (TARP) — or made the public wonder whether the plan should be retired before passage, considering its close name association with the American Association of Retired Persons or AARP.
Second, ERA II must be flexible, transparent and accountable. Therefore, the program will be reviewed along certain select performance measures and the size of the program will be re-evaluated each year. These performance measures will be established in advance in order to define success or failure and to allow for optimal transparency.
They are not just limited to such quantitative data as economic growth and the rate of unemployment, but they should also include such factors as changes in the carbon footprint of the nation. All performance measures should also be expressed in U.S. dollars. This helps to estimate the net benefits of the program after completion in an honest fashion.
Third, the program must be designed to address the structural imbalances in the U.S. economy. The current account deficit of the United States has been identified as the country's greatest economic weakness.
Current account deficits (or their national account equivalent, savings/investment gaps) are not bad by definition. But when they are the result of chronic over-consumption, as was the case in the U.S. during the first seven years of this millennium, their distortionary properties are indisputable.
In contrast, if they are the result of rapidly growing domestic investment, such current account deficits can have long-lasting beneficial effects on economic growth.
Therefore, the program should avoid tax cuts as much as possible. At best, tax cuts provide a short-term stimulus for consumption. At worst, they are ineffective. There could be no better case study to prove this point than last year's tax rebates, which failed to meaningfully change the momentum of the U.S. economy.
Some tax cuts for small businesses may help those businesses in doing what they do best (and better than large companies), that is to create jobs.
An increase of certain entitlement programs, such as food stamps and unemployment benefits, is socially essential. It should have the added gain of allowing beneficiaries to increase their consumption of basic human goods. Finally, the program may include changes to the tax code that would facilitate the phasing in of President Obama's universal health care plan.
To a large degree (at least 80%), though, ERA II should focus on investing in the nation's economy with long-term goals in mind. The obvious areas are education, roads and bridges, the nation's electrical grid, clean energy and a whole host of other infrastructure projects.
Estimates vary, but long before the crisis, it had been suggested that the United States must invest at least $3 trillion over the next ten years merely for infrastructural upkeep. Then, there was no political will to even contemplate making a dent in meeting these needs.
It is different now. Recognizing the need for economic revitalization, it is up to this administration to forge unity between short-term goals and long-term needs.
Critics of public sector investments at this stage have noted that far too few projects are "shovel ready" to absorb large public sector investments in order to have the desired effects on economic growth.
However, a staggered economic reconstruction program, as proposed, would allow for maturation of project approvals throughout the program. Moreover, our U.S. ecological and infrastructural needs are far too great to claim a shortage of available, desirable and viable projects.
Also, infrastructure investments will be executed at the federal and state level — and, for this purpose, federal aid to the states incorporated in ERA II must be earmarked to public sector investments. Wherever possible, these projects should be undertaken as private-public sector partnerships. Yet, such partnerships must be transparent. No no-bid contracts.
Investments in the future of the United States, as contemplated in ERA II, will help to stimulate economic growth and employment creation in the short run. More importantly, it will create the physical and human infrastructure for prolonged growth in the long run, while making such growth ecologically sustainable.
Investment-driven, equitable growth will also allow for higher savings rates which in turn will allow for a low interest rate environment. In combination, these factors will allow for a long-term reduction of gross public sector debt accrued by implementing ERA II, while a low interest rate environment will bring down the debt servicing costs for the government, especially in relationship to GDP.
Most importantly, the net costs of the program may be zero, if the program succeeded in helping to save our planet. The latter is not some cliché, as some argue, but a cold political reality.
For Mr. Obama, this is a win-win proposition. For the rest of the world, this new type of American leadership would be a blessing.
Editor’s Note: Read Part I of this Globalist Paper here.
The economic challenges facing President Obama offer him the opportunity to tackle many of the key items on his political agenda with one stroke.
U.S. ecological and infrastructural needs are far too great to claim a shortage of available, desirable and viable projects.
If they are the result of rapidly growing domestic investment, current account deficits can have long-lasting beneficial effects on economic growth.
"First responders" in the U.S. Treasury have been trying to save the banks that ventured to climb the Kilimanjaro without oxygen tanks.