Steven EKOVICH

est professeur à l'American University of Paris.

The Economic, Political and Social Landscape of the Stimulus Package

Barack Obama was elected President of the United States at a moment of economic distress and public apprehension. In fact, the arrival of the financial crisis in the middle of the presidential campaign played a very large role in the defeat of John McCain. The rival Republican candidate was leading in the polls until the banking system started to collapse. So, the crisis gave Obama an opportunity that he transformed into victory, and now a challenge that he will turn into either success or failure as president.

What does the new president have going in his favor and what are the real as well as the possible limits on his actions?

First of all, Obama heads into the traditional honeymoon period of a new presidency with an extraordinarily high public approval rating. When he took the oath of office on January 20, slightly more than 73% of Americans thought he had already been doing a good job in the long transition period typical of the United States. Even if he lost about 10 points in this first week in the White House, he still has enormous popularity and thus significant political capital to use in advancing his projects. Of course presidential approval ratings go up and down, and skillful presidents have astutely managed the downward movements as well as the upwards. In fact the upward movements in the polls, especially when they are very high, also carry a risk – the risk of overconfidence and hubris. Barack Obama possesses a lot of self-confidence, which is very important for a president, especially when he can communicate it as optimism to an apprehensive population. And Obama has proven his prowess at communication. The problem is the thin and fuzzy line between confidence and arrogance. Such high approval ratings also indicate that very high hopes have been placed on the new president’s shoulders. High hopes, when they are very high, are difficult to satisfy – even impossible. So, Barack Obama in the coming weeks and months will necessarily disappoint, that is certain. What cannot be predicted is whom he will disappoint, how deep the disappointments will be, and how he will manage them.

Disappointments are all the more likely given Obama’s governing style, which we are now only beginning to see take on concrete shape. The young president had a rather short previous political career, particularly at the national level. He served only about half of a senatorial term, about three years. His limited legislative record placed him on the left of the American ideological spectrum, what Americans call “liberal.” He was even rated the most liberal member of all 100 members of the Senate. It is often noted that the ideological center of gravity in the United States is at the center right. Presidents and other political leaders with a national mandate who have strayed too far to the left or the right have failed. Only exceptionally have some presidents been able to displace the center. Ronald Reagan moved it to the right. There are some who believe, and perhaps Obama is among them, that the new president can push the center back toward the center left. But if Obama’s voting record has been on the left, his discourse during the campaign called upon Americans to come together and attenuate the sometimes heated and bitter confrontations between Democrats and Republicans. He has even kept the Republican Secretary of Defense. The formation of his administration in the transition period has revealed to Americans that their president is a pragmatist, or at least careful and calculating, reaching out to all of the wings of his party and making overtures to the Republicans. This moderation has dispelled the worries of many Americans, perhaps helping to explain the 73% favorable rating on his first day in the Oval Office.

But building a broad coalition has a downside. The more diversity one puts into a government, the more like there will be disappointments. Not all factions can be appeased. Not only is there a panoply of different ideological tendencies and policy preferences in the Obama administration, there are even contradictory ones. The president has, for example, a Secretary of Labor who favors protectionism (workers tend to vote Democrat), but a Secretary of Commerce, and others, who are partisans of open markets and lowered barriers to trade and the movement of capital. It is also worth recalling that there is not systematic voting discipline within the parties in both chambers of Congress. Very often Democrats and Republicans will vote with the other party on issues that touch their local interests and therefore their political fortunes. For example, among the 435 members of the House of Representatives, there are approximately 50 conservative Democrats (called “Blue Dog Democrats”), who represent conservative districts that in the past have often elected Republicans. If these 50 vote as a bloc they will deny the president a majority in the House. On the vote in the House on the economic stimulus package 11 Democrats voted with all Republicans against it. Of course the measure still passed with a comfortable margin.

In light of the political, ideological and institutional landscape presented above, it is easier to understand the choices President Obama made in putting together his economic rescue package. Here we see at one and the same time the president’s partisan proclivities and his attempt at pragmatism and reconciliation, or at least caution and calculation. Obama left the real work of putting together the legislation to the Congressional leaders of his party, where his political comfort zone lies. But he also employed exhortations to bring into it a variety of economic doctrines representing different political ideologies. This is his pragmatism, his outreach to as many factions as possible: liberal, moderate and conservative.

So, in Obama’s attempt at outreach and unity we find three categories of proposed stimulus in the legislation, which will cost taxpayers over $800 billion in the next ten years. Each category spends about a third of the huge sum of money. Even though economists differ on the effectiveness of the three types of stimulus, they all agree that the preferred goal is to get as much money as quickly as possible into the pockets of consumers and producers so that they will spend and produce and spur economic activity. Most observers believe that what the economy needs most is for people to spend money, helping stores to sell more, factories to produce more and employers to avoid cutting additional jobs and even create new ones.


The first category of proposals is most appealing to conservatives – tax cuts. This was partly to fulfill a campaign pledge. No candidate who implies a raise in taxes stands a good chance of winning. But it is also meant to appeal to Republicans, especially tax provisions that help business. But in fact the stimulus package more precisely will provide tax “credits.” Tax credits go to nearly all income groups, including those who do not pay taxes. So tax credits are really a form of wealth redistribution. A curious irony here is that this thrust of the stimulus package is the least controversial, even though there are a few, like the speaker of the House Nancy Pelosi, who want to raise taxes. But most of those who are disappointed believe that more of the stimulus should be devoted to tax cuts, and larger and more permanent cuts. The tax “cuts” that are really tax “credits” have more attraction among Democrats. It is the next two categories of stimulus that have raised the most criticism and public debate.

The second category of stimulus proposals creates new federal projects to renew the American infrastructure – not just bridge and highways, but in respecting Obama’s pledge to protect and improve the environment new green technologies. The criticism of this approach, coming mostly from moderates and conservatives, is that new programs take a long time to put together and institute, so the spending is not injected son enough into the economy to make a positive contribution when it is most needed. A Congressional Budget Office analysis found that only 64 percent of the bill’s spending would be completed within 19 months, and spending on construction projects was among the slowest. It projects that in fiscal 2009 (through this September) about 21 percent of the new spending and tax cuts will flow to the economy. For 2010, the estimate is another 44 percent. The total of 65 percent means that, by CBO's estimate, about a third of the $819 billion package would be spent after fiscal 2010. So, investing in tomorrow won't automatically stimulate the economy today. However, if the economic recovery is slow, spending that is stretched out in time could work out well, giving the economy a boost just when faster-acting early spending has had its initial effect. But if the rebound is quicker than expected, many of those projects could start just at the time when there is renewed private spending, threatening it with government-supported competition when private investment is most needed. There is also he risk that the long-term projects will have little or no economic value and simply drive up the budget deficit, which will have to be paid by future taxpayers. Similar worries could be focused on health care and especially on alternative energy programs. Like some of the education spending, a large part of health care spending would not start until 2012 or later, when, most experts think, the recession will be over.

Partly in response to this criticism, the third category of proposals includes spending that will be injected into already existing government program at the federal level as well as at the level of the states. This gets tax dollars into the economy more quickly than new programs. One area where analysts say the bill would be relatively effective is in providing assistance to states, many of which, to comply with balanced-budget requirements, are facing the prospect of steep cuts in jobs and services. But there is the concern that aid to states does not necessarily expand economic activity, although it might prevent cuts that would make the downturn even worse. However, some government spending on existing programs, like extended unemployment benefits and increased direct aid to the poor are stimulus tools which have immediate effect. They also have the added benefit of reassuring those in society who are most vulnerable to economic downturns. Such government funds allow money to flow quickly to people who need it and are likely to spend it, but it is not clear if it will be spent on Chinese textiles, Korean-made refrigerators or French wine.

Another criticism of increased government spending on existing programs is that they have been built upon a solid and enduring base of organized interest groups, what some prefer to call lobbies (a “lobby” being the interest group of one’s adversaries). This brings us to a contradiction in Barack Obama’s campaign promise to try to change “the way things are done in Washington” – that is, to circumscribe the influence of lobbyists. We can already see this at work in a controversial provision of the rescue package – the requirement that money spent on infrastructure be used only to buy products made in America. Proponents of the "Buy American" provisions argue that it is the only way to ensure that the stimulus creates jobs at home and not overseas. The proposals are meant to regenerate manufacturing jobs in the United States by obliging government contractors to use domestic materials and equipment, even if they are more expensive. Opponents, say it amounts to a declaration of war against free trade. That, they maintain, could spark retaliation from abroad against U.S. companies and exacerbate the global financial crisis. Such measures also violate trade deals the United States has signed in recent years, including an agreement on expanding access to government procurements reached through the World Trade Organization. American manufacturers would certainly not want to be shut out of getting contracts in foreign markets if, for example, European governments institute similar local content laws to protect their producers and workers. Historians agree that one of the most significant mistakes of the 1930s was the U.S. adoption of protectionism. It had a cascading effect that brought world trade almost to a halt, and no doubt heavily contributed to transforming a recession into the Great Depression.

Another example of how spending will be used to support interest groups is the provision in the bill to increase assistance to education: "No recipient . . . shall use such funds to provide financial assistance to students to attend private elementary or secondary schools." This has the effect of directing funds away from nonunion teachers. The American teachers’ unions are strong supporters of the Democratic Party and Barack Obama. Provisions such as these lead to the criticism that Obama and the Democrats are using the pretext of the stimulus package to please their political base and to finance all the programs they have supported over the years, but which they have not been able to fund under a Republican president and, until recently, a Republican Congress. So, Democratic leaders have merged temporary and immediate stimulus measures with their long-standing policy agenda. The criticism coming from moderates is that if there is to be renewed funding for these programs, it should come only after debate, deliberation and public discussion. The approach of the Democrats in Congress goes against Obama’s promise to bring in an era of bipartisanship, since the legislation was written exclusively by the president’s party with very little real contribution from the Republicans – one of the reasons all Republicans voted against it. As Speaker Nancy Pelosi put it: "We won the election. We wrote the bill." Such an attitude does not inspire confidence in a renewed sense of post-partisan politics.

So, the stimulus package has become controversial for several reasons. The economists, at least those who are modest, admit that they do not really know how to cure recessions and in particular this one. They cannot even agree on how serious the crisis is. Some find disquieting similarities with the Great Depression, others say this crisis is no worse than the last serious recession of 1982. Still others find that the economic indices are in no worse shape than after the recent bursting of the dot.com bubble. Such a lack of consensus has led to serious reservations about the various elements and scope of the package. There is also the concern among political leaders and influential commentators that the components which institute a long-term investment program should not be put together hastily and lumped in with a strictly anti-recession bill. This is all the more disturbing if the bill also permanently alters the role of the federal government and its role in the economy. In the face of uncertainty about what to do, there is a temptation to try everything at once. This could be seen as pragmatic, and in the tradition of Franklin Roosevelt who tried a myriad of approaches to the Great Depression and kept only those that seemed to be working. On the other hand, it can also be viewed as acting on too many matters at once and on a hasty, even irresponsible timetable -- without prudent structure and safeguards.

John Maynard Keynes said in his The General Theory that in economic behavior there is “the instability due to the characteristic of human nature that a large proportion of our positive activities depend on spontaneous optimism rather than mathematical expectations, whether moral or hedonistic or economic.” He called this incalculable factor in economic endeavors the result of “animal spirits” which he saw as “a spontaneous urge to action rather than inaction, and not as the outcome of a weighted average of quantitative benefits multiplied by quantitative probabilities.” If President Obama can employ his celebrated oratorical skills and symbolic presence to raise the spirits of Americans at a time of uncertainty and fear, it may be the most useful contribution he can make to the recovery of the United States -- despite the relative successes or failures of the different components of the stimulus package.

http://www.constructif.fr/bibliotheque/2009-3/les-questions-soulevees-par-le-plan-obama.html?item_id=2933&vo=1
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