Obama's economic stimulus plan: too little, too late
By Barry Sheppard, in San Fransisco
President Barack Obama has presented his plan to try to turn around the US economy in the context of a rapid and accelerating decline. Official figures for the fourth quarter of last year indicated that US gross domestic product contracted at a 3.8% annual rate. The January 31 New York Times reported that this figure “fell short of the 5 to 6 percent that most economists had expected for the fourth quarter. But that was because consumption collapsed so quickly that goods piled up in inventory, unsold but counted as part of the nation’s output.”
Nigel Gault, chief domestic economist at HIS Global Insight, told the Times that “the drop in spending was so fast, so rapid, that production could not be cut fast enough”, adding: “This is happening now, and the contraction in the current quarter, as a result, will probably exceed 5 percent.”
At the end of January, official figures showed that in December new home sales fell to their slowest pace on record, businesses cut their orders and jobless claims continued to rise. Orders for durable goods by both businesses and consumers fell by 2.6%. Excluding transportation, they fell by 3.6%, and excluding military orders, by 4.9%. For all of 2008 durable goods orders fell by 5.7%. New homes sales were 37.8% lower than in December 2007, when the US recession began. Foreclosures are rising and bad debt is mounting as a result in the financial system.
Every day, major corporations are announcing big layoffs. For the week ending January 24, the Labor Department reported that first-time unemployment claims rose to 588,000, an increase of 3000 from the week before. It reported that 4.78 million US workers — 7.2% of the workforce — are unemployed, the largest number since it began recording jobless numbers in 1967.
“Employers had long resisted making mass layoffs as the economy cooled, seeking instead to cut costs through shorter work weeks, pay cuts and hiring freezes, but they are now cutting jobs by the thousands”, the January 30 New York Times reported. However, Labor Department figures show that a total of 2.6 million US jobs were lost in 2008, the largest slump in employment since a 2.75 million drop in 1945.
The House of Representatives has passed the Obama administration’s US$825 billion stimulus plan, and the White House is getting ready to release $350 billion to financial institutions, the second half of the $700 billion bailout plan Congress approved last September, as the banks continue to teeter. Behind the scenes, the country’s central bank, the Federal Reserve Board, has underwritten up to $8.5 trillion in guarantees against losses for the big financiers.
Obstacles to stimulus plan working
Will Obama’s plan work to reverse the recession? Writing in the February 2 issue of the left-liberal Nation magazine, William Greider observed: “Three large obstacles are blocking Obama’s path. The first is one of scale: his [$825] billion recovery package sounds huge, but it is perhaps two or three times too small to produce a turnaround. The second is that the financial system — still dysfunctional despite the bailouts — requires much more than fiscal stimulus and bailout: the government must nationalize and supervise the banks to ensure that they carry out the lending and investing needed for recovery. This means liquidating some famous nameplates — led by Citigroup — that are spiraling toward insolvency. The third is that the crisis is global …”
The Levy Economic Institute of Bard College, an outpost of Keynesian thinking — and it is toward the policies advocated by John Maynard Keynes that Obama and his advisers, despite their neoliberal views, are moving — says that the virtual collapse of bank lending, private spending, consumer incomes and demand “will make it impossible for US authorities to apply a fiscal and monetary stimulus large enough to return output and unemployment to tolerable levels within the next two years”.
Levy’s analysis, made before the latest GDP figures were out, is that it would require federal deficits of 8-10% of GDP annually — $2 trillion or more to reverse the economic contraction. Levy says it is inconceivable that this level “could be tolerated for purely political reasons”, or that the US government could sustain such a huge rise in indebtedness without terrifying its leading creditors, the Chinese and Japanese central banks.
Obama’s plan passed the House without a single Republican vote, and with a few Democratic Party defections. One plan the Republicans put forward, which was defeated, had no increase in spending, only tax cuts mainly for capitalists. The Senate now is debating its own stimulus bill.
While workers have seen hundreds of billions of dollars of government funds going to the banks, they have yet to see any relief for their worsening situation. Their anger was intensified when a reporter unearthed that financial company managers gave themselves almost $20 billion in bonuses at the end of 2008, while they were clamoring for more hundreds of billions in bailouts.
The worst case was of John Thain, the chief executive of Merrill Lynch. He was lionised as a rare Wall Street saviour, when he helped seal the deal that sped his “toxic” debt-ridden firm into the “safe” embrace of Bank of America, the country’s biggest bank. Just before BofA took over and the government gave a second bailout to cover Merrill Lynch’s unexpected $15 billion fourth quarter loss, Thain rapidly doled out secret bonuses to managers amounting to over $2 billion. At the same time, he was laying off thousands of Merrill Lynch employees.
The disclosure of these billions in bonuses while the working and middle classes are suffering economic hardship forced Obama, as the chief executive officer of the capitalist class as a whole, to go on TV to denounce them. He pointed out how “irresponsible” the bonuses were while he is asking Congress to release the next $350 billion in bank bailout money.
Bush tax cuts to rich retained
What is in the $820 billion bill the House passed? One third is in tax cuts, to workers and small businesses. Obama is reneging on his election campaign promise to revoke the Bush administration’s tax cuts to the rich. Employed workers who make $75,000 a year or less would see $12 or $13 more on their weekly pay slips if the tax cuts go through. A provision the Republicans want to cut out especially would give small rebates to those who make too little to even pay income taxes. The growing ranks of the unemployed would see a $25 weekly increase in their take-home pay, and the length of time they could continue to receive unemployment benefits would be temporarily extended beyond the usual 26 weeks. Food stamps for the poor would be raised by $79 a month.
Of course, even these piddling amounts would be welcome, but almost all economists agree they do will little, if anything, to stimulate the economy. Workers will likely use the money to pay down debts, including huge credit card debts (another bubble that threatens to burst), or to save. The crisis has shocked working people, and greatly increased their sense of insecurity and uncertainty, and they are not planning to rush out en masse to buy cars and washing machines, even if they could get the loans. The poor would spend the extra $79 a month on somewhat better food, but this would have little stimulus impact.
Areas of spending that would have a stimulus effect are in projected aid to state governments that are facing severe budget crises of their own, and are drastically cutting back on social services. In the House stimulus plan there are hundreds of billions in aid to the states to bolster spending on education, helping the unemployed with health insurance for a time, some health care for the poor, and so on. But the amounts projected would only reduce the states’ shortfalls, not eliminate them. Aid to the states does not expand economic activity, but helps reduce cutbacks in their spending that would make the downturn even worse.
For example, California has a projected budget deficit of $42 billion over the next 18 months. This will get higher if the economy continues to contract. The state government hopes to close the gap by borrowing. Governor Arnold Schwartzeneger says any federal aid will go to reducing borrowing, unless it is specifically earmarked for other purposes. The massive cuts planned for social spending also mean big layoffs for state employees.
Under the House plan, California’s schools are scheduled to get $10 billion in the next two years for construction, special education for those with disabilities, and for help for low income students. The money could not be used for other expenses, such as retaining teachers. Even with this help, the governor plans to slash funds for education by $5.2 billion. He also plans to “save” $7 billion more by cooking the books.
“This is forcing schools to prepare for extensive teacher layoffs, ballooning class sizes and even a chance for a shorter school year”, Nanette Asimov wrote in the January 28 San Francisco Chronicle. The “proposed $10 billion in federal funds is earmarked for specific purposes and is unlikely to prevent all the dire steps being planned.” An example is in San Francisco, where the “school district has to spend $31 million from its general fund to pay for special education costs the federal government requires but does not fund. Under the stimulus package, the district would receive an additional $6.5 million specifically for special education.”
The projected spending on infrastructure in the House stimulus plan includes $30 billion for highway construction, and tens of billions more for other transport projects, water projects, park renovation, military base construction, and local housing projects. This amounts to less than $275 billion. These projects would employ workers as they came online. But the workers involved would largely be white and male. The needs of blacks, other people of colour, and women, the hardest hit in the recession, are overlooked. The unemployment rate for African Americans, for example, is double that for whites.
The American Society of Civil Engineers estimates that it would take $2 trillion over the next five years to fix the nation’s dangerous bridges, leaking water mains, sewerage systems that pour billions of litres of untreated waste into the rivers and bays. Such projects would stimulate economic growth and improve the lives of tens of millions of citizens.
The Obama stimulus package thus appears to be too little too late. When there is an upturn, whenever that is, the pouring of trillions into the bank bailouts and the stimulus projects will result within a few years in massive inflation, leading into a deeper economic crisis.