Thursday, 18 December 2008

Obama Plans $850 Billion Economic Stimulus Package. Will it Work?

According to a story posted in Bloomberg's Web site, President-elect Barack Obama is negotiating a stimulus package of $850 billion. That follows remarks made this week that suggested that the U.S. government is running out of tools to fight the recession. 

There is almost full consensus that fiscal stimulus is what the U.S. requires to be pulled out of its worst recession in eight decades. The size of the package (of about 6 percent of GDP) should help propel recovery in some sectors but it may be not enough to restore some other sectors to equilibrium. The combination of both fiscal and monetary stimulus means in the end that the Federal Reserve will be crazily printing money until a single sign of recovery appears.   

One Wall Street economist told me an effective package would include programmes that generates enough jobs in labour-intensive activities such as infrastructure. Tax cuts may help, but would only help widen the fiscal deficit more rapidly. Children care programmes, unemployment benefits and other type of social aid would help mitigate the welfare effects of the recession, the economist said.  

One of the problems is the way congressional leaders, and local governments deal with the aid. If Congress uses part of the stimulus programme to add some pork-barrel spending projects to it, and state and municipal leaders decide what to do with some of the money, there are little chances that the Obama administration may reach its goal with the initiative. It is unclear how the programme would also help boost exports (which may get an additional boost with the expected drop in the dollar after the Fed cut rates to almost zero this week.) A rapid narrowing of the trade and current account shortfalls would permit U.S. policymakers more rapid action in other fronts and would open more space to expand fiscal spending, some economists said.

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