Political India: Engaging America

From The Hindu

Even as the Obama administration pushes forward with its Af-Pak and healthcare reform policies this month, joblessness in United States will increasingly dominate the attention of the President, Congress and the ordinary Americans. Unemployment may have fallen marginally in November after touching a 26-year high of 10.2 per cent in the month before, but the Federal Reserve has projected that even with positive economic growth it will hover around 8.3-8.7 per cent during 2010. Over the coming months, President Obama will worry that four states that are all Democratic bastions — Michigan, Nevada, Rhode Island, and California — will see the highest rates of unemployment. He will have to also struggle with the limited room for manoeuvre in public finances implied by staggering levels of public debt and the overall budget deficit. Given the elevated spending commitments in the Af-Pak region and subsidies for the proposed healthcare reform, there is practically no fiscal leeway to tackle America’s jobless recovery through further stimulus-like measures.

Yet the deterioration in labour market conditions for middle-class Americans is an ominous threat to President Obama’s already-falling popularity. With the entire House of Representatives and a part of the Senate facing elections next year a decisive strategy to create jobs quickly has become imperative, even urgent. The government has a range of relatively inexpensive policies to choose from. For example, the House will soon pass a bill that may include an extension of transport-related spending, a tax credit for expanding company payrolls, and incentives for credit to small businesses. Some Senators have proposed a plan, at an estimated cost of $600 million, whereby the government could share employers’ labour costs temporarily in a bid to avoid layoffs. If a financial transactions tax is introduced to address the issue of excessive risk-taking by financial institutions, the additional revenue could be productively deployed via local government to create new jobs. Public services such as education would benefit from this type of support. Additionally, policies of the last one year are likely to begin producing results: literally thousands of job-creating projects financed by the $787 billion stimulus package are still in the pipeline. Even the flourish of fiscal dexterity may not, however, save President Obama from politically motivated accusations of profligacy, typically from conservative lobbies opposing big government. The President needs to hold his nerve and soldier on regardless, only ensuring that he is transparent in outlining his plans to those who stand to gain from them.

Labels: Af-Pak, economic downturn, Obama administration, recession, stimulus package, unemployment

From The Hindu

As the United States economy continues to battle recessionary conditions, recent months have seen developments that some have hailed as indicators of economic recovery. First, stock markets witnessed an unexpected rally from early March, with the Dow Jones industrial average jumping 57 per cent — however volatility has soared since the crisis began, with $6.9 trillion of U.S. shareholder value wiped out in 2008 alone. Secondly, banks that accepted taxpayer money under the Troubled Asset Relief Program, including Goldman Sachs, J.P. Morgan, Morgan Stanley, and U.S. Bancorp, repaid their debt to the federal government. Subsequently, some of them went on to make record trading profits even as commercial banking languished, most notably Goldman Sachs which made $3.44 billion in profits for the second quarter. Thirdly, the U.S. economy posted growth results that heralded, technically, the end of the recession. Supported by massive stimulus packages to banks and automobiles, the third-quarter growth rate of 3.5 per cent marked the first quarter of positive growth in more than a year.

But juxtapose these indicators of recovery with the looming symptoms of recession that remain, and optimism about a full-fledged return to pre-crisis conditions seems hollow. Unemployment in the U.S. recently climbed to 10.2 per cent and, by some predictions, will remain above 8 per cent even two years from now. After the end of the ‘cash for clunkers’ scheme aimed at boosting automobile sales, many of the large car manufacturers reported a sharp fall in sales in September. Quantitative easing by the U.S. Federal Reserve has made little difference to bank lending to customers — total consumer credit decreased at an annual rate of 6 per cent in the third quarter of 2009, according to the Fed. The International Monetary Fund predicts that economic growth in the near-term will be “sluggish, credit constrained, and, for quite some time, jobless.” There is general agreement that the signs of what looks like a recovery are driven by the massive fiscal stimuli supplied. There is even a risk that these signs will encourage conservative lobbies to press for rolling back fiscal deficits. Such misguided efforts must be resisted if the current low ebb of economic activity is to revive. A premature 1930s-style rollback runs contrary to the need for even higher levels of spending on public infrastructure and social services, vital to individuals and households who will remain in the vice-like grip of housing foreclosures and job losses for years to come. President Obama cannot afford to be fearful of deficits.

Labels: cash for clunkers, deficit, Dow Jones, Goldman Sachs, IMF, J.P. Morgan, Morgan Stanley, quantitative easing, recession, recovery, stimulus package, TARP, U.S.