With the US economy contracting 3.8 per cent in the last quarter and 2.6 million jobs being shed last year, economists and politicians of all stripes agree that the world's largest economy is in serious crisis. But arriving at solutions has proven to be far more divisive.
As Congress considers a more than 800-billion-dollar fiscal stimulus package, the largest in dollar terms in the country's history, debate is fierce across the United States on whether the plan will truly be able to pull the world's largest economy out of its worst recession.
The House of Representatives approved an 819-billion-dollar package Wednesday, without a single supporting vote from opposition Republicans. The Senate will begin debate Monday on its own version, an 888-billion-dollar stimulus with extra tax cuts for middle-income families.
President Barack Obama has made the stimulus plan the centrepiece of his economic policy and promised it will save or create 3-4 million new jobs in the next two years. About two-thirds of the stimulus package comprises government spending plans, compared to one-third that will go towards a 1,000- dollar tax cut for workers and some separate business tax cuts.
Hundreds of economists - including university professors, Nobel laureates and former government officials - signed onto competing petitions this week in favour and in opposition of the stimulus package. The argument so far has mostly turned on classic disagreements over how best to stimulate an economy: Tax cuts versus government spending; big government versus small government.
"The sharpest divide is absolutely an ideological divide," Josh Bivens of the Economic Policy Institute, a left-leaning thinktank, told dpa. "It's just about a fundamental view of how the economy works." Obama and his fellow Democrats argue the plan will create jobs by injecting much-needed cash into up-and-coming industries and ailing public sectors like infrastructure, schools, the health system and renewable energy projects.
If anything, Bivens said the rescue package may be on the low end of what is needed to revive the economy. "I would always like to see it bigger." But conservatives question whether now is the time to invest in slow-acting government programmes instead of fast-acting stimulus.
For them, the bill includes too many spending projects long sought-after by Democrats and not enough tax cuts - especially for businesses - which could be implemented faster and create more jobs. "I don't think it's about ideology. It's about politics," Alan Reynolds, a senior fellow at the Cato Institute, a conservative thinktank in Washington, said. "Much of this bill is what (Obama) promised" during the presidential campaign.
Supporters say the mixture of tax cuts and spending is necessary to provide the right boost to the economy. Tax incentives will come in faster but likely have less of an impact - consumers fearful of the worsening economy are likely to pocket the money instead of spending it.
Government projects by contrast will take longer but could have a stronger impact. The Congressional Budget Office, in an analysis, said only half of the spending on infrastructure projects would enter the economy in the first two years. "If the past is indeed a prologue, then we may be overestimating the economic benefits of stimulus," said Mark Zandi, chief economist of Moody's Economy.com.
The onus will therefore be on states and local authorities who receive the funds to direct them to ready-made projects. "It's very important that projects are funded that can be implemented quickly," Zandi said. There is much at stake. An 800-billion-dollar package is unlikely to be repeated. Many economists have warned that a failure to act could lead to double-digit unemployment and an even greater collapse of consumer confidence in the US.
Obama has also tried to tone down expectations, warning the economy is likely to "get worse before it gets better," regardless of whether the stimulus is approved in the coming weeks. The International Monetary Fund this week forecast a 1.6-per-cent contraction of the US economy in 2009. Unemployment, currently at 7.2 per cent, could continue rising through much of 2010. But the IMF warned things could be far worse without a massive injection of government funds.
Even that is a matter of contention for some conservatives. Reynolds said there has never been an example of government spending being able to stimulate demand in the wider economy. "If nothing was passed, I think the economy will perform at least as well as otherwise," said Reynolds. "Everybody's done fiscal stimulus - when did it ever work?"
Comments
Comments are closed.