Obama's shot in the arm is too small
From today's FT.
Despite his clear electoral mandate and big Democratic majorities in Congress, politics is already blocking Barack Obama's efforts to deliver a fast fiscal stimulus. The country's political system was designed to force debate and delay action, and it works. Even when all of Washington agrees that speed is crucial - which it does - getting anything done is still difficult. Mr Obama has clout and his party is pretty much in control. But these factors are confounded by the sheer scale and complication of the stimulus plan.
Some of Mr Obama's team dared to hope that a stimulus bill would be on the president's desk awaiting his signature by the time of his inauguration on January 20. The new target is the President's Day recess on February 13, and Democrats in Congress no less than Republicans are warning that this will be hard to achieve. The American recovery and reinvestment plan will not move forward in one piece but will be written bit by bit in committee. House and Senate versions will have to be reconciled, more changes made and further votes taken. "Congress must work its will," says Nancy Pelosi, speaker of the House.
There is fundamental disagreement about strategy, too. In large part, this is the familiar Democratic-Republican divide over spending increases or tax cuts, Democrats preferring the former and Republicans the latter. Mr Obama is proposing a sensible compromise: an $800bn (€594bn, £527bn) two-year package, split roughly 60:40 in favour of spending increases.
Many Democrats resent the concession to Republican preferences. Many Republicans want the tax cuts to be permanent; others, having acquiesced for years in the fiscal incontinence of the Bush administration, have decided on the downslope of a severe recession to become fiscal conservatives.
That is an outrageous imposture and Democrats' exasperation is justified. In view of his party's majorities, why then does Mr Obama not simply ignore the Republicans? One reason is that the new influx of Democrats includes a draught of winners in close contests who tend more than the party average towards fiscal conservatism. Another is the lack of a filibuster-proof majority in the Senate. A third is that US public opinion is itself more centrist than the congressional Democratic leadership, and wary of vast new spending initiatives. The country has already seen hundreds of billions spent or committed to little apparent effect. There is no clamour for the next trillion.
Mr Obama's first big speech on his plan last week was mainly addressed to those concerns. He underlined the risks of doing nothing and the opportunity to boost the economy's longer-term growth by investing in new and better infrastructure. He is right to offer reassurance and to wish to keep voters onside. In this, some political cover from Republicans would be valuable and is worth a political price. Many in his party, though, still care more about punishing their opponents. Their instincts say that if the enemy likes it, the policy must be wrong. Many Republicans take the same view, of course. The consensus Mr Obama seeks will not come easily.
One can only hope that Democrats and Republicans wake up to the gravity of the situation and quickly compromise on the structure of the plan. Once they do that, they can attend to its real, as opposed to imagined, defects.
So far as the structure goes, a mix of temporary tax cuts and high-impact spending (albeit with a strong bias towards the latter) is wise, even though tax cuts, as Democrats say, most likely have a smaller total effect on aggregate demand. Since it is difficult to ramp up spending quickly on this scale without waste, you can make a good case for diversifying the bundle of measures to include some well-targeted tax relief. Why dig in on the wickedness of any and all tax cuts, except to annoy Republicans? It is childish. As for the Republicans' new access of fiscal responsibility, they should first have some shame, and then get the timing right: big fiscal stimulus this year and next, credible steps to reign back spending and borrowing beyond.
This is where the real problems with the Obama plan lie - not in its basic structure (though a clearer plan for dealing with the still mounting tide of home loan foreclosures, among other things, would not go amiss), but in its scale and in its unaddressed long-term implications.
If anything, $800bn over two years now looks too small. The recession appears to be accelerating and the shortfall in demand seems likely to be bigger than the $1,000bn in 2009 that Mr Obama mentioned in his speech last week. The implications for unemployment are correspondingly dire. A stimulus of $500bn to $750bn in 2009 should be the aim. The bigger the number, the stronger the case for including temporary tax cuts in the plan. In this respect, perhaps, a bigger stimulus would improve the prospects for a deal between the two parties.
Yet even without this necessary further stimulus, the longer-term outlook for the budget deficit is alarming. The current estimate for 2009 is $1,200bn, roughly 8 per cent of gross domestic product, not counting the new plan. In later years, on unchanged policies, an enormous deficit is projected to persist. Sooner than it thinks, Washington will have to change those policies. Otherwise, in the next iteration of this crisis, the global capital market will intervene. Plans for medium-term fiscal consolidation - higher taxes and lower spending - need to be framed now and must be made to conform to the short-term stimulus. Next week I will suggest how this can be done.