Will it prevent a prolonged slump and revive growth?
Even before taking over the US presidency, Obama was forced to grapple with the deepest economic crisis since the Great Depression of the 1930s. Shocking unemployment figures released in January revealed a sharp decline in the US economy and the onset of a deep and most likely prolonged recession. A million jobs disappeared in November and December, bringing total losses for 2008 to 2.6 million.
In a major speech on the economy on 8 January, Obama outlined his stimulus package to create three million jobs and jump-start renewed growth. What is the character of this package and can it prevent a prolonged slump and revive growth?
Obama is proposing an economic stimulus package of $775 billion over two years, while hinting that it could approach a trillion dollars. About $300 billion (40%) will be tax rebates for ‘middle class’ families and businesses. Around $500 billion will be for Keynesian-type public spending. This will include aid to the states (state governors say they need $100 to $150 billion to avoid savage cuts in social spending).
Extra funds will go to unemployment insurance, food stamps, Medicaid, etc. Obama also proposes to fund subsidies for health insurance contributions. There will also be extensive investment in public facilities and infrastructure: roads, bridges, public transit, libraries, public broadband networks, energy conservation, solar and wind power projects, etc. If implemented, this will be the biggest state spending package, apart from World War II, since Roosevelt’s New Deal in the 1930s.
Obama has also announced a review of the second part of the bank bailout programme, the so-called Troubled Assets Relief Program, with $350 billion of the original $700 billion left. Obama promises to draw on this cash to help working families, helping homeowners to avoid foreclosure, and relieving the burden of other debts (auto loans, consumer debt, student loans, etc). As yet, however, he has not put forward any detailed proposals to cancel or modify predatory mortgages, even though more than two million homeowners currently face foreclosure.
Opposition in Congress
Obama is unlikely to have his package approved by Congress by the time of his inauguration on 20 January, as he may have been hoping. The package, in its current form, faces opposition from both the right and the left.
Many Republicans – and also conservative ‘blue dog’ Democrats – oppose another stimulus package on principle, especially increased public spending (as opposed to tax cuts). This partly reflects electoral calculation.
There is still widespread anger at the $700 billion taxpayers’ handout to the banks and financiers – the profit-seeking moguls who triggered the crisis. There will undoubtedly be suspicions that a large slice of another rescue package will find its way into the hands of big business and the wallets of politicians.
Opposition from the ‘fiscal conservatives’ also reflects doctrinaire adherence to the idea of ‘free-market’ solutions – in spite of the present free-market financial meltdown – and opposition to government deficits.
However, in the face of a deep financial and economic crisis, which raises fears of social upheaval and class radicalisation, the leading representatives of capitalism have abandoned the ultra-free-market economic orthodoxy that prevailed after Reagan’s presidency. “In a severe crisis,” said Bernanke recently, “orthodoxy can prove to be a very bad strategy.” (Financial Times, 4 January)
Despite the prospect of a huge federal government deficit and the danger, later, of explosive inflation, the strategists of the US ruling class support a massive stimulus package to save their system from collapse. Obama is acting in their interests.
Criticism from the left
There are left Democrats, however, who are critical of the existing package because 40% ($300 billion) will take the form of tax cuts. Of this, $150 billion will go to ‘middle-class’ taxpayers ($500 each), while $100 billion is earmarked for businesses.
Most personal rebates are saved in the bank or used to pay off debts, as was shown by the $168 billion tax-rebate package passed by Bush in February 2008. Unlike public spending, tax rebates are much less effective for increasing demand for goods and services or creating jobs.
Obama may well be thinking that tax cuts are always popular and will sweeten the stimulus package with public opinion. Apart from this, he is clearly seeking to appease Republican critics in Congress, attempting to muster bipartisan support. (Strangely, while opposing deficits, fiscal conservatives never object to tax cuts, which reduce government revenue and invariably increase deficits.)
Commenting on Obama’s proposed tax cuts for the middle class and business, Keith Olbermann (on MSNBC’s Countdown) said: “… the president elect is proposing [tax] cuts that in total might make George Bush blush.” (Washington News, 6 January)
Though it is the biggest stimulus package since the New Deal, some left Democrats doubt whether it will be enough to revive economic growth. Fervent Obama supporter, Paul Krugman, who has been forcefully urging him to implement a Keynesian spending package, now refers to Obama’s “somewhat disappointing economic plan… which falls far short of what’s needed”. (New York Times, 8 January)
“Our economy could fall $1 trillion short of its full capacity [over 2009-2010],” declared Obama in his 8 January speech. As Krugman points out, however, the Congressional Budget Office estimates the output loss at $2.1 trillion, double Obama’s figure. When only about $500 billion of Obama’s package is for Keynesian-type public spending, the plan may not be enough to avert “a prolonged slump”.
Obama has been spelling out that there are going to be huge – and rising – federal government deficits, implicitly making the point that he has inherited a dire situation. The deficit for fiscal year 2009 is likely to be $1.2 trillion (8.3% of GDP) – a post World War II record – even before Obama’s package is implemented.
A government deficit is itself a stimulus in that government debt finances a share of employment and spending that would otherwise not contribute to economic growth. However, a huge slice of the current deficit (Bush’s last deficit was $455 billion) arises from the bailout of the banks and finance houses – which are hoarding cash and still restricting lending, thus depressing growth.
If Obama’s stimulus package is implemented over the next two years, it will push the annual federal government deficit up to about 10% of GDP. The ratio of the accumulated national debt to GDP will rise from 36.9% to 54.2%, a record apart from the Second World War period. According to some Republicans, this is already a ‘fiscal disaster’, and Obama will make it worse.
For the strategists of the ruling class, however, Obama’s plan is a necessary evil – to bail out their floundering system. They recognise that deficit spending on a massive scale will saddle future generations with colossal debts. However, they will later offload the burden onto the working class through new taxes and cuts in social spending.
For 30 years, capitalist leaders upheld monetarist orthodoxy, condemning inflation as the plague. Now, when their system is threatened by crisis, they are ready to support the government printing money to bail out the banks, counteract deflation and (at least partly) finance spending.
Inevitably, printing money today raises the spectre of inflation tomorrow. But under the headline, The Printing Press Cure, a New York Times editorial concludes that “the Fed[eral Reserve] is doing the right thing”. (23 December 2008) Later, they will turn back to the kind of savage monetarist policies applied under Reagan in the 1980s, which restricted public spending and increased the real cost of debt for workers.
Obama himself has hinted at the price that will be paid by workers in the future. “I’m not out to increase the size of government long-term,” he told the New York Times (9 January). Obama says an important part of his budget will be ‘repairing’ major entitlement programmes, Social Security, Medicare (healthcare for retirees), and Medicaid (healthcare for the poor).
‘Repair’ means cuts: higher payroll tax contributions, a later retirement age, and reduced health benefits. Obama’s package, comments columnist David Brooks (New York Times, 9 January), “is not an attempt to use the crisis to build a European-style welfare state”. Keynesian spending is for an emergency, to try to prevent economic collapse and political upheavals. Afterwards, capitalist leaders will attempt to return to fiscal conservatism.
Perspectives for economy
Will Obama’s package prevent a prolonged slump and revive growth? Despite the scale of state intervention (the cyclical deficit, plus the bank bailout package, plus the proposed stimulus), it is still limited in comparison to the economic forces that have been unleashed by the US and global downturn. Obama plans to create three million jobs, but there are already eleven million unemployed, and it will get worse.
In reality, the most favorable scenario for US capitalism is that Keynesian-type intervention will cushion the recession and prevent the onset of a depression. Even this, however, is not guaranteed. A further crisis on the US and global financial system, a collapse of the dollar, and other convulsions in the world economy, could all exacerbate the crisis of US capitalism.
Even if it averts a prolonged slump, Keynesian state spending in itself will not necessarily jump-start the economy, producing self-sustaining growth. That would require renewed, extensive capital investment by big business – and the capitalists will only invest if they are assured an acceptable level of profitability.
A big proportion of the toxic debt and industrial overcapacity, given current levels of money-backed demand, will have to be squeezed out of the system before there can be any return to broad-based growth.
The current recession is likely to continue in the US and globally for some time, and a recovery, when it begins, is likely to be slow and uneven. Even if Keynesian measures soften the impact of recession, the working class will pay a heavy price for the capitalist crisis, through low wages, mass unemployment, and poverty. Keynesian measures will not overcome the anarchy of market forces or cure the capitalists’ lust for profit.
At the same time, attacks on workers will provoke mighty struggles, a questioning of the capitalist system, and a search for a real alternative. At best, Keynesianism offers a temporary palliative for capitalist crisis. The idea of democratic socialist planning, on the other hand, will gain more and more support as the only way of harnessing science, technology, and productive forces to meet the needs of society, as a whole.
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