After a month of political back-and-forth, President Barack Obama's plans to address the most daunting U.S. economic crisis in eighty years are coming into focus. Speaking to a joint session of Congress on February 24, Obama outlined his strategy to rescue the struggling financial sector while simultaneously directing resources toward overhauling longer-term policy problems in U.S. health care, energy, and education. In doing so, Obama said the country's "day of reckoning has arrived" after a period of financial and political irresponsibility.
The historic speech built on an unprecedented series of moves since the president took office barely a month ago aimed at staving off economic disaster by bailing out banks and stimulating U.S. economic activity. On February 17, Obama signed a $787 billion economic stimulus package, including major outlays for infrastructure development. Days earlier, Treasury Secretary Timothy Geithner unveiled plans for a $2.5 trillion bank bailout package (NYT) making use of funds from the government and private investors and calling for the U.S. Federal Reserve to print more money. But markets continued to tumble (FT), reaching ten-year lows before rallying slightly as the new president put the finishing touches on his speech.
Analysts remain divided over the degree to which these moves will bear fruit in terms of jobs, investment, or economic growth. Thus far, Obama's initiatives have won popular support (Reuters), but experts say the most challenging aspects of Obama's policy overhaul are yet to come, and the broader ramifications of his full-scale economic rethink remain far from obvious.
For starters, many observers find fault with the stimulus plan passed by Congress. The Economist says the legislation is "stuffed full of boondoggles" and concessions to special interests--though it adds that some of these concessions may have been made intentionally in an effort to get the bill passed quickly. Most economists now agree about the need for some form of economic stimulus, given heady declines across global markets since the middle of 2008. But some disagreements remain over Obama's particular strategy and policy mix. Among the most controversial areas:
- Stimulus as a strategy in general: The extent to which government spending boosts the economy remains disputed among economists, and many say the degree of effectiveness will rely heavily on expenditures being targeted narrowly and temporarily.
- Tax cuts: Some policymakers from Obama's own party have faulted the plan for its program of tax cuts, saying that they are broader than necessary (Obama's advisers have defended tax cuts as a strategy, saying that even if they prove less efficient than spending on infrastructure development, they will reap rewards more quickly).
- Budgetary obligations: News reports indicate that the president's first budget, which is due out shortly, indicates an intention to run record deficits for at least the duration of his first year in office. That possibility worries economists who say the rising need for borrowing to fund this deficit could push the U.S. government closer to defaulting on its international debts. Obama defended his programs on February 22, saying reductions in war spending and reforms to some entitlement programs will gradually reduce the deficit, cutting it in half by 2013 (FT).
Just how Obama's economic policies play out in practice will have serious global repercussions, too. Experts say a high U.S. budget deficit will necessitate borrowing funds internationally--one of the factors that led to geoeconomic imbalances, and ultimately the financial crisis, in the first place. But with oil prices sagging and China's economy also struggling, it remains unclear whether cash will flow as freely as it has in recent years. China recently warned (Xinhua) of the potentially negative effects of U.S. stimulus-related debt. This risk would be heightened if Washington is forced to take large capital stakes in U.S. commercial banks, as many news reports say is increasingly likely (NYT). The extent of this spending has fueled fears about Washington's future ability to pay off its international debt. the Economist's Gregory Ip notes that markets now price the risk of Washington defaulting on its international debts during the next ten years at around 6 percent (WashPost), as opposed to 1 percent a year prior.
These concerns notwithstanding, some analysts see reason for measured optimism about Obama's approach. Federal Reserve Chairman Ben Bernanke, testifying on Capitol Hill, sounded a note of optimism (USA Today) about a possible turnaround in late 2009, helping explain a late market rally before Obama's speech. The Financial Times judges in an editorial that Obama's strategy appears "mostly right," in that it appears to be geared toward temporary expenditures that will limit the long-term budgetary impact of stimulus spending.
Obama has also moved to ramp up the regulation of financial markets--a move most market watchers now agree is necessary, given the regulatory lapses that took place in the run-up to the current crisis. This Working Paper from 15 economists known as the Squam Lake Group gives detailed recommendations along those lines.
But few claim to have definitive answers. The Carlyle Group's David Rubenstein, in a recent interview with CFR.org, said the U.S. government's strategy is best understood as a "kitchen-sink approach." Washington doesn't "really know what will be necessary to make it work," Rubenstein said, "but they're willing to try almost anything." In a very uncertain economic climate, it's a dramatic strategy, but given the grave threats facing global markets, many economists now cautiously support the approach.