Obamanomics: Critical analysis of the fiscal stimulus package for USA

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“Humpty Dumpty sat on a wall
Humpty Dumpty had a great fall
All the kings’ horses and all the kings’ men
Couldn’t put Humpty together again”

How prophetic this simple nursery rhyme sounds when compared with the ongoing financial crisis in the U.S. economy. The greatest moguls of investment banking have fallen and thousands of people have been handed the pink slips. Many investors have lost their hard earned money as the world watches in shock the meltdown of the U.S. economy. Undoubtedly, as U.S. sneezed, the rest of the world caught cold. The consequences have been far from over, disrupting the economies of all those countries that had trade relations with U.S.

President Obama signed legislation to jumpstart the economy with the American Recovery and Reinvestment Act, less than a month after his inauguration. The plan is expected to save or create 3.5 million new jobs. Critical investments in infrastructure and giving 95 percent of working Americans a tax cut were the initials of the plan. By making bold investments in healthcare, energy and education, and restoring fiscal accountability to government spending, Obama expects cost cuts for American families and businesses and create good jobs within the economy. He has also initiated a bill that is aimed at providing tax-cuts to companies that operate within US and imposing higher taxes and removal of tax benefits to US companies that outsource business to countries like that of India.

With Obama’s policy being exclusively a fiscal enactment, the question arises-Will altering humpty’s wall by spending money over it (government spending) and by charging less from humpty to sit on the wall (tax cuts), the right remedy? Undoubtedly, Obama’s policy is endured by great minds in U.S. However, there are questions that arise against certain realms of the fiscal policy that might be either unrealized or overlooked.

First and the foremost, it is utterly a fiscal stimulus plan. All government spending and tax cuts lead to increase in income levels and GDP but this as a consequence also increases interest rates over a period of time. Lower interest rates will only reduce investments. We all know that investments have already fallen down even when the interest rates were better. Don’t you think such a policy will even worsen the scenario?

Another element to argue about is that Obama’s spending plan emphasizes on renewable sources of energy, newer technology, education and health care, all of which are not just lavish but also not the right areas to be targeted on. Even though his areas of focus of developing environmentally sustainable technologies are concrete and highlights the fact that something good for environment is good for the economy, it does not appear to be enough labour intensive. Money seems to flow in capital intensive areas and investment on building roads and constructions take a smaller segment. How will employment be created then? The policy does not reflect boost in employment in a short period of time but waits to increase through indirect economic forces in the long run. But within this period the economy may worsen and unemployment may rise which will only create additional problems for the government.

The White House has already forecasted a budget deficit for this year of $1.84 trillion, or 12.9 percent of gross domestic product. Republicans have warned that programs such as the proposed health care plan would add to the budget deficit for years to come and have also criticized Obama’s $787 billion stimulus plan, which was passed by the Congress in February. A deficit will only create a vicious circle of borrowing and will amplify the deficit. The idea must be to lay a foundation that moves the U.S. economy from “borrow and spend” as created by President Bush, to an economy of “invest and save”. It might be reasonable for the Obama administration to argue that the kind of investments it wanted would result in productivity gains that would produce tax revenues. But the question is when will we see those gains, and will they be enough to pay for the investments? That seems highly unlikely. And will it be enough to help significantly in dealing with the other fiscal challenges that we’re facing?

And now the recent outsourcing Bill that Obama has initiated, the United States of America is already reeling under severe economic recession. Quite a few of its top companies have gone bankrupt already. Will the US want its companies to incur more costs? The cost-effectiveness of these companies is due to various cost factors in countries like India, including low cost labour, something that they just cannot overlook.

Considering these factors, the Obama Fiscal Stimulus Plan appears quite controversial and requires a rethinking before going further with these aggressive measures as it is not just U.S. but the whole world that has humpties waiting to climb back the wall, the ability of which lies in the hands of the U.S administration.

Jayati Khurana

[Image source:http://sfcitizen.com/blog/wp-content/uploads/2009/04/img_9191-copy.jpg]

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