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reflections

Nov 24, 2008 | 05:04 GMT

4 mins read

Geopolitical Diary: Obama's Plans for the Economy

It can be difficult to separate the important from unimportant on any given day. Reflections mean to do exactly that — by thinking about what happened today, we can consider what might happen tomorrow.
In the battle against economic stagnation and outright deflation, U.S. President-elect Barack Obama came out swinging on Sunday, signaling that he would pursue a combination of spending increases and tax cuts upon taking office. Building upon the stimulus and bailout packages of the Bush administration, Obama seems to be melding the stimulus tactics of the Republicans (tax cuts), with those of the Democrats (spending). We wonder, though, what such an undertaking will look like. More to the point, will taking the classic tools of state-sponsored stimulus and implementing them at a massive scale work? Or is the situation in the United States such that tweaking the tax code and stimulating demand won't have the effects they once did? The public expects Obama to deliver on oft-repeated promises of tax breaks for the middle and lower classes. Obama's staff is now signaling that he may leave the Bush tax cuts for the upper class in place as well, though it remains to be seen whether public sentiment will allow for such a move. Raising taxes for the wealthy could prove not only popular, but necessary, if the large budget deficit is to be kept under control. In either case, if the incoming administration were to pursue a policy of broad tax cuts, it would almost certainly cause an increase in demand. The question is whether this increase would occur with sufficient force to overcome a recession. At this point it is too early to tell, but we can examine the issues that will frame the outcome. One issue is whether the consumer is in a position to funnel tax savings into the economy, by purchasing goods and services — or whether, in light of economic volatility, consumers will be more inclined to squirrel away savings for the next rainy day. Furthermore, with U.S. households plodding away under a $14 trillion debt burden, they might use some of that tax savings to pay down existing debt. This is not to say that proposed tax cuts would simply slip into a black hole, leaving no discernible impact on the economy. Realistically, we expect some combination of both. The other plank of the Obama economic stimulus plan — spending — deserves a closer look too. In a move characteristic of the Democratic Party, Obama appears ready to ramp up government outlays for infrastructure and green energy projects. Against a backdrop of flagging demand, stagnant wages and rapidly rising unemployment, increasing federal spending to spur demand appears to be a logical move. But the United States is in uncharted territory. Comparisons between Obama's proposals and Franklin Delano Roosevelt's New Deal are common. In a broad sense, the use of federal programs to stimulate the economy and the impulse toward tightened regulatory control over sectors of the economy describe both Obama's and Roosevelt's platforms. However, the New Deal was received by a workforce trained in farming, construction and factory work. Obama's plan would have to gain traction among legions of office workers, computer programmers and various other specialists. Going from an ergonomic chair in a climate-controlled office to operate a jackhammer in the heat of the day might be a pill too hard to swallow for many Americans. In a more likely scenario, an influx of foreign laborers would fill the jobs created by Obama's stimulus program. This is not to say that infrastructure spending would be ineffectual — the United States could certainly undergo a shift that changes its economic structure under the Obama administration — but the gap between the post-dot-com service economy and Obama's envisioned "green labor" economy could prove challenging to bridge. This terrain will be traversed over time, however. Obama so far, has presented the United States with only a broad policy initiative, based on a set of principles. He has left himself a great deal of room to maneuver as the recession and financial crisis unfold. Now is a critical time for the development of these policies, and we will have to monitor the development of Obama's team and its process carefully.

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