- Economy Weblog - https://economy.blogs.ie.edu -

Making Obama´s dreams come true

Tomorrow, as Barak Obama takes office as the 44th U.S. president and the first black man to lead any of the world´s rich industrialized countries, the economic crisis offers him a unique opportunity to pursue ambitious social objectives.

As the last details are completed for the inauguration, committees in the U.S. Congress are working on an $825bn recovery plan (equivalent to 6% of GDP, or about 3% per year during the life of the plan) that will overhaul the national electricity grid, pour billions into renewable energy, modernize public schools, computerize all medical records nationwide, and subsidize health insurance for millions of families while cutting taxes for all but the wealthiest Americans. Obama is also expected to immediately begin spending the second half of the $700bn bank bailout fund (TARP), with a stronger emphasis on helping homeowners who face foreclosure and getting stalled credit markets moving again.

At any other time, Congress would have rejected a spending plan that would have such a massive impact on the government´s budget deficit, which may have ended 2008 at as much as 5.3% of GDP (OECD projections) and could rise to almost 7% in 2009. In fact, Bill Clinton was turned down by a Democrat-controlled Congress in 1993 when he asked for only $16bn in stimulus to boost the economy out of recession.

Even if Congress approves the entire package and Obama can carry out his agenda, however, the problems of the U.S. economy are far from over. A stimulus of 3% of GDP per year may turn out to be too little for an economy that some experts say is now contracting at an annual rate of 5%.

And getting the money to spend may involve more than just Congress´s approval. Government debt may become more difficult to sell in the near future, forcing issuers to raise yields and making the fiscal impact of any package even larger, due to higher financing costs.