Thursday, December 16, 2010


The American economy remains stuck in the doldrums, with unemployment remaining near 10% and continued weak credit despite near-zero interest rates. The housing market remains weak.

This does not seem likely to improve anytime soon, thanks largely to misplaced concern about the deficit and more deadlock anticipated in Congress. With Republicans opposing anything that adds on to the deficit, (although the $858 billion was allowed to pass just because it came as tax cuts), the government might be deprived of some of its best tools for cutting unemployment and restoring growth.

If congressional Republicans choose to beholden themselves to the hypocritical, anti-intellectual Tea Party Movement, the economy is on course for very poor economic growth.

The consensus among wise folk is that the US needs more fiscal stimulus. The initial $800 billion package was, odd as this may seem, too small and scattershot. Christina Romer, chairwoman of Obama's Council of Economic Advisers, calculated the US needed $1.2 trillion of it. Plus, the meltdown was worse than thought when Romer was running the numbers

The bottom line here is simple: the government should dole out more money for infrastructure projects, small and medium businesses, and manufacturing. With more people employed, more taxes are paid and, depending on the project, GDP is increased in other ways, for example, constructing new solar plants encourages further investment by corporations and reduces fuel expenditures. The extension of the Bush tax cuts also encourages consumption as well as hiring.

The breakdown of the first stimulus plan. Congress must make sure the second one is more focused on job creation, skills training and small business support.

Joseph Stiglitz, Nobel laureate in economics writes in Newsweek (Issues 2011 edition) that "the cost of not spending is even higher". As he points out, workers lose their skills, and "human capital will be destroyed" if the country experiences high unemployment for years.

More importantly, the American economy needs to be rebalanced. There are two ways of doing this. Firstly is by moving the economy away from the dodgy financial services that started the whole mess in the first place. Worse, the swelling of the financial sector came at the expense of the manufacturing sector.

Data on Wikipedia shows the financial sector producing between 12-15% of total sales, receipts or shipments, ahead of construction (less than 6%) and not far behind manufacturing (just above 18%).

Shuttered factories testify to the slow but sure death of the manufacturing sector in the US. It is worth noting that the worst period of American job creation was during 2001-2007, the Bush years.

The second (probably more effective) way to rebalance the American economy is to boost exports. For too long, the US economy has been focused on domestic consumption, with too little income coming from exports. This does not make sense, because US know how (when sensibly utilized) produces beautiful, cutting-edge products that people desire. Plus, with US consumers also drowning in debt (household indebtedness stood at 132% of income in 2009) , they can no longer be counted upon like they once were as a source of growth.

So why then do these facts abound? The US Congress has not ratified free trade agreements with Colombia, Panama and worst of all, South Korea. PayPal reports that only 14% of US merchants sell to overseas customers.

US exports clearly should be beefed up. Trade with developing markets like South America and Asia remain small, and will stay that way until more free-trade agreements are signed and approved.

The solution, then, is for the Obama administration to support more small businesses, which create the vast majority of jobs. Congress must also remove barriers to international trade, and thus encourage firms to sell to the rapidly growing middle class overseas.

These steps will not be easy to get through Congress, simply because 'stimulus' has become a four-letter word to voters. But Obama can use the silver tongue he wielded during his campaign here too.

He could point out that he's kept the tax cuts. He could also point out that the returns from the public investment (that's a nicer word than stimulus), would raise future income and tax revenues, which would help trim the debt. The bottom line is, spending now might be the best way to reduce debt in future.

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