Posts Tagged ‘stimulus’

Obama’s Stimulus Program And Deficit Spending: An Alternative Response To The Economic Crisis

December 25th, 2008 Comments off
The incoming Obama administration has yet to finalize the size of its economic stimulus package. Clearly, however, it will be of vast proportions. The numbers being speculated on keep inclining upwards, most recently in the $800 billion range. When it is put into effect after Barack Obama is inaugurated as America’s 44th president, it is likely to approach one trillion dollars, a sum equal to 20 % of the entire national debt of the United States only 8 years ago, when George W. Bush became the 43rd president. With the global economic crisis raging and financial markets imploding, most politicians and economists argue that only a gargantuan infusion of deficit dollars can stimulate the American economy to the point where the recession can be arrested. The question is, are the politicians and experts correct?
No doubt, the U.S. economy is undergoing its worst crisis since the Great Depression. Many experts point to the failure of the Hoover administration after the 1929 stock market crash to inject stimulus into the economy with deficit dollars as a significant contributing factor to the aggravation of the Great Depression. Other experts, acknowledging that the New Deal of President Franklin Roosevelt did not entirely eliminate the worst ravages of the Great Depression, claim that the decision by Roosevelt in 1937 to end the pump priming and restore fiscal balance in the Federal Budget initiated a severe recession following initial recovery after 1933.

The weakness with all these arguments is that those advocating them have tried to construct an economic rescue paradigm based on 1929 and its aftermath. While some parallels between the current Global Economic Crisis and Great Depression no doubt exist, every epoch in history, including economic crises, have their own unique reality. What may or may not have worked in the Roosevelt administration’s New Deal is not necessarily analogous to the prescription required for the current economic emergency confronting the United States.

The years leading up to the collapse of the world financial system and current global economic crisis were ones of unprecedented deficit spending by the U.S. government. Under President Bush, taxes for the most affluent Americans were slashed while government spending across the board, but especially in the military sphere, skyrocketed. The result was that even before massive governmental spending was initiated, as the economic crisis became more acute, Bush’s economic policy had already in place budgetary practices in the category of major fiscal stimulus. The fact that the national debt of the United States doubled from $5 trillion to nearly $10 trillion before the onset of the global financial crisis is a reflection of that fiscal reality.

Economists rightly point to the demand destruction that is crippling the world economy. In the United States this has had a severe impact, considering that more than 70 % of America’s GDP is derived from consumer spending. Accordingly, in this time of economic crisis, the government must substitute for the downfall in retail and business activity by regenerating demand in the economy. However, replicating the fiscal and monetary indiscipline of the past 8 years will only lay the seeds for far worse financial turmoil. There is another alternative for policy makers to consider, which offers a structural as opposed to a Band-Aid cure for the global economic crisis, especially in its impact on the American economy.

If the incoming Obama administration were to reverse the massive increases in military spending undertaken by George W. Bush, several hundred billion dollars a year can be redirected from unneeded defense department allocations to the civilian economy, including funding for massive infrastructure projects. Since the staggering increases in military spending are premised on the threat posed by one enemy, a non-state actor called Al-Qaeda, a fundamental question must be answered by the incoming Obama administration: what poses the greatest risk to America’s national security- a non-state actor with a few thousand adherents, or a global economic crisis that threatens to bankrupt the United States, and destroy its economic power, which is the basis of its military power? It may very well be that redirecting hundreds of billions of dollars from expensive new weapons systems that may be unnecessary for the defense of the nation to the civilian economy will be a sounder approach to financing a major economic stimulus program than continuing to add to the indebtedness of the national economy.