President-elect Barack Obama has got off to a shaky start at being Franklin Roosevelt and saving the American economy again, but at least he and everybody else recognises that the US is in a recession that is getting worse, and that drastic action is required.
Australia remains glued to the dangerous official fantasy that we can avoid recession entirely.
In the President-elect’s radio address on Saturday he increased the estimate of job creation from his proposed stimulus package and, in general, tried to whistle a happy tune (“…whenever he feels afraid…”). To wit: “I am confident that if we come together and summon that great American spirit once again, we will meet the challenges of our time and write the next great chapter in our American story.”
He had asked the proposed head of his council of economic advisers, Christina Romer, and Vice-President Joe Biden’s chief economic adviser, Jared Bernstein, to calculate the number of jobs that would be created by his proposed $US775 billion stimulus plan. Saturday’s address was to release their report.
Er, whatever you want boss, Romer and Bernstein said, but: “It should be understood that all of the estimates presented in this memo are subject to significant margins of error.” That’s because it’s a “hypothetical program”, and the calculations are based on historical experience which doesn’t apply because every recession is different, and the uncertainty is higher than normal now because this recession is “unusual”.
And to drive the point home: “We confess to considerable uncertainty about our choice of multipliers…”
Nevertheless Barack Obama declared on Saturday: “The report confirms that our plan will likely save or create three to four million jobs.” It doesn’t confirm anything in fact, it’s just a rough stab.
And in any case, it’s too weak according to Paul Krugman, the current Nobel prize winner for economics. In his New York Times blog, he says the plan would close only about a third of the output gap over two years.
Obama is talking it up because he has to drive each dollar as far as possible. That’s because a few days earlier the Congressional Budget Office (CBO) released its estimates of future budget deficits.
It will be $US1.2 trillion in 2009, or 8.3% of GDP, shattering the previous post World War II high of 6 per cent of GDP posted in 1983. That’s before the Obama stimulus plan of $775 billion.
The CBO’s “baseline” case has the deficit falling back to $US700 billion in 2010, and then to $188 billion in 2018. Total deficits, 2010-2019: $3.1 trillion. Total public debt in 2019: $9.3 trillion.
But that is based on nominal GDP growth 2011-2014 of 5.7%, which is wildly optimistic.
On Friday the US unemployment rate rose to 7.2%, but it is effectively higher than that because hours worked are being savagely cut. Hours worked fell to 33.3 per week in December, an annualised decline across the quarter of 7.7%. Goldman Sachs economists said: “The decline is so large we wonder if some special factor could be at work, although we have no obvious candidate for this.”
Barack Obama has had the misfortune to be elected President two years too early.
When President Roosevelt launched his New Deal in 1933, GDP had already contracted by 25% and unemployment had already risen from 4% to 25%. The worst was over, and he was able to take credit for the recovery.
When Barack Obama is inaugurated next week, the worst will plainly not be over, and he is facing the prospect in the next election campaign, in three years’ time, of being blamed for not doing enough.