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Obama tempers hope for economy
Mr. Sohn said Mr. Obama can learn from the experience of President Franklin D. Roosevelt, who was “very good at managing expectations.” The Depression-era president started a “blizzard of activities, including public works programs,” which inspired hope and created some jobs, though they failed to spur lasting economic growth. Mr. Obama’s economic program also centers on trying to spur job creation through a surge in infrastructure spending.
“Roosevelt let the people know that the government was on their side and doing everything it could to help them,” Mr. Sohn said. “Economic historians conclude it was the Second World War, not the New Deal spending, which brought an end to the Depression. The many programs he launched did more to earn people’s confidence than to end the Depression.”
Mr. Sohn and other private economists doubt that Mr. Obama’s public works programs will produce a quick or lasting revival of growth or jobs. Mr. Sohn noted that a decade of massive public works spending in the 1990s failed to pull the Japanese economy out of recession.
Nevertheless, economists are calling on the new administration to take action to stimulate growth, given the magnitude of the downturn since last fall. While the public focuses on jobs, economists focus more on the government’s proven ability to invigorate spending in the public sector as well as among consumers and businesses, whose spending is the main source of economic growth. That is why many recommend a large package that can inject hundreds of billions of dollars into the economy.
Much of the spending in Mr. Obama’s $800 billion package, despite the rhetoric, is aimed not so much at creating jobs as helping people thrown out of work through expanded unemployment benefits, cash welfare, food stamps and Medicaid spending. Hundreds of billions of dollars more are provided to states hit hard by the recession to help avoid layoffs and maintain spending on building projects that employ millions of private workers in construction and manufacturing.
Brian Bethune, chief financial economist at IHS Global Insight, said a large stimulus package should help jolt the economy back to growth, although he favors tax cuts over spending.
“Quick, effective fiscal action is what the economic patient needs to be revived,” he said, noting that Mr. Obama was elected in large part because Americans trusted him to deal with the economy.
“The economy was the No. 1 key to Obama’s success,” he said. Now, “it is his No. 1 problem.”
Economists note that the Federal Reserve already has gone to extraordinary lengths to combat the recession, with little effect. Last month, the Fed ran out of its conventional ammunition for fighting recessions when it drove interest rates almost to zero. Now the Fed has only less-tested tools, such as purchasing corporate bonds and mortgage securities, to try to revive the economy.
“The Fed has throttled up monetary easing to maximum levels,” Mr. Bethune said. “Now it is a matter of lighting the right sparks to get the economy moving again,” both with a stimulus package and further recapitalization of the financial system through the Treasury’s bank bailout program.
“The big question is: Will they be sufficient to get the economy moving again by the second half of 2009?” Mr. Bethune said.
Mr. Bethune expects the stimulus at most will slow the pace of job losses this year. He does not expect the economy to start creating jobs again until 2010.
Louise Purtle, an analyst at CreditSights, said the stimulus package’s emphasis on building projects and aid to states is justified because the recession is expected to be long and that the spending measures need time to take effect.
Infrastructure aid, increased funding for Medicaid and cash infusions for state and local governments will help to avert severe cutbacks and layoffs by state governments, which have cumulative budget gaps totaling $350 billion in fiscal 2010 and 2011, she said.
“State and local governments are economic engines that employ more than 20 million workers, or roughly 14 percent of the nation’s work force” - far more than the federal government, she said.
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