When Barack Obama becomes the 44th President of the United States, he will face a daunting set of economic problems. Incoming Presidents usually have a honeymoon period of 100 days when positive public sentiment insures passage of key components of their platform. Given a narrow window of Congressional bipartisanship, Obama's economic priorities are clear.
Fiscal Stimulus: With America in deep recession, our new President's highest priority will be jumpstarting the economy; sending an electric shock into the market to motivate businesses and consumers to begin buying again. The issues are the size of the stimulus and its contents.
Congress is considering a relief package in the range of $500 billion to place on Obama's desk on January 20th. However, many economists believe more funds are required; they argue an effective stimulus will cost upwards of $1 trillion.
Some elements of the pending plan have broad support: extension of unemployment insurance; expansion of food assistance for the disabled, elderly, and poor - currently 27.8 million individuals receive food stamps; and funds to prevent state cutbacks in critical safety-net programs such as Medicaid.
There is also agreement that several million jobs need to be created. Obama talks about 2.5 million jobs but economist Joseph Stiglitz argues that a realistic number is more than 5 million. So far, three job-creation strategies have been proposed, all of which funnel dollars through states and municipalities. The first funds people, particularly teachers and medical personnel. Advocates argue that the most bang for the Federal buck would come from a tight focus on education and healthcare. However, many analysts feel the scope of a people-intensive effort should extend beyond schools and hospitals to "first responders" in general, expand American domestic security by employing more fire, police, and public health professionals.
The second strategy emphasizes infrastructure - repair of America's bridges, dams, roads, and public facilities such as schools and hospitals. To be effective infrastructure projects would need to be run by local contractors, employ American workers, and focus on relatively low-tech repairs. (At this early stage, what aren't required are massive high-tech infrastructure programs, such as building a high-speed rail line between New York and Boston, which would take too long to spur employment.) Advocates suggest a logical expansion of the initial infrastructure investment. Some funds could be allocated to "harden" defenses at facilities are vulnerable to terrorist attack, such as chemical plants and shipping terminals. Many have proposed a large-scale energy-conservation initiative to weatherproof public buildings and install solar panels. A combination of these efforts would generate hundreds of thousands of new jobs.
The third proposed strategy would generate additional "green jobs," beyond the relatively modest efforts to make public facilities more energy efficient. While there is considerable public sentiment to eventually fund green projects, such as the construction of gigantic wind farms, there is no initiative that merits serious consideration during the first 100 days.
Obviously, it makes no sense to focus on creation of new jobs and ignore the reality that the current economic decline threatens many existing jobs. Obama has promised to work with the beleaguered American auto industry to save as many jobs as possible. In addition, funneling money to states and municipalities will save many public sector jobs.
Beginning January 20th, Obama needs to put Americans back to work. His challenge will be to do this fast enough to avoid further economic decline.
Tax Relief: Candidate Obama promised a variety of tax cuts for working families and it's likely that during the first 100 days Congress will enact these into law. Nonetheless, while middle-class tax cuts will have a psychological benefit - by indicating Obama's intent to keep his campaign promises - they won't stimulate the economy, as Americans will use the funds to pay down their debts.
Mortgage Relief: Conspicuously missing from October's $700 bailout package was homeowner relief; during 2009, roughly 5 million foreclosures are projected. While Fannie Mae and Freddie Mac have taken sensible action to help troubled homeowners stay in their residences, other lenders have been slow to follow suit. Obama should take two actions: ask Congress to support legislation permitting bankrupt homeowners to have their mortgages lowered in court and endorse the plan developed by FDIC Chair Sheila Bair establishing a fund to refinance troubled mortgages and lower monthly payments.
Recapitalizing Financial Institutions: So far, Treasury Secretary Paulson's use of the $700 bailout package has been remarkably cavalier. The Obama administration has to be hard-nosed about further relief for financial institutions: demand a greater equity stake and more stringent controls over spending - such as curtailment of dividend payments and executive bonuses. During Obama's first 100 days in office, Congress will hold hearings about re-regulation of the financial service sector, but this is unlikely to produce legislation.
By the middle of April, America will still be in recession. However, public confidence should improve if Obama takes forceful steps to provide relief.