IS OBAMA'S PLAN BIG ENOUGH TO WORK?

President-Elect Obama

Setting a goal of keeping the plan under one Trillion dollars could become a big mistake.

I applaud Obama for his sense of urgency and his getting the ball rolling on the economy before he takes office. And it´s unfortunate that he and his new team are having to spend time and effort dealing with side issues such as the Blagojevich / Burris circus. Or to be subjected to old accusations like the recent right-wing essay published by Daniel Pipes titled; "Was Barack Obama a Muslim".

These types of unnecessary activities try to divert the focus from the big "800# economic gorilla in the room" to other issues of little or no consequence. .

These are difficult times for most middle-class Americans that demand serious thought and focus, especially while President Bush and company are considered virtually; "persona non-grata". It is sad that Representative Barney Frank´s recent comment is correct when he said; "Mr. Obama says we only have one president at a time, I'm afraid that overstates the number of presidents we have [right now]." I agree with Mr. Franks, and apparently Obama is going as far with his economic plan as he feels is appropriate, without crossing the line of "one president at a time".

Where I am seriously concerned however, is whether Obama´s plan is going too far in trying to satisfy the conservatives in Congress without the plan having a chance to achieve what we all want it to do.

Mr. Obama has said, "I´m afraid that if dramatic action isn´t taken as soon as possible, this recession could deepen and could linger for years." But it is appearing that Mr. Obama´s prescription may not live up to his diagnosis. The economic plan he´s offering isn´t as strong as his language about the apparent economic threat. In fact, it appears to fall well short of what´s going to be needed.

As the largest economy in the world, a giant chasm is now opening between what America will actually produce over the next two years vs what its production capacity is today. With consumer spending and overall investment on such a downward spiral, America will be in a position to produce much more than it is going to be able to sell.

Per Paul Krugman of the New York Times; "Obama´s plan of $775 Trillion has 40% targeted at tax cuts, and 60% toward consumer spending, which isn´t near enough to fill the minimum $2 Trillion of the increasing output gap."

Even the Congressional Budget Office (CBO) says that; "economic output over the next two years will average 6.8% below its potential." This translates into $2.1 trillion of lost production. "Our economy could fall $1 trillion short of its full capacity," declared Mr. Obama on Thursday. Well, unfortunately, I agree with Mr. Krugman, Obama was gravely understating the situation.

Many economists are skeptical about how much increase the tax cuts, especially the tax breaks for business, will actually do, if anything to boost spending. And many Senate Democrats apparently share these doubts. Howard Gleckman of the nonpartisan Tax Policy Center summed it up in the title of a recent blog posting: "lots of buck, not much bang."

Also, per Mr. Klugman; Obama´s hesitancy to go further seems to be a fear of more debt or the CBO´s recent forecast report of a $1.2 Trillion deficit for this year. "But it would be even more dangerous to fall short in rescuing the economy. The president-elect spoke eloquently and accurately on Thursday about the consequences of failing to act. There´s a real risk that the US will slide into a prolonged, Japanese-style deflationary trap. But the consequences of failing to act adequately aren´t much better. Is the plan being limited by a lack of spending opportunities? There are only a limited number of "shovel-ready" public investment projects. That is, projects that can be started quickly enough to help the economy in the near term. But there are other forms of public spending, especially on health care [or education], that could do good while aiding the economy in its hour of need."

Press reports last month indicated that Obama aides were anxious to keep the final price tag on the plan below the politically sensitive Trillion-dollar mark. There have also been suggestions that the plan´s inclusion of large business tax cuts are pure politics. These cuts will add to the plans cost, but will do little for the economy, and it appears to be an attempt to win Republican votes in Congress. It seems Obama is either expecting to go after a second phase later on for more money, or he is pushing for a total of 80+ senate votes instead of the required 60 votes to pass the incentive package.

Whatever the case, Obama´s stern comments on the economy and his goal for taking "bold action now" and his incentive plan do not seem to be in sync. I agree that it is important to take the Republican´s concerns into consideration, but if the plan fails due to being "too little, too late", the Recession/Depression could go on for years.

The country, Obama and the Democratic Party do not need such a critical failure for starting this new era.

Copyright G.Ater 2009