Don't Be Afraid To Spend, Economists Tell Obama

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Inter Press Service

Don't Be Afraid To Spend, Economists Tell Obama

by
Adrianne Appel

A bank employee counts US dollar bank notes. With the US economy mired in its worst crisis in decades, president-elect Barack Obama is likely to chart a new direction away from the unbridled capitalism of recent years but faces a challenge in restoring confidence, analysts say. Obama is likely to face strong criticism for advocating more spending and adding to the nation's mega-debt. (AFP/File/Jung Yeon-Je)

BOSTON - President-elect Barack Obama will inherit an ailing economy and the way to help right it is to spend -- and spend some more, independent economists say.

'We need proposals that will stimulate demand' for goods, Allan Mendelowitz, a director on the Federal Housing Finance Board, told IPS.

People and businesses are not buying as much because they can't afford to, Mendelowitz said. They have lost their jobs or fear they may, and the cost of oil, gas and food has risen. At the same time, homeowners are watching the value of their houses sink, and for some, their mortgage payments rise.

What would help now is spending to create jobs, like road repair and alternative energy start-ups, and extending unemployment benefits and food stamps for people out of work, he said.

'People are feeling less secure and feeling poor because they are poor. When people's wealth declines they respond by cutting consumption,' Mendelowitz said.

The government needs to get money into the hands of U.S. workers, as quickly as possible, he said. The goal is to get people working and spending again, and paying taxes, Mendelowitz said.

To recommend spending as a way to help the economy may sound like advice tailor-made for a president who espouses progressive ideals, as Obama does.

However, 'It has nothing to do with left, right or progressive ideology. It's good economics,' Robin Hahnel, professor emeritus of economics at American University, told IPS.

'Even the fiscal conservatives will say that for the first year, or couple of years, there has to be massive amounts of spending,' said Theodore Moran, an economist at Georgetown University.

The lame-duck administration of George W. Bush and Congress are leaving behind a 2008 budget that is a trillion dollars over-budget, and added to the U.S. multi-trillion-dollar debt.

In September, Treasury Secretary Henry Paulson secured more than 800 billion dollars from Congress to spend on Wall Street, banks and the largest businesses in the U.S. The banking industry was near collapse, Paulson argued, and needed immediate cash.

Hahnel believes the bailout gives too much latitude to the banks, and not enough back to taxpayers. Obama should direct Paulson to make changes, Hahnel said, even before Obama takes office.

'We already passed the lousy bailout,' Hahnel said. But 'You can send word to the banks and say 'We are watching and there will be hell to pay if you take advantage of taxpayers between now and Jan. 20'.'

Obama should urge Congress to spend as much as possible this year, Mendelowitz said.

'Clearly available funding will be very tight. But you don't want to get fiscal religion, and not spend because you are running a big deficit,' Mendelowitz said.

Congress, with a push from Obama, may try to pass a 61-billion-dollar package of job creation funds and unemployment extension, the week of Nov. 17. A similar plan failed in the Senate in September.

The plan dovetails with Obama's 'jumpstart the economy' platform, that advocates spending 25 billion dollars for road and bridge repair and sending 25 billion dollars to the states, many of which have begun laying off employees.

Economist Nouriel Roubini of New York University told Congress recently that it needs to spend up to 500 billion dollars, as soon as possible, to prevent the economy from sliding into a deep recession.

Obama should not worry about adding to the U.S. debt, Moran said.

'All sensible economic folks say next year is not the year to balance the budget or even restrain the budget,' Moran said. Obama needs instead to stay focused on stimulating the economy by injecting cash into it, he said.

Obama's economic plan is still a rough sketch, with few details and dollar amounts. He says that after he takes office he wants to create jobs by funding the development of alternative energy, and expand the federal health programme to allow the average U.S. worker to buy into it.

Mendelowitz backs this plan, as a sound investment for the long term, and for moral reasons.

Hahnel would caution Obama not to go after a big, new health care programme in the first couple of years, for political reasons, as Hillary Clinton learned. It would take a huge amount of attention and political capital, and would distract him from focusing on pressing economic problems.

Obama is inheriting an economy that is dangerously weak by almost all measures.

'I'm not sure you can call anyone who won this election lucky,' Mendelowitz said. 'The economy is in the worst shape.'

The Gross Domestic Product grew at just .3 percent from July through September, the worst in seven years.

On Thursday, retail stores across the nation released statistics showing a double digit drop in sales during October.

A recent survey of manufacturers put industrial activity at a 26-year low, while the U.S. Labour Department reported that worker productivity stood at 3.6 percent growth in the spring, but fell to 1.1 percent by the end of the summer.

Close to 500,000 homes have been foreclosed and 2.5 million more foreclosures loom.

National unemployment has risen to 6.1 percent, and has been in the double digits in poorer communities and among young people of colour for years.

The government can help by pouring billions into 'the real economy' and create jobs, give out tax breaks and tax rebates.

'You want to do as much of that as you can,' Hahnel said. 'Starting on Jan. 20 there are a whole host of things he can do right. Whether Obama's economic advisors will encourage him, is another matter.'

'He hasn't started out talking to the right people,' Hahnel said. 'Robert Rubin is a neoconservative.'

A treasury secretary under former President Bill Clinton, Rubin is now a CEO at CitiGroup. And 'Larry Summers is his clone,' Hahnel said. Summers also was Treasury secretary under Clinton.

Obama is likely to face strong criticism for advocating more spending and adding to the nation's mega-debt.

'The truth of the matter is, when you are headed into a bad recession the last thing you want to do is pull back spending on programmes. All that does is aggravate the recession. You lose tax revenue. You end up throwing people out of work,' Hahnel said.

Obama should stick to his proposal to give tax rebates and tax cuts to workers, Hahnel said.

'They may say, 'How are you going to give those middle class tax cuts now, with the economy in a recession?' His answer should be, that is exactly what needs to happen,' Hahnel said.

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