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Obama’s stimulus bill is a tough sell so far

President-elect Barack Obama has won plaudits for his management skills as he prepares for office in less than two weeks. However, his stimulus bill is coming under fire from both the right and the left. On the left, Paul Krugman is critical about the high proportion of so-called stimulus that Obama’s proposal gets from tax cuts. On the right, Republicans like the fact that Obama is not only living up to his tax cut promises for the middle class but is also delaying a return to pre-Bush tax levels for the wealthy. However, there is pause within Republican ranks about the size of this package and the debt load that will go along with it.

First, let’s look at what Krugman has to say.

This really does look like a plan that falls well short of what advocates of strong stimulus were hoping for — and it seems as if that was done in order to win Republican votes. Yet even if the plan gets the hoped-for 80 votes in the Senate, which seems doubtful, responsibility for the plan’s perceived failure, if it’s spun that way, will be placed on Democrats.

I see the following scenario: a weak stimulus plan, perhaps even weaker than what we’re talking about now, is crafted to win those extra GOP votes. The plan limits the rise in unemployment, but things are still pretty bad, with the rate peaking at something like 9 percent and coming down only slowly. And then Mitch McConnell says “See, government spending doesn’t work.”

Let’s hope I’ve got this wrong.

Edward here. The long and short of Krugman’s fuller analysis is that this will NOT be enough stimulus to provide the economy the boost it needs. Moreover, Krugman asserts that the lesson learned if it comes up short is that government spending does not work. Therefore, Obama will be less likely to receive monies if he tries to add stimulus a second go ’round.

I tend to agree with Krugman’s political calculus here. Obama has one shot. From a political standpoint, he should be opting for massive stimulus and look for that to be cut back to a more palatable level in negotiation. However, he seems to be treading a cautious line, looking for bipartisan support that he may not receive.

I see this scenario as very negative for the U.S. economy. First, you have huge government spending that requires additional borrowing by the U.S. government. But, this spending does not give the economy the needed jump start to pull out of the deflationary spiral. In a worst-case scenario, one could see interest rates rising, inflation going negative, meaning real rates are even worse, while the economy stagnates and unemployment rises. This is the stag-deflation scenario of which Nouriel Roubini warns.

If that weren’t enough, Obama faces push back on the right despite the olive branch of disproportionate stimulus from tax cuts he has thrown into the package. Deficit hawks do not like the spending and are going to fight this from the word go as evidenced by Eric Cantor (R-VA) during a recent appearance on CNBC. Take a look at what Cantor has to say and judge for yourself.

In the end, I am left feeling that Obama needs to go bigger if he goes at all and therefore, this package is dead on arrival.

Update 07 Mar 2009: I am re-posting this in light of increasing evidence that Obama’s stimulus bill was in fact too small. Paul Krugman has a good post today called “One-sided debate,” which reminds us he made that argument but was essentially ignored.

Sources
Stimulus arithmetic (wonkish but important) – The Conscience of a Liberal, Paul Krugman , NY Times
Obama’s Hard Sell – CNBC

About 

Edward Harrison is the founder of Credit Writedowns and a former career diplomat, investment banker and technology executive with over twenty years of business experience. He is also a regular economic and financial commentator on BBC World News, CNBC Television, Business News Network, CBC, Fox Television and RT Television. He speaks six languages and reads another five, skills he uses to provide a more global perspective. Edward holds an MBA in Finance from Columbia University and a BA in Economics from Dartmouth College. Edward also writes a premium financial newsletter. Sign up here for a free trial.