New Economic Stimulus Bill - Essay Example

New Economic Stimulus Bill The economic stimulus bill passed by the Congress on the 17th February, 2009 bears tremendous macroeconomic effects over the National as well as Regional economies. It is visualized that it directly impact on the performance, structure and behaviour of the United States economy. In order to analyse and understand the economic targets behind the bill, that has been declared as an historic chance for boosting up the US economy, we will have to study the views of economists over estimated impacts of the bill. How it would affect GDP, unemployment, prices indices, National economy input, output, inflation, savings and investments, international trade and above all the confidence in financial markets. It is well known to everybody that current global economic crises has its roots in the United States, where one of the biggest financial institutions collapsed due to non payment by borrowers to whom the banks freely lent huge amounts against various mortgages, specially house mortgages. The banks and financial institutions badly suffered with the collapse of Lehman Brothers in the United States. The banks and financial institutions World over hurt the public trust as they stopped or restricted further lending to housing industry as well as business. All these circumstances added to the worst global economic crises. The World vide economies went to worst recession after the Second World War. (PlentyMag 2009) Different countries took different steps they considered suitable for boosting up their own economies, United States gave two stimulus packages, one by the Bush Administration and the other by the Obama Administration. Bush Administration pumped in billions of dollars prior to current economic crises. It was specially meant for housing industry that was indicating something worst. Obviously that much money failed to give the desired results and ultimately the banks and financial institutions either became bankrupt or reached close to bankruptcy. It is understood that when the financial system of any country either collapse or it looses the public confidence than the economy of that country can not move forward. Therefore, The American President decided to float in the Congress another economic stimulus bill for about $825 billions. An economic stimulus bill is a sort of federal legislation needed to step in money into the economy to curb the economic recession. On Feb 17, 2009, a new economic stimulus package was passed and signed into law by President Barack Obama with just three Republican votes to promote the $787.2 billion plus package. This bill was passed after heated discussions at all the forums with the expectations that it will meet its goals to pull the economy out of downward trend and encourage the companies and individuals to change their behaviour. (Deveto 2009: Gott 2008) This stimulus bill constitutes about 7 percent of the real Gross Domestic Product (GDP) of about $12 trillion. After working through their psychoanalysis, the government and economic think tanks reason out that this stimulus package will help raising the GDP by about 3.7% by the end of 4th quarter of 2010. The economists also presume that this 3.7% increment in GDP would be helpful in creating and restricting loss of jobs by that time. It is estimated that under the current economic trends the rate of unemployment would rise as high as to 9% but by the end of 4th quarter of the year 2010, this rate will come down to 7%. ( Gott 2008) In order to discuss the positive and negative impacts of the bill over the economy, we must have a brief overview of the allocations and sectors of allocations. The bill allocates $308.3 billion to new spending, $267 billion to social services, and $212 billion to tax breaks. The theme behind these allocations is to put more hard currency into the economy – spend more or tax less. It aims to provide tax relief and tax cuts to individuals and companies so that they could spend more and more. In the Health care sector, the plan allocates an additional $86.6 billion for Medicaid and $19 billion to modernize health information technology. The package also allocates a huge amount of about $100 billion for education that includes $15 billion to increase Pell grants for low income students by $500 to $4,860 and $13 billion for grants to schools that are providing educational facilities to low income families. Dollars 48 billion are allocated for improvements in the infrastructure, $57 billion for environment energy, $11 billion for housing and scientific research and $ 6 billion for energy research. For giving tax relief to individuals couples and workers and helping the handicaps and retirees $267 billion have been allocated in the bill. Out of this allocation incentives are proposed to be given to new house and/or car buyers. (Banks 2009) Mr. Obama in his election compaign promised to give such a bill after he is elected. He committed to give tax relief through tax cuts and incentives for badly hit business and industry.After passage of the bill the Economists and Analysts opined over the impacts of the economic package and economic stimulus plan. The overall impacts of the package on the GDP, investment, savings and job creations are being discussed at various forums. The positivities of the economic package thatare agreed to by a good number of economists and analysts are as under: Increased government spendig will have multiplier effect that will increase private spending as well. It will help generating the economic activities and thus new employment opportunities. There are intermediate assumptions also that assume partial decrease in the private activities that could also result in increased employment and increase in Real Gross Dometic Product. It depends upon the government as to how efficiently and effectively it spends as compared to private spending. It is an other opinion that under the current situation when financial markets are going to collapse, stimulus package was must to counter the existing slump in the private demand. By increasing spending levels public confidenc in the financial system is expected to be restored to some extent. As the financial institutions are reluctant to lend and finance the housing and business sectors, government spendings would provede them another source for the time being. (NAW 2009) The economists and analysts who question the usefulness of the package argue as under: The cause of crises behind is the investors who are not inclined to invest despite having sufficient funds because of feared risks. In case the household is supported to afford excessive spending, it will not help the economy any way; rather it will create further problems because of temporary incentives. They believe that the crisis was result of excessive spending by the household and lack of savings. The government will have to borrow the needed funds for the package either from internal resources or from overseas. In case it will arrange funds by borrowing from internal resources that will decrease private spending and results will remain the same. In case the funds are arranged from overseas, it will cost too much to government in shape of high interest rates prevailing in the overseas market. In order to reap temporary political and economical benefits the government will shift the burden of heavy debts and interest over the shoulders of children of generations to come. Therefore, the government should take suitable steps in stabilizing the financial sector by necessary legislation and regulation so that the investors may gain confidence and come up for investment. In that way only long term economic stability can be expected. (PlentyMag 2009) Americans are expecting immediate and short run results. The package might be helpful in long term economic growth rather than short term. Most of the macroeconomists are against use of fiscal policy in order to generate the economic activity in the short run. Therefore such measures are needed to be adopted that may boost up the confidence in the financial sector that will help generating the economic activity and general public would be able to reap its benefits within minimum possible time. Under the proposed programs of investment and spending, it appears to be impossible to plan effective and targeted spending in the presence of about 7 to 8% of already existing unemployed workforce. Additional spending over the proposed sectors might attract already employed persons resulting in less job creation. Government spending program on the infrastructure, and particularly on health, energy, and education, will mostly appeal employed persons from other business and industry rather than creating new job opportunities. New package will bear very small increase in the GDP and employment. The bill is feared to speed up the transformation of the United States from existing Capitalist system to a Socialist system. The bill will encourage the Executives of the banks, financial institutions and companies to continue their existing policies of generous and insecure lending and also avail heavy salaries, bonuses and perks at the cost of tax payers. A call to the Nation was needed to be made for helping out themselves with the assistance of their families and known, employing their own visions, take risks for climbing out of crises. Instead the government itself has come up to play the role. It appears that the goal of the bill is merely distribution of money for political gains and not revival of the economy. A ‘Buy American’ clause is stated to have been added to the bill. This clause is highly objected to by the international trading partners of the Unite States. It might cause damage to its international trade. European Union’s ambassador John Brunton said, “If the first major piece of legislation that he signs is one that is seen as damaging to the economic interests of other countries in a way that is unneeded and uneconomical, then his capacity to give the sort of leadership the World needs at this time is substantially and unnecessarily reduced”. (Gott 2008) The bill reflects certain pork as well. Major allocation is made towards tax relief while remaining goes to discretionary spending. This is that part of the bill wherein pork normally hides. About 335 million dollars allocated for condoms, how far will stimulate the economy? One billion dollars are allocated to federal rail road that has never turned profitable. $ 650 million are allocated to digital TV conversion coupons that also do not appear to add anything to economy. Analysts and economists are of the view that out of about 825 billion dollars package about $90 billions appears to be something that can be considered as real contribution towards stimulation of the economy. REFERENCES PlentyMag, (2009, Mar 24). Obama’s new stimulus package creates jobs through green investments. Retrieved May 3, 2009, Web site: http://www.mnn.com/earth-matters/politics/stories/obama%E2%80%99s-new-stimulus-package-creates-jobs-through-green-investments Banks, E. (2009). Economic Stimulus Package 2009 - How Will Obamas New Stimulus Package Affect Your Mortgage. Retrieved May 3, 2009, Web site: http://ezinearticles.com/?Economic-Stimulus-Package-2009---How-Will-Obamas-New-Stimulus-Package-Affect-Your-Mortgage&id=2116748 Deveto, V. (2009). The stimulus package Energy and New York State. Retrieved May 3, 2009, Web site: http://www.area-alliance.org/documents/stimulus%20issue%20brief.pdf Gott , L (2008, Dec). Talk of a 2009 Obama Economic Stimulus Plan: U.S. Economy Package - Tax Cuts, New Jobs, Infrastructure Projects? Retrieved May 3, 2009, Web site: http://americanaffairs.suite101.com/article.cfm/talk_of_a_2009_obama_economic_stimulus_plan Read More