The New Stimulus Bill by Obama's Administration - Personal Statement Example

The New Stimulus Bill The American people elected Barack Obama as their President believing that he had unique vision to bring America out of global economic crises. They believe the saying of Mr. Obama after winning the Presidential elections that, “we don’t want big government or small government, we want smart government. Americans have moved beyond the old liberal vs. conservative argument on government and so should Congress. We will be getting smart government with the power to rebuild America if we support the President’s stimulus package.” Mr. Obama viewed that to meet broader economic goals it is utmost necessary to increase government spending necessary to create new jobs. Due to the worst ever global economic crises the American economy in line with a number of developed economies of the World, is suffering from deepest crises after the Second World War. Hundreds of thousands of People are loosing their homes; millions are loosing jobs, numerous increasingly suffering from poverty and hunger, lack of health facilities and overall future insecurity. New American Administration felt the need to act promptly so as to minimize the social and economic impacts of present economic crises. President was firm to believe that by giving a stimulus package, a new wave of activity, innovation, building and construction will start all over America, thereby creating millions of new jobs, increasing purchasing power of general public and boosting up the economic activities. (Chaddock 2009: Quinn 2009) It is worth to mention here that the current global economic crisis in fact was originated from the United States. Main factor, besides other factors was non payment of debts by millions of mortgage borrowers to the lending Banks and Financial Institutions. Borrowers could not make repayments stately due to high interest rates. Why interest rates were increased to that extent is a separate issue needs to be discussed separately. Non payment by the borrowers left the banks, lending companies and financial institutions close to bankruptcy, leading to economic collapse. Previous Administration of the United States tried to set right the affairs by awarding multi- billion dollars bailout package for banks, financial institutions and highly affected industries such as car industry. But the crisis was so severe that the package failed to give desired results and the economic condition of the country continued to deteriorate faster than expected. Keeping in view the severity of the situation, President Obama decided to float a bill in the Congress requesting for about 825 billion dollars proposed to be utilized towards increase in public spending, tax cuts and immediate assistance to such industries and companies that employed thousands of people but were in danger of going to bankruptcy. Congress passed the stimulus plan for $ 787.2 billion by a vote of 245 to 183 whereas the Senate passed it by 60 to 38. The bill was opposed by seven democrats whereas three Republicans supported it. This reflects deep differences of understanding the way to tackle the economic issue, between Republicans and Democrats. Democrats are of the view that by increased spending economic activity can be generated creating and/or saving millions of job opportunities, whereas the Republicans stress upon increase in the tax cuts. (Chaddock 2009) President Obama signed into law, “American recovery and Reinvestment Act of 2009” (the “Stimulus Bill”), for $787.2 billion, on the 17th February, 2009. After signing the bill into law, he declared it as ‘once-in-a generation’ chance for transformation of the US economy with bold steps. Salient aims of the bill are to create/save from loss about 3.5 million jobs, help families pay for housing, food and health care etc. Out of 787 billion dollars package $575 billion are allocated towards spending and $212 billion for tax breaks. The breakup reflects that the plan aims to boost up the economic activity and growth through heavy government spending and relief to public in taxes. Before discussing the positive and negative impacts of the stimulus plan in the short and long run we must have a brief overview of the allocations made in the 1073 page bill that will help us in understanding the direction and susequent results at the end. The bill allocates $308.3 billion to new spending, $212 billion for tax breaks and $116.2 billion to refundable tax credits for individual and married couples, $20 billion to clean energy in shape of tx incentives, $14 billion to higher education and $4.7 billion to tax credits for families having three or more children. Out of $308.3 billion allocation to government spending, $48 billion are to be spent on transportation infrastructure, $27.5 billion on highways, $8.4 billion on mass traffic, $ 11 billion on electric grid, $6 billion on alternate energy resources research, $86.6 billion on medicaid, $10 billion on information technology and $100 billion on education.( Marquit 2009: Quinn 2009) After passage of the bill the Economists and Analysts started their debates over the impacts of each and every sector of allocation. They have debated the overall impscts on the GDP and job creations. It is generally viewed in a number of the debates that by increasde spending in the existing conditions of employment, private spending will be crowd out leaving no affects over the GDP. In another point of view, under the present situation of underemployment and excess unemployment in the country increased spending wll have a multiplier effect resulting in increased private spending resulting in increase in the economic activities. There are intermediate assumptions also that assume partial decrease in the private activities that might also result in increased employment and hence GDP. All that depends upon how efficiently and effectively government spends in comparison with the private spending. (NAW 2009) Arguments both in favor and against the economic stimulus package are cotinued before and after the passage of the bill. No policy can deliver eitherway instantly but certain short term economic indicators might some times determine failure or success or at least direction of any economic policy. Those who are arguing in favor of stimulus package opine 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. In order to counter the financial markets uncertainities overall level of spendind needs to be increased so that when banks are not ready to finance the household and business there should be some source to help. Economic activities can not boosted up without household and business spending and that could have been possible only when banks and financial institutions would have been in position to lend and finance them. In the current situation banks and financial institutions are lacking funds as such they are reluctant to finance these sectors as was being done prior to global economic crises. Real public debt has stately increased by more than 80% of GDP as a result of financial markets meltdown due to prolonged economic recession. Therefore in order to block further slowdown in the economy and making the crises even worse, stimulus package was highly needed. The package will enable even the government to get out of large debt levels. (NAW 2009) Another group of analysts and economists question the usefulness of the package by arguing that the problem with the economy is not that household or business are not spending due to lack of finance rather investors are not ready to take risks despite having sufficient finance with them. They believe that the crisis was result of excessive spending by the household and lack of savings. By encouraging the household to spend more will cause more problems and the crisis would not decrease. Financial markets that afforded finance against mortgages without calculating the value of risk involved are actually responsible for the crises. The government itself lacks funds to support the stimulus package; therefore it will have to borrow money either from the domestic markets or from overseas. It will result in decreased spending by the household and business in case the government borrows from domestic market whereas it will have to borrow from overseas at high interest rates due to global recession. After all the government will have to repay the borrowings and for that purpose it will have to either create inflation or raise taxes on coming generations. Therefore, the government should take suitable steps in stabilizing the financial sector by necessary legislation and regulation. Most of the macroeconomists are against use of fiscal policy to generate the economic activity in the short run. They stress to take such measures that may boost up the confidence in the financial sector. Most of the money allocated in the package will not help the economy to move in the short run therefore people would not be able to get desired benefits out of it for at least years to come. The package might be helpful in long term economic growth rather than short term. The employment effects of stimulus package appear to have been overestimated because it would not be possible to chalk out programs for 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. If we have a critical review of the bill we will feel that a major allocation is towards tax relief while remaining goes to discretionary spending. This is that part of the bill wherein pork normally hides. For example how far allocation of about 335 million dollars for condoms will stimulate the economy? One billion dollars are allocated to federal rail road that has never turned profitable. Similarly $ 650 million are allocated to digital TV conversion coupons does not appear to add anything to economy. Analysts have estimated that about $90 billions out of entire package appears to be something that can be considered as real contribution towards stimulation of the economy. (Marquit 2009) Americans are not happy because they are seeing billions of their hard earned money is being wasted while they are loosing jobs and Wall Street is being paid bonuses and rewards for their ‘Excellent performance’. Government that is already facing budgetary deficit of about $1.2 trillion will merely add another $800 to 900 billion to it. This entire burden would pile up onto next generations. REFERENCES Chaddock, G. R. (2009, Feb 14). Obama wins his economic stimulus package, but without the bipartisanship he sought. Retrieved May 3, 2009, Web site: http://features.csmonitor.com/politics/2009/02/14/obama-wins-his-economic-stimulus-package-but-without-the-bipartisanship-he-sought/ NAW. (2009, Feb). New Economic Stimulus Package Expands Employer Obligations for COBRA Coverage. Retrieved May 3, 2009, Web site: http://www.naw.org/nawnews/news_article.php?articleid=564 Marquit , M.(2009). Economic Stimulus Plan: How Will It Help Your Personal Finances?. Retrieved May 3, 2009, Web site: http://www.bizzia.com/yieldingwealth/economic-stimulus-plan-how-will-it-help-your-personal-finances/ Quinn, J (2009, Jan 27). Economic "Stimulus" Package: A Sign of Things to Come. Retrieved May 3, 2009, from About.com Web site: http://usconservatives.about.com/b/2009/01/27/economic-stimulus-package-a-sign-of-things-to-come.htm Read More