Briefing: Stimulus

Each Sunday this blog briefs the basic background information on a major international event recently in the news. This week: Barack Obama signs into law a $787 billion stimulus Act.

The passage of the world's largest ever economic recovery package is US President Barack Obama's first major achievement in office. But it came without the hoped-for bipartisan support, and on its own it will be unable to rescue the troubled American economy.

The American Recovery and Reinvestment Act (ARRA) of 2009 became law last Tuesday after President Obama appended his signiture to a compromise hashed out between the two houses of the US Congress the week before. Designed to alleviate and shorten the current recession by boosting demand in the US economy, it is a mixture of government spending on infrastructure and social programmes amounting to two-thirds of the total, and tax cuts accounting for the final third. After the inaction of the outgoing Bush administration in its final months in office, speed was seen as essential to shore up collapsing confidence in the economy and prove that Washington was capable of enacting effective and timely aid. The passage of such a large bill less than a month after taking office is an undoubted success for the new President.

However, the neccesary haste with which it was passed carried it own problems. Detailed scrutiny of the bill in such a short timeframe was impossible, and the Act in its final incarnation is far from flawless. It contains feast of 'pork' - projects designed not for their economic effectiveness but to win voter support for individual congressmen and women - protectionist signals to foreign countries with provisions to 'Buy American', and measures making it harder for foreigners to obtain Visas. More important in terms of the image of Mr Obama was his failure in the time avaliable to win over more than three Republicans to his cause. The rest of the Senate Republicans and the entire Republican contingent in the lower house adamantly opposed the bill, undermining Mr Obama's prior claims to usher in a new era of bipartisanship. Yet it is the Republicans who deserve most of the blame for this, holding out for package far more skewed towards tax-cuts than government spending, and it is they rather than the Democratic President that most polls shows Americans blaming for the lack of compromise.

Even if most macroeconomists supported the stimulus package, there remains great uncertainly as to whether it will succeed. What seems clear, however, is that on its own it will struggle to do so, and the Obama administration must follow it up with a comprehensive package to help rebuild a functioning financial system, without which the economy as whole stands little hope of recovery. So far the proposals to do so have been worryingly vague but there is an increasing consensus that radical government intervention may be neccesary in the banking sector, with once unthinkable options - such as nationalisation - firmly in prospect. Unless the financial underpinnings of the economy are reconstructed, the early success of President Obama in getting his stimulus package passed will be for nought.