Days of open wallet
Barack Obama is promising a vast new public-works programme as his solution to America’s economic woes
NO SOONER had the worst job losses in a generation been reported (on December 5th, a Friday), than Barack Obama stepped up his calls for an ambitious fiscal stimulus package, taking to the airwaves twice over the weekend to do it. Not only would his plan prop up the sinking economy, he said, but it would equip America with more productive and efficient infrastructure, aiding future growth. His remarks gathered infinitely more attention than those of the actual president, who confined himself to vague optimism and a hard-to-substantiate claim that the frozen financial system is starting to thaw.
There seems no doubt that resistance from politicians and investors to a seriously big package is melting. The December 5th figures showed that America lost 533,000 jobs in November, the biggest monthly loss in absolute terms for 34 years, though at 0.4% of the workforce, it was a bit less bad—only the worst since 1980. The unemployment rate rose to 6.7% from 6.5%, and would have risen far more if so many unemployed workers hadn’t given up looking for work. Losses were especially severe in construction, retailing and manufacturing. Macroeconomic Advisers, a forecasting firm, estimates that the economy will shrink at an annual rate of 5.5% this quarter and 4.25% next. A fiscal stimulus of $500 billion over two years would come too late to alter that but could bring the recession to an end by mid-2009 and hold the unemployment rate to 8.5%, the firm estimates. Without such a stimulus, the recession would stretch into the third quarter and unemployment would hit 9.5%.
For once, politicians and economists agree the deficit should not be a worry. The credit crunch and the collapse in the stockmarket mean households are trying to consume less and save more. But for them to do so collectively, some other sector must consume more and save less. Corporations are not going to do it: they are cutting investment and hoarding cash in the hope of staving off a liquidity crisis or even bankruptcy. Demand is not going to come from the rest of the world: many other countries are in recession. Even in China, which is still growing fast, demand for foreign goods is contracting sharply: by 18% year-on-year, according to figures released on December 10th. So that leaves the federal government.
Mr Obama has not yet provided any precise details of the sort of fiscal plan he will seek to drive through Congress once he takes the reins at noon on January 20th, although speculation has centred on a package worth some $300 billion a year (or 2% of GDP), comprising hiring credits for employers, permanent tax cuts (or credits) for workers and a public-works programme which, he pledged, would be the biggest since Dwight Eisenhower created the interstate highway system in the 1950s. (That project, at $400 billion in today’s dollars, cost four times as much and took three times as long as planned.)
State and local governments account for most public investment (see chart). Their spending on highways and schools for baby-boomers lifted such investment above 3% of GDP in the 1950s and 1960s. But the federal government pays for much of it, and so gets a significant say in how the money is spent.
The conundrum is that it is hard to spend both rapidly and wisely. America’s transport infrastructure is in need of overhaul (see article), and many worthy projects exist that could boost energy efficiency or alternative fuel sources. But there may not be enough of them to absorb large sums quickly. Often such projects are kept on the drawing board not by lack of money but by politics and planning. Adapting the electricity grid, for example, to use more alternative energy may require new transmission lines for which approval can take years. In September the non-partisan Congressional Budget Office estimated it would take two years to spend just 60% of $37 billion in infrastructure funds in a stimulus bill passed by the House of Representatives (but not yet acted on by the Senate).
State and local governments say they have thousands of “shovel-ready” projects that could be started as soon as federal money becomes available. The Conference of Mayors, seizing the moment, released an 803-page report this week listing 11,000 projects which, they claim, would create more than 800,000 jobs over the next two years. But the economic merit of many is dubious. Their list includes $1.5m to coax prostitutes off the streets of Dayton, Ohio, and $200,000 for a dog park in Hercules, California. Douglas Holtz-Eakin, a former economic adviser to John McCain, says many unfunded projects are “ready to go because they were drawn up, reviewed and rejected” by government. Mr Obama has promised not to spend money the “old Washington way” but those ways are hard to change.
Mr Obama also considered an early implementation of the $500-per-worker or $1,000-per-household tax cut (or, for those who don’t pay enough income tax, a payment) which he promised during the campaign. But tax cuts provide limited bang for the deficit buck: only about 30% of last summer’s $110 billion in tax rebates were spent. The impact could probably be larger now, partly because more households are strapped for cash, but also because a permanent boost to income is more likely to be spent than a one-off rebate.
Even so, such rebates will raise the deficit sharply relative to how much they boost growth. And that highlights another problem. The budget deficit could top $1 trillion, or 7% of GDP, this fiscal year. That may be necessary in the short run, but could be dangerously destabilising before long. Rudolph Penner, a former CBO director, predicts that the federal debt (excluding debt owed to other parts of the federal government) will soar from 38% of GDP this year to 55% at the end of 2010, the highest since the early 1950s, when the country was still in hock from fighting a war.
Japan offers a cautionary tale on the risks of infrastructure-based stimulus. A spree of public-works projects designed to spur growth left construction equal to an unwieldy 20% of GDP, compared with 10% in America, and drove the national debt to one of the highest levels relative to GDP in the OECD. America’s construction industry is not as politically powerful, inefficient and corrupt as it historically has been in Japan, and Japan worsened its slump by increasing the sales tax to deal with the debt. Still, Mr Obama should take note if he wants to get his stimulus right.
Causes of conflicts
Why wars happen
Analysing the causes of conflicts
THERE have been nine wars and almost 130 violent conflicts across the world this year, according to an annual report released on Monday December 15th by the Heidelberg Institute for International Conflict Research, a think-tank. The study classifies conflict broadly to include peaceful disputes over politics or borders (low intensity), as well as those involving sporadic or constant violence (medium or high intensity). In 2008 previously non-violent conflicts escalated into violence in countries such as Kenya and Yemen. Ideological change is both the most common cause of conflict and the root of most wars, but there is rarely only one cause of dispute. Congo’s ongoing conflict encompasses a battle for its mineral resources and, according to some, an invasion by another state, Rwanda.
Boom to bust and worse
The state of the economy in Russia looks worse with each passing day
ECONOMIC growth and political stability: those were the two proudest achievements of Vladimir Putin and his ex-KGB associates in the eight years since they gained control of Russia. Now the economy is looking wobbly—industrial output in November slumped by 8.7% compared with a year earlier, according to figures published on Tuesday December 16th—the big question is whether the regime’s political control will crack too.
The rouble—a rock-hard currency since the oil price started to rise—is losing value at an accelerating rate, down by 3% this week against a basket of currencies. It has lost around 15% of its value since the summer. Even so, Russia’s huge foreign-currency reserves are steadily shrinking as the authorities defend the rouble. They are down by more than a quarter, or around $160 billion, from their August peak of $600 billion.
Russia has been hit by a double blow. One is a collapse in the oil price. Urals crude is trading around $44 a barrel, whereas Russia’s budget had pencilled in an oil price of $70. The other is the credit crunch which means an end to cheap loans for an economy that had become used to a flood of petroroubles.
The stockmarket has fallen by some 70% since its peak in May. Lay-offs are mounting. Western credit ratings agencies are downgrading Russian banks; earlier this month Standard & Poor’s downgraded Russia’s sovereign debt for the first time in nearly a decade. Industrial production is plummeting: this week marked the steepest fall since the crisis of 1998. Oleg Vyugin, a former deputy finance minister, reckons that 2009 may see GDP shrinking by as much as 4%. (The Economist Intelligence Unit, more optimistically, has cut its growth forecast from 3.7% to 3%.)
Finding an economic-policy mix to deal with that is a daunting task. Russia’s main macroeconomic problem of the past two years—inflation—is far from vanquished: it was down only slightly to 13.8% in November. But a far bigger problem is maintaining growth in an economy that during the boom years borrowed recklessly and used the money for higher living standards rather than diversification.
The rouble’s depreciation does cut Russia’s current-account deficit, by making imports pricier. It takes some of the strain off the budget. But it does not help much else. Russia’s underlying uncompetitiveness was disguised by the oil boom. Now it is exposed.
Nor do bail-outs seem to be working. A $200 billion programme is helping Kremlin-linked companies stay afloat (and also consolidating the authorities’ control of the economy). But much of the money that was meant to unblock the financial system is instead going offshore. Confidence is shrivelling.
A rise in the oil price might buy the Kremlin some time. President Dmitry Medvedev last week suggested that Russia might even join OPEC, the oil-producers’ cartel. It is unclear how that would square with the nominally private ownership of most of Russia’s oil industry, or Russia’s membership of the G8 club of rich industrialised countries. OPEC members themselves may be unconvinced by Russia’s new-found enthusiasm.
Public discontent is beginning to simmer. The problem is less the tiny self-proclaimed opposition, but spontaneous protests by citizens fed up with incompetent and arbitrary behaviour. A protest by drivers in the Russian far east brought a nervy response from official Kremlin media. The regime’s popularity rested on a combination of higher living standards and selective repression. The economic crisis has weakened the effect of the former. The latter is one of the few options left. The signs are ominous. Memorial, a group that champions the cause of truth about the Stalin era, has had its computers seized in a police raid. The Soldiers’ Mothers Committee, which campaigns against conscription, says law-enforcement officials have asked its staff to prove that their offices are not used for drug-dealing.
For now, the economic crisis is scarcely discussed in Russia’s mainstream media, which has come under steadily tighter control since Mr Putin came to power. That is not likely to persuade Russians that the authorities have everything under control.