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September 24, 2017

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Obamanomics faces a bottomless pit

That President Obama is facing up to the economic crisis at breakneck speed is beyond question. Although he has been in office barely a month, he has already achieved a major goal of his administration by wresting a US$787 billion stimulus package out of a Congress laden with skepticism in his own party and almost unanimous rejection by Republicans.

After less than three weeks in office, he had his Treasury Secretary introduce a new plan to rescue banks and get credit flowing, but Timothy Geithner's proposals were so vague that the response in Congress and the financial community has been consternation. Last Wednesday, the President announced a US$75 billion plan to reduce home foreclosures, yet another controversial attempt to stem the downward economic spiral.

Doubtless the president is coming up with solutions, but is he coming up with the best ones? How much do his plans lead to resolution of the problems confronting America, or do they merely delay inevitable measures that should be taken now?

The financial system is virtually paralyzed, saddled with non-performing mortgages and trillions of dollars of exotic derivatives based on them. These toxic assets cannot even be valued because there is no market for them.

The real estate crisis deepens, with some two million foreclosure evictions, millions more homeowners facing foreclosure, and additional millions whose homes are worth substantially less than what they owe. An estimated thirteen million U.S. mortgages are either in default or exceed the value of the home that insures them. That number will grow as foreclosed property floods the market and values continue to sink.

Among the consequences of inability to pay, unavailability of credit and fear to purchase in an economy so heavily dependent on consumer spending are plant closures, bankruptcies and soaring unemployment. Nearly 1.7 million jobs have been lost in the past three months alone, and 5 million workers are collecting unemployment benefits.

President Obama aimed first at creating or saving jobs. He sought proposals almost immediately after the election, leaving it to the outgoing Bush administration to deal with the banks and the first US$350 billion of the Troubled Assets Relief Program. Although Republican lawmakers voted almost unanimously against the US$787 billion stimulus package, quite a few Republican governors, who have real economic responsibility in their states, have broken ranks and spoken out in favor of it. The opponents claim that tax breaks stimulate recovery but spending does not. They assert that their opposition is prompted by profound philosophical differences and concern for fiscal responsibility.

A deeper truth behind all this is that the Republican leadership calculates that no matter what action the administration takes, recovery will not gain momentum before the 2010 elections. Therefore the Party's best strategy is to campaign on the claim that Democrats are squandering the taxpayers' money and burdening our children and grandchildren with a crushing national debt.

Most economists are on the president's side of the spending versus tax cuts debate. Data over decades shows that government spending injects money into the economy and creates jobs faster than cutting taxes. Recent history leads to the same conclusion. Job creation during the tax-cutting Bush presidency was notably anemic, particularly in the private sector.

All in all, President Obama rates high marks for leadership in pushing through the stimulus package, while almost all Republicans in Congress should be awarded gold stars for disciplined political self-interest and the guts to gamble that Obamanomics will be a political and economic failure by election time in 2010.

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