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John Quiggin

Obama must be bold

John Quiggin Australian Financial Review

15 January 2008

As the long years of the Bush Administration draw to a close, incoming President Barack Obama is faced with the need to deal with pressing consequences of failure on many fronts at once. Rarely has a new president faced so many, and such intractable problems, all apparently demanding immediate action.

The Middle East is in crisis over the invasion of Gaza, the war in Afghanistan has spilled over into Pakistan, and the Guantanamo Bay detention campstanding affront to American values. Longer term failures include Social Security, health care and climate change.

Overshadowing all of them is the global financial crisis that grew, unchecked through the last two years of the Bush Administration, before erupting in the cataclysmic events of late 2008.

The $700 billion financial bailout package has already proved inadequate, as well as being subject to the mismanagement that has characterised every aspect of the Bush Administration. While the risk of total financial meltdown has receded, the bailout has done nothing to restart bank lending. At best, it is a down payment on the effort needed to ensure that the recession does not turn into something worse.

Obama’s stimulus plan, currently being debated by the new Congress calls for $775 billion in tax cuts and new expenditure. But the need for intervention won’t stop there. The analysis released by Obama’s team suggests that even with the proposed stimulus, the rate of unemployment will reach 7 per cent in the course of 2009 and remain at or above that level until 2011. The analysis suggests that the stimulus is too small, and too focused on short-term impacts.

Then there are the business tax cuts proposed as part of the package. The most important of these are tax subsidies for businesses taking on new employees. accelerated ‘bonus’ depreciation for new investments, and a provision allowing larger tax writeoffs for past losses.

As Australian experience has shown, proposals for job subsidies face the difficult problem of distinguishing between new and existing jobs. Current reports suggest that this proposal will abandoned.

Accelerated depreciation is even more problematic. There is little to suggest that it provides any real stimulus, while generating substantial scope for abuse.

The tax write-off proposal is the worst of all, rewarding past failure. The obvious beneficiaries are the financial institutions that created the mess, leading Nobel prizewinning economist Joseph Stiglitz to describe the measure as ‘a hidden bailout’.

But it is precisely this measure that is most appealing to Congressional Republicans. The Republicans have shown themselves both unwilling to support stimulus measures (most voted at least once against the Bush package) and unable to offer any coherent alternative. However, they invariably support tax cuts. Obama’s hope for an overwhelming majority in support of his package therefore depends critically on this element.

Obama is a natural centrist. His campaign rhetoric included strong claims about a ‘post-partisan’ approach to politics. He appealed to a long-standing American faith in bipartisanship, reflected in a tradition of co-operation between Democratic and Republican legislators.

However, there are strong pressures in the other direction. Despite the bipartisan rhetoric, the actual level of partisanship in US politics has increased greatly. Over the last thirty years, the Republican Party has converted itself from a broad coalition to a disciplined, ideological, conservative party.

The Democrats have been slow to follow suit. But the Internet activists who mobilised millions of supporters in the election campaign have no taste for the bipartisan dealmaking they associate with decades of Republican dominance. Their influence is already making itself felt.

Many Democrats see little benefit in pursuing bipartisanship any further than a deal with the handful of remaining Republican moderates. Regardless of how many Republicans support it, responsibility for the success or failure of the package will rightly rest with Obama and the Democratic majority.

The stimulus package will provide the first big test of Obama’s approach to government. There are powerful political arguments for a centrist approach. But, as with Roosevelt 75 years ago, the force of events seems likely to push his Administration away from ‘safe’ policies and consensus politics. Radical challenges demand radical responses.

John Quiggin is an ARC Federation Fellow in Economics and Political Science at the University of Queensland.

John Quiggin is an Australian Research Council Federation Fellow in Economics and Political Science at the University of Queensland.

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