The frailties of governing an economy steeped in crisis dawned on the US’ Democratic Party leadership in last week’s mid-term polls. In a historic turnaround of fortunes, the Democrats almost lost control of the US Congress, making it difficult for the President to implement his programmes without the backing of the Grand Old Party.
The political upheaval has been so dramatic that images of an immensely popular Barack Obama taking office less than two years ago, with the promise of turning the economy around, appear a distant memory. Obama stated then what the American people had been desperately waiting to hear: “The state of our economy calls for action: bold and swift. And we will act not only to create new jobs, but to lay a new foundation for growth.”
Most of those promises now lie in tatters. Indifferent economic performance together with the ineffectiveness of the stimulus package has now caused this major swing away from the Democrats. So flawed was the management of the economy that the Obama administration’s initiatives on healthcare reform, which Americans had awaited for decades, made little difference to its popularity.
Perhaps the administration’s most significant failing was its mishandling of the economic stimulus package that received presidential endorsement in February 2009. Initially, the stimulus package included in the American Recovery and Reinvestment Act (ARRA) of that year was estimated to provide $787 billion over a period of ten-and-a-half years. In January 2010, the congressional budget office estimated that the package would pump in $862 billion, of which $626 billion would be in the form of increased spending and $236 billion would be by way of tax cuts. While endorsing the Bill, the President had announced that it was a step which “marked the beginning of the end” of the economic crisis, the step needed “to create jobs for Americans” and to set the “economy on a firmer foundation, paving the way to long-term growth and prosperity”.
Yet, Obama’s early promise of job creation and economic recovery— made in the early days of his presidency—remains unfulfilled. This has given the opponents to increased government spending in the Republican camp the opportunity to campaign against a large government. And as the mid-term results have shown, this campaign has resonated well with the electorate.
Gross domestic product (GDP) numbers would confirm that a sustained growth path has eluded the US economy. This is despite heartening news in September from the business cycle dating committee of the National Bureau of Economic Research that the economic recession, which had begun in December 2007, had ended in June 2009. In other words, US business activity had bottomed out and the recovery had commenced.
However, in its latest quarterly assessment of global economic prospects, the International Monetary Fund (IMF) has reported that the US economy had experienced a noticeable slowdown during the second quarter of 2010. In the three months ended June, the economy grew at an annualized rate of 1.7%, a significantly slower pace than the 3.7% growth rate posted in the first quarter of the year. The latest set of projections for GDP growth indicates that in 2010, the US economy should grow at 2.6%, 0.7% below the projection IMF made a quarter earlier. What is more disconcerting is that IMF projects a smaller GDP growth for 2011: just above 2%, a projection that is lower than the previous estimate by 0.6%.
Contributing to this weakness in the economic recovery was the sluggish growth of personal consumption, which is the largest component of the country’s GDP. This has, in turn, been influenced by the high unemployment rate, which has remained at 9.6% since August. The broader measure of unemployment (which includes those working part-time, but seeking full-time employment) was 17% in October, up from 16.5% in June. IMF reports that the median duration of unemployment has been 20 weeks, nearly twice the peak level of the previous 40 years. Some analysts are already predicting that unemployment rate will increase to double digits in 2011.
When he had campaigned for the stimulus package at the start of his presidency, Obama and others in his administration had repeatedly insisted that federal funds would go to the “shovel-ready” projects, i.e., projects that would be implemented immediately, thus creating jobs instantaneously. White House economists Christina Romer and Jared Bernstein had predicted that the stimulus package would help keep the unemployment rate below 8%.
The United States government accountability office, which has been reporting on the uses of and accountability for ARRA funds, has pointed to the fact that projects in several prominent sectors have lagged behind targets. The problems in the implementation of the projects covered by ARRA have got so acute that the President has finally acknowledged that “there’s no such thing as shovel-ready projects”. With this admission of ineffective implementation coming only at the mid-term of his presidency, questions about the ability of Obama to make a real impact on the American economy should perhaps be given greater credence.
Biswajit Dhar is director general at Research and Information System for Developing Countries, New Delhi.
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