It’s Friday 6th November in New Mexico. Friends and neighbours who haven’t seen each other since the election are remarking on the landslide victory of President-elect Barack Obama and the shift in power in Congress. There seem to be more garden stakes and posters on display than there were on Monday!
Barack Obama has just made his first speech as president-elect. No surprises on the topic – the economy, stupid. The issue that 62 per cent of Americans said was the most important thing in determining their vote.
With America, the UK and a host of other countries going in to recession, the landscape that Obama surveys is one of home foreclosures, business failures, car manufacturers on the verge of collapse and pension plans plummeting in value. Figures showing that 1.2million people had lost their jobs so far this year are spooking markets and leading them to believe that the slowdown is going to be longer and more painful than previously envisaged.
What might Obama be able to offer the American people, and to the global economic community?
First, a stimulus package is urgently needed. Obama says if it is not agreed this year, it will be the first thing he does as president. The package must support Main Street, not just Wall Street, with tax breaks to middle income families and targeted government spending. And tax cuts targeted at the poor and middle income families will have the greatest positive economic impact, in stark contrast to Bush’s tax cuts for the wealthiest. Although tax rebates are not always successful – they are often saved rather than spent – this time they are likely to have more of an impact with many families so squeezed by the credit crunch, so unable to access finance at an affordable rate.
Job losses so far have been in retail, construction and manufacturing. But state and local governments are committed to balanced budgets which, given falling revenues, is going to equate to cuts in expenditure unless tax receipts start to increase or Federal government steps in. So, part of the stimulus package should include support for state and local government to avoid government cuts which would exacerbate declines in consumer and business expenditure.
Tax incentives for business too, to encourage the two things the US and global economy need right now – jobs and investment – would also be welcome. These initiatives will increase the government deficit and that is a good thing in a recession. We are all Keynesians now (even The Economist says so), but it is imperative that this extra government largesse is only temporary – in the UK the Tories and Lib Dems just don’t get this. Spending is needed now to get us through the downturn, to provide a boost to the ravaged business and consumer sector. In the medium term, Obama must give his commitment to higher taxes (or lower spending) to repay today’s generosity, because if it’s not temporary, interest rates will go up, squeezing out private sector investment and spending.
Second, the source of the problem must be addressed. What hasn’t happened yet is a review of what went wrong so that never again are banks and financial institutions able to dabble in some of the more risky business practices that have got us in to this recession. The president should set up a commission to look at transparency, risk and reward in financial markets. At the international level, the IMF must do the same.
Finally, the US must not look inwards. Reform of our global economic structures is warranted – a new Bretton Woods settlement – to oversee, alert us to risks and support the global economy and individual countries. Commitments to the Millennium Development Goals, an environmentally sustainable economic policy and free trade are crucial to ensure that it is not the poor and future generations who end up the biggest losers from our failed financial and economic hegemony. Although advocated by Europe these changes won’t happen without America’s support – a point made forcefully by Gordon Brown in recent days.
Gordon Brown, more than any other world leader, is well-placed to advise and support Obama as he sets out his economic strategy. During the recent banking crisis, the world followed where Brown led. His experience as Chancellor, through the Asian and Russian crises of the 1990s, the bursting of the dot com bubble and his contacts and understanding of economic and financial markets give him the expertise as well as political leadership to continue shaping the policies to take the economy forward.
There are such high hopes for Obama’s presidency – witnessed by the millions of volunteers and donors over the last eighteen months and by the outpouring of euphoria that greeted his victory. The challenges that America faces today do not end at her borders. To succeed, Obama will need to build global coalitions and consensus, to avert a world-wide depression.