Obama, however, inherited an economy in freefall, and could not possibly have turned things around in the short time since his inauguration. President Bush seemed like a deer caught in the headlights - paralysed, unable to do almost anything - for months before he left office. It is a relief that the US finally has a president who can act, and what he has been doing will make a big difference. Unfortunately, what he is doing is not enough.
The stimulus package appears big - more than two percent of GDP per year - but one-third of it goes to tax cuts. And, with Americans facing a debt overhang, rapidly increasing unemployment (and the worst unemployment compensation system among major industrial countries), and falling asset prices, they are likely to save much of the tax cut. Almost half of the stimulus simply offsets the contractionary effect of cutbacks at the state level. America's 50 states must maintain balanced budgets. The total shortfalls were estimated at $150 billion a few months ago; now the number must be much larger - indeed, California alone faces a shortfall of $40 billion. Household savings are finally beginning to rise, which is good for the long-run health of household finances, but disastrous for economic growth. Meanwhile, investment and exports are plummeting as well. America's automatic stabilisers - the progressivity of our tax systems, the strength of our welfare system - have been greatly weakened, but they will provide some stimulus, as the expected fiscal deficit soars to 10percent of GDP. In short, the stimulus will strengthen America's economy, but it is probably not enough to restore robust growth. This is bad news for the rest of the world, too, for a strong global recovery requires a strong American economy. The real failings in the Obama recovery program, however, lie not in the stimulus package but in its efforts to revive financial markets.
