President Obama’s In-Box - Part I in a Series — The Economy
President-elect Barack Obama finds himself transitioning into the office at a time when the country is faced with a set of challenges both domestically and internationally with problem number one (at least for now) being the anemic state of both the domestic and international economy. Those of us invested in 401(k) equity mutual funds have seen the value of those holdings drop some 42% since the markets high a year ago resulting in a massive loss of wealth (albeit on paper if one has not sold out). Unemployment has now hit 6.5% and is likely to go higher as disappointing 3Q earnings/loss reports for US companies are nearly fully reported. The worldwide deleveraging continues as banks and credit offerers continue to both tighten terms and credit limits all the while hoarding cash infused by the Treasury under the TARP program. Business activity depends on access to credit that is reasonably priced on reasonable terms and both are lacking in this environment. Indeed, credit of any kind is becoming exceedingly difficult to find. The Libor (London Interbank Offering Rate) rate which is the rate at which banks loan to other banks had been running some 400 or so basis points over the US Fed Funds rate which in normal times would be pegged nearly even. That key rate has been blamed for the freeze up in the commercial paper markets on which business depends to fund day-to-day operations and here too the US Treasury has stepped in to provide liquidity but even with the drop in Libor over recent weeks we are not as yet seeing any indication that credit markets are freeing up. Admittedly this may take some time to take effect but current trends are not favorable for the broader economy as companies are under great pressure from their lenders to improve their cash positions which means they must cut their costs and for almost all of them this means shedding the single greatest driver of these costs — employees.
Things are not any rosier on the international economic scene. The IMF estimates that global GDP would fall to 2.2% in 2009, based on purchasing-power parity (PPP) weights, from 5% in 2007 and 3.7% in 2008 marking the greatest global recession since the Great Depression. Falling crude oil prices which so far have been the silver lining in this dark cloud may or may not continue as oil-producing nations from Venezuela, to the Gulf to Russia find their economies under increasing pressure as this source of wealth plummets. With prices currently around $60/barrel OPEC has just announced that another round of cutbacks in production could be in the offing to restore price levels to the $70-$90/barrel range which would have a further deflating effect on already weak economies. Should an international crisis with Iran arise that might curtail production or access to Gulf crude oil the effects on price and on the world economy could be devastating.
On the home front plans are afoot for a economic stimulus package starting at $100 billion on top of the $700 billion being injected into the financial markets by the Treasury and last years $100 billion tax rebates. Here President Obama will be challenged to keep this package in that range as pressures will build from his own caucus to expand that dramatically including a bailout of the US automakers and their UAW “partners”, both key Democratic constituencies while sober economic analysts like the Washington Post’s Steven Pearlstein are of the opinion that the only plan that makes economic sense for the automakers is a pre-packaged bankruptcy process that would tie federal aid to a haircut for the union membership in terms of wages and benefits, a total shellacking for stockholders and the firing of top management. Any such plan will be resisted fiercely in the Congress by Democrats who owe much to organized labor for recent electoral gains.
What form the economic stimulus package takes (and some form of it will pass probably with wide bipartisan support in the end) is where the rub will lie. Putting some of this money into infrastructure projects like roads and bridges probably makes some sense as these projects could ramp up fairly quickly and would provide jobs along with much needed transportation relief in some areas. The problem will lie, however, with certain lawmakers wanting to make sure their states get a share of this even though they probably have little in the way of need for same — think “Bridge to Nowhere” here along with any of the innumerable “Robert C. Byrd” Highways to Nowhere in West Virginia. Promised investments in alternative energies, while needed, would not have much immediate economic impact especially in a period of low global crude oil prices. With respect to President Obama’s longer term economic plans, if he’s smart (and he is) he will not push for a rollback of the Bush tax cuts intitially as raising taxes in the current economic climate on anyone is contra-indicated. But one can rest assured that many in his own party will not take this news as welcome although he will get good GOP support on this as well as support from some members of the Democratic “Blue Dog” caucus who might be persuaded to support this over their objections that any new spending be paid for without adding to the deficit.
What is not in doubt is that President Obama will take office at a time of the greatest global economic peril since the 1930s. It is the duty of all Americans to support him where we can in this hour of our country’s need.
