Obama's latest recovery plan

US government continues to rely on traditional measures to revive the economy and create jobs. In his latest effort to improve his approval rating which has sunk to a low of 44 percent, President Barack Obama has unveiled a $447 billion package to deal with unemployment an issue that many believe could cause him to lose re-election.
Speaking before a joint session of Congress, Obama demanded six times that lawmakers should act "right away" on his plan, saying that the proposal "will provide a jolt to an economy that has stalled, and give companies confidence to invest and hire." The President's latest proposed American Jobs Act includes $140 billion for major infrastructure projects and $70 billion in tax breaks for small businesses. Infrastructure projects include repairing and modernising 35,000 schools. The plan also proposes aid to states to prevent a possible 280,000 lay-offs.
Whether the President's latest recovery plan would be finally approved without some major changes is, however, difficult to say at this stage. Referring probably to the Recovery Act of February, 2009 involving the infusion of $787 billion into the economy, Senator Orrin Hatch, the most senior Republican on the Senate Finance Committee commented that "the President's plan simply doubles down on the same failed policies that he has pursued before. And, I don't expect they will be any more successful than they were the first time around." Another Republican Senator added that "this isn't a job plan. It is a re-election plan." Obama, however, insisted that "this isn't political grandstanding. This isn't class warfare. This is simple math. The question is whether, in the face of an ongoing national crisis, we can stop the political circus and actually do something to help the economy."
While bickering between the Democrats and Republicans and making a show of it to win the favour of voters is the standard stuff of US politics and should not be taken too seriously by the outsiders, the final version of the Jobs Act likely to be approved in the coming days would, in all probabilities, reflect a compromise after a great deal of debate between the two parties. This is so because both the parties would like the public to believe that they are striving to improve their lot without sacrificing their core principles which are well-known to all and sundry. Also, they are aware that American voters are now wary of partisan politics and want something concrete to better their standards of living. Anyway, it needs to be stressed that the route to recovery proposed by Obama is in keeping with the classical theory of business cycles and the easiest one to take because it does not involve any harsh measures but, as experienced in the past, it may not yield the desired results. We say this because the effectiveness of Keynesian model to revive the economy through increasing effective demand by resorting to deficit financing and printing more money is not guaranteed in the current environment as experienced by many economies. For instance, unemployment rate in the US is still stuck at over 9 percent despite the pumping in of about $800 billion into the economy in 2009 and raising the debt limit to nearly $14 trillion recently. Economies, in fact, have now become much more complex and proven relationships between various variables can no more be completely relied upon for formulating policy strategies. Therefore, while Obama's effort to improve the economy would appear to be well directed, there is no certainty that economy will get a boost and unemployment would be considerably reduced to bolster his chances in the next election. On a more fundamental level, US economy would not be primarily driven by Washington but by a change in the behaviour of various economic agents including the entrepreneurs, business community, consumers and investors. Of course, efforts would also need to be concentrated to stabilise the economy by narrowing the fiscal and external sector deficits. Additionally, leaders of other fast emerging economies, particularly of China, also need to show a co-operative attitude in reviving the US economy. All of this is also important to the rest of the world because US economy serves as an engine of growth for the global economy.
It needs to be pointed out, however, that while expansionary fiscal policies as proposed by the US government do have a chance to improve the prospects of American economy, Pakistani authorities need to resist the temptation to follow suit in the hope of a similar outcome. This is so because the Keynesian model was primarily devised not so much for its ability to capture details of recessions of economies flushed with capital but facing recessionary tendencies because of a lack of effective demand, but for its ability to demonstrate the possibility of a stable equilibrium at less than full employment. While the real wage rate adjusts in the Classical Model to move the economy to full employment, the real wage rate does not appear in the Simple Keynesian Model and equilibrium is achieved by adjustments in aggregate demand, which equals aggregate income. The equilibrium aggregate income need not imply full employment. The conditions in Pakistan are entirely different. Not only is our economy woefully lacking capital, but also energy, skilled manpower and law and order conducive to trade and industry. Contrary to the experience and expectations in the developed countries, expansionary fiscal and monetary policies would increase effective demand in the economy further without enhancing productivity and this would lead to further macroeconomic instability in the country.