Obama's money talks but will US listen?

IT is an ambitious plan on which the world's economy hinges. And only one man could have the audacity of hoping to pull it off.

US President-elect Barack Obama is betting that a spending bonanza, worth US$775 billion (£530 billion) will rescue the globe's biggest economy from further financial ruin and set up his own administration with a lasting legacy.

But the impact of the fiscal stimulus package, which combines tax cuts and infrastructure spending, will reverberate far wider than just the boardrooms across America.

The United States' share of world GDP has been in decline since the start of this century, but at 30 per cent it still boasts the world's largest economy.

Following his election victory, Mr Obama said that after taking office he would "confront this economic crisis head-on by taking all necessary steps to ease the credit crisis, help hard-working families and restore growth and prosperity".

Yesterday he met to discuss the crisis with his allies. "The reason we are here today is because the people's business cannot wait," he said as he arrived for talks with House Speaker Nancy Pelosi, a Democrat.

"We've an extraordinary economic challenge ahead of us," he added.

He warned of a "sobering" job report at the end of the week, further compounding the economic gloom facing America.

The plan now looks unlikely to be introduced before mid-February, a few weeks after he is sworn in on 20 January.

The new president will be plunged straight into negotiating with the House of Representatives and the Senate to win support for the plan.

Domestically, it promises to divert the Bush administration's tax cuts for the wealthy to the poor and middle classes instead. Supporters of the plan argue that it is crucial: the US recorded a loss of half a million jobs in the normally busy retail month of December alone.

President-elect Obama's package aims to create 2.5 million jobs; no small order in an economy that has been losing market share since the turn of this century.

And he also aims to spend on America's ailing infrastructure, including roads, bridges and schools and a splurge on "green" technology.

There will have to be compromise, however, to make it more palatable to Republicans, upon which success of the plan depends.

One area in which the president-to-be has had to give way is tax cuts, which will now account for a larger than expected 40 per cent of the entire package. Individuals will be offered $500 (£344) tax cuts while couples will get $1,000 off their bills.

Businesses will get $100 billion (£68 billion) in total.

Another provision brought to the negotiations by the Obama team would award a one-year tax credit costing $40-50 billion to companies that hire new workers, and would provide other incentives for business investment in new equipment.

The tax relief proposals are designed to attract support from fiscal conservatives in Congress, who prefer cutting taxes to increasing federal spending.

One of the new president's biggest fears is that the US would be hit by deflation, where prices and wages tumble, making the country a less desirable place to invest.

Big spending of about $500 billion is also planned to help prop up the US's beleaguered construction industry, which has been knocked off course by the massive slump in house prices.

Federal Reserve officials, who have cut the benchmark interest rate to as low as zero to combat the recession, are backing this.

San Francisco federal president Janet Yellen said that "it's worth pulling out all the stops" in a recovery plan. Chicago federal president Charles Evans said a "big stimulus is appropriate".

Anthony Champagne, a political science professor at the University of Texas in Dallas, was optimistic of the plan getting political approval. "Obama has the advantage of an economic crisis and the advantage of coming after an incredibly unpopular administration," he said. "Their chances of success are very high."

But not everyone is convinced of the merits.

There are concerns about America's growing debt levels: it is anticipated that this will spiral past $12 trillion (£8 trillion) this year.

And there are also suspicions that the new president is conflating all spending as "emergency" funding.

Robert Bixby, the head of the Concord Coalition think tank, has warned: "I do worry that politicians will take the current climate as a signal that anything goes. 'Let's do healthcare', 'let's cut taxes' – all in the name of an emergency. If we are not careful, this culture will become ingrained."

In a paper on fiscal stimulus, John Taylor, a Stanford University economist, has cautioned that the financial crisis will last for years and the impact of such measures will be minimal.

"There is little evidence that short government impulses will jump start an economy adversely affected by other forces," he said. "In the current recession, the economy has been pulled down by the housing slump, the financial crisis, and the lagged effects of high energy prices. Expectations of future income and employment growth are low because the effects of the financial crisis are expected to last for years into the future. Unless these effects are addressed, a short-term fiscal stimulus has little chance of causing a sustained recovery."

Creating "new" money can also trigger inflationary pressures, which no beleaguered economy can afford.

The plan will have consequences for Britain.

Since the start of the financial crisis in 2007, Gordon Brown has emphasised how the default on toxic debt in the US triggered the slowdown in the UK market.

Britain usually follows a pattern set by America, sometimes up to 12 months later.

British politicians have also borrowed some of team Obama's ideas.

Yesterday, David Cameron's promise to boost the digital economy and invest in green technology had echoes of the Democrats' plans.

And Mr Brown's pledge to create tens of thousands of jobs also echoes the return to government, rather than markets alone, taking charge of the economy.

In the era of globalisation, ideas, as well as economic gloom, are more easily shared.


OBAMA'S IN-TRAY

MIDDLE EAST:

The US's influence in the Middle East cannot be overstated. Trying to broker a long-term peace plan for Israel and a Palestinian state will be one of the biggest tests for the new president – and will also clarify just how united he and Hillary Clinton, his secretary of state, are.

ENVIRONMENT:

The deadline for a new United Nations climate-change deal is looming and the president will have to get Congress to approve a bill this summer. He also plans to put one million plug-in hybrid cars on the road by 2015.

HEALTHCARE:

The president-elect has a bold plan to relaunch the healthcare system at a cost of $1 trillion. Businesses will also be offered tax breaks to insure the 46 million Americans who currently have no cover.

IRAQ AND AFGHANISTAN:

The US's 130,000 troops will be withdrawn from Iraq and many will be transferred to Afghanistan, where the president backs a more interventionist approach. He will want to ensure the porous border with Pakistan is made more secure. However, none of his ambitions can be realised without more help from Nato allies, including the UK.