American Stimulus 2: The return of the left!

I guess the news has hit mainstream that the recent American stimulus plan, The American Recovery and Reinvestment Act of 2009 (TARRA), didn't exactly stimulate the American economy the way it was billed it. Sensible economists knew it was not targeted enough to small business and the traditional economy. Conservative fiscal hawks knew it spent too much- over $800 billion of 40% tax cuts and 60% cold hard cash- to begin cutting the budget deficit. And, political scientists and politicians, alike, knew it was the pay off pitch to traditional democratic and left leaning party supporters of the Obama campaign. But, why did it pass in the first place and why is there talk of another stimulus by the end of this year or early next year?

Let's remember some of the facts. For all intents and purposes, this is the third- yes third- American stimulus plan, if we count the TARP, 2008 (Troubled Asset Relief Program) that was supposed to save the American economy, by bolstering and bailing out the financial system, with the financial system, being the "plumbing" for the American economic engine. However, this program didn't encourage financial institutions to lend the money it had or the newly injected funds it received from the American government, as it was envisioned.

There was a bit of politics being played by the large financials, as well as there were legitimate economic reasons to why they were reluctant to lend- even though firms like Goldman Sachs and JP Morgan had pretty stable and profitable companies during this economic crisis. More importantly, the job losses further fueled the fear for investors of a profitable investment climate for the USA in the short term, coupled with job losses being tied to the housing market and how that affected the wider economy.

To the extent that TARRA, 2009 actually supported the traditional sector as well as acted as a psychological support mechanism to the TARP, 2008, was something that was overshadowed by the overwhelming urge for lawmakers to do something, which, in itself, eased the burden of the economic crisis and gave the market confidence that the worst was possibly over.

However, the recent job losses in the USA- 467,000 jobs in June and the unemployment rate ticked up another tenth of a percentage point to a 26-year high of 9.5 percent- shows that there is more economic pains to bear.

What was wrong with TARRA, 2009 was that it was heterotactic as it related to core and related inputs that are proven drivers of direct and rapid economic growth. For example, TARRA 2009’s focus on education, increased state funding and agriculture and to a smaller extent, transportation, which could have been understood as construction related and could have aided traditional economic forces, but certainly all are not components for growth through stimulating investment and consumer spending.

Also, stimulus funds were geared towards industries that were not yet tested and proven to be viable engines of economic growth, like green technology and even worse, subsidies to state legislatures for pet projects that have nothing to do with creating employment or spurring investment for Small and Medium Enterprises (SME's). In the USA, SME's employ over 80% of the total work force.

When President Obama said he represented change, he meant change. Even at the direct and immediate cost of the traditional American economic engine, at the core, barring the financial services sector. I guess you could not possibly attempt to implement change, if you invested stimulus funds and energy into the things of old. (Why should we have thought that the party of big government could have possibly done any better by the private sector and for the wider economy?) I digress.

More importantly though, over 30% of the funds allocated in the stimulus were given directly to the states in the union, and legislators have, in turn, padded their local budgets as they too are facing difficult times with regard to the economic downturn and the loss of state revenue due to it.

Enter from the left, Vice President Biden, Speaker of the US Congress Nancy Pelosi and her whip, Steny Hoyer, with the idea of an American Stimulus 2.

How exactly will TARRA 2 be formatted is up for debate. In fact, there were talks that TARRA 1, could have been expanded and would have possibly be ballooned to $ 1.5 trillion along with the mention that if that wasn't possible, TARRA 2, could have been in the pipeline allot sooner. Whatever the semantics are, there is a need to do more for the American economy and TARRA 2 must come.

If TARRA 2 is to be, it should be directed toward SME’s, if it is to jump start the job market. Private sector employment should be the key focus and assistance should be in the form of tax credits and employment subsidies, in the short term. For the long term, however, issues like expanding partially state funded health insurance and allowing for regulations to fasciate and create synergies within inter and intra-industries, with special regard to expanding property rights through fully liberalised patent legislation and improved clustering.

Secondly, TARRA 2 should have incentives for financials to back and issue direct consumer and credit card loans, as well as finding room for an amnesty or facilitated amortisation of credit card debt. While the downside is that this would, possibly, fuel another bubble, I must remind the reader that the bubble that caused this crisis was the packaging of these toxic assets and specialised derivatives products built on those bad loans and not the extension of those bad loans themselves. While a high amount of default is unacceptable, if tighter lending rules are applied on top of sensible derivatives regulations, the bubble that burst from this aspect can be minimized if, at all, voided.

Whatever the case may be, certainly, American stimulus packages have not seen their end.