Tremendous economic problems await Obama

McClatchy NewspapersNovember 4, 2008 

WASHINGTON — Campaigning about the economy may prove easier than managing it. Beyond inheriting a global financial crisis, President-elect Barack Obama faces the challenge of reversing mounting job losses, halting an economic downturn and navigating pressure from abroad for a new architecture to govern the global economic system, long dominated by the United States.

Here's a closer look at the economic challenges that await him:

Q. Wall Street rallied on Election Day, so things are getting better, right?

A. One day does not a trend make, and it's important not to confuse Wall Street with the real economy. On Friday, the Labor Department will release the October jobs report, and it's expected to be grim. Consensus forecasts expect to see about 200,000 more Americans tossed out of work. Rising unemployment cascades through the economy, and will make Obama's job tougher.

When people join the ranks of the unemployed, they spend less, so businesses suffer. If they don't find new jobs quickly, defaults on car loans rise, more people become delinquent on their mortgage payments and all this compounds the crisis in financial markets, which has banks unwilling to lend and consumers unwilling or unable to spend.

Q. What can be done about it?

A. Democrats strengthened their grip on Congress on Tuesday, and they're readying an economic stimulus package. It will be broader than the Bush administration's taxpayer-rebate package earlier this year, and the idea has the blessing of Federal Reserve Chairman Ben Bernanke. The debate now is about what the stimulus package should include and how big it should be.

Q. Won't this add to the national debt and the federal deficit?

A. Yes. The Treasury Department said Monday that it would borrow $550 billion in the final three months of this year and another $368 billion from January to March next year. This borrowing is for efforts to bolster weak financial markets, including the $700 billion Wall Street rescue package that Congress passed Oct. 3. In a bad sign for Obama, the Treasury explained that the borrowing is due partly to declining tax revenues.

A stimulus plan would make the federal debt grow even faster. Bernanke didn't put a price tag on a second stimulus, but he said that it needed to be big enough to be significant. Most economists say it needs to be at least 1 percent of the nation's total economy, which means that it would have to be at least $150 billion. It could be twice that.

Q. That's a lot of money. Where would it go?

A. Congressional Democrats are keen to pass a stimulus plan that's anchored in a substantial increase in public-works spending for things such as highway and bridge repairs, port modernization and the like.

Some critics have questioned whether this money could be spent quickly enough to spark the economy, especially since big infrastructure projects need all sorts of approvals and extend over long periods.

However, Ken Simonson, the chief economist for the Associated General Contractors of America, said that Census Bureau data pointed to a 1.5 percent drop in highway construction spending in September. It suggests that existing projects are being halted for lack of funding, so there wouldn't be a large lag time before a stimulus provided benefits.

"We know there are thousands of projects ready to go ahead if the funding becomes available," he said. "I think the fact that highway spending has leveled off at a time when states were expecting to have more money available means they do have projects ready to go."

Q. What else might be in a stimulus package?

A. All measures need to be timely, targeted and temporary. With the jobless rate expected to rise and an economy now thought to be in recession, Democrats and their president are expected to push for extending unemployment benefits. Congress passed a 13-week extension of unemployment benefits over the summer, and Democrats would like to add another seven weeks for those who are still unable to find work after 26 weeks. They'd extend benefits another 13 weeks — on top of the seven — in states where the unemployment rate is above 6 percent.

Liberal policy-research groups such as the Center on Budget and Policy Priorities are pushing to include an expansion of food stamp programs and greater federal contributions to states to relieve pressure on programs such as Medicaid, which provides health care to the poor and people with disabilities.

"We think it is really important that you have the things that have a really big bang for buck as a starting point," said Chad Stone, the chief economist for the center. Extending unemployment benefits and expanding food stamps ensures that federal stimulus money is circulated back into the economy quickly and isn't used to pay off bills or saved by consumers.

Q. Beyond a stimulus plan, what else might Obama do?

A. There were a lot of big ideas, such as renegotiating trade agreements and taxing oil companies, that grabbed campaign headlines but are unlikely to happen right away.

International economic affairs will demand his immediate attention. President Bush has scheduled an international summit in Washington on Nov. 15 to discuss new tools to ease the global financial crisis and prevent future ones. Obama and his team may want to weigh in to ensure that the United States retains its lead role in the global financial system; at the same time, he's noted that the nation has only one president at a time, so how he'll be represented at the conference remains uncertain.

At home, Obama must decide quickly whether to rescue U.S. automakers, and if so how. The financial crisis has hit them extremely hard at a time when they're trying to retool for the future. In October, the U.S. auto sector had its worst sales month in a quarter-century. GM sales plunged 45 percent, Chrysler's fell 35 percent and Ford's dropped 30 percent.

GM and Chrysler have been in merger talks for weeks, and Congress has passed a $25 billion loan to help Detroit carmakers retool to make more energy-efficient vehicles. The Bush administration has been wary of using Wall Street rescue money to boost the carmakers' auto-finance arms, and Democrats may consider a more direct effort to save a troubled industry that once was the symbol of U.S. manufacturing prowess.

Q. Is there any good economic news for the president-elect?

A. There are signs that the unprecedented efforts by the Federal Reserve to prevent a collapse of credit markets are starting to pay off. Overseas dollar-lending rates that serve as a benchmark for progress have been falling, and the Fed's decision to bypass banks and purchase short-term debt issued by U.S. corporations has helped calm the waters.

Even as the credit crunch shows signs of easing, however, the Fed's survey of bank executives, released Monday, paints a disturbing picture. Senior loan officers told the Fed they were tightening their lending standards, and 85 percent reported that they've raised the bar for businesses that are seeking loans. This signals even less economic activity in the weeks and months ahead, deepening the downturn, and it ensures that Obama will enter office facing the worst economic crisis since Ronald Reagan was sworn in on Jan. 20, 1981.

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