What's the Essence of Obama's Plan?

What’s the essence of Obama’s plan? It’s countering unemployment, modernizing schools, reducing interest rates, creating tax incentives for hiring the unemployed, and infrastructure projects – for a total of $447 billion. What does the Republican majority in Congress think about this? Rather than being a jobs creation program, it’s a plan for getting Obama re-elected.

Experience shows that programs based on high public spending don’t work. Gas prices continue to rise, the national debt keeps increasing, health insurance costs keep going up, and during the past 2.5 years 1.7 million Americans have lost their jobs.

What about spending cuts? We’ll hear about that from the president on September 19. Will Congress accept this plan? It might be partially accepted. First, the Republicans are firmly against the policy of redistributing income from the rich to the poor. Second, they’ll try to prevent Obama’s re-election for a second term. The result? Any reforms will be accompanied by dangerous procrastination due to lengthy negotiations.

Additionally, Bernanke’s speech did not have a positive impact on the market. Bernanke was concerned about low consumer spending, high unemployment, rising energy prices, higher taxes, and falling real estate prices. Another reason to worry is the unrelenting financial stress caused by the European debt crisis. At the same time, Bernanke assured, as always, that the Fed has many monetary stimulus measures. The increase in inflation is temporary. Bernanke again asked the government to hurry up with the spending cuts. However, this will also slow down the economic recovery rate. American finances may get out of control.

Americans persist in trying to solve new problems using the old methods: increasing spending on infrastructure, and via open market operations. The former helped Roosevelt bring the U.S. out of the Great Depression. The latter, according to the founder of monetarism, Milton Friedman, would have helped the U.S. avoid the Great Depression altogether. Will these methods work this time around? That’s highly questionable.

First, globalization has led to radical changes in the structure of the U.S. economy. Second, since the beginning of 2008 too many people and organizations have lost too much money. The country has negative expectations for the short and medium term, and there’s a lack of faith that the government will be able to deal with the situation. For this reason, Americans either save their earnings, or use them to make up for prior losses. The marginal propensity to save indicator is rising. This indicator is inversely proportional to the multiplier of government spending, on which the U.S. government has pinned its hopes. Accordingly, the impact of pumping money into the economy will be fairly low.