Obama gambles with tax cuts, but what about the jobs man?

9th December 2010

The $120bn payroll holiday came in a post-election agreement between Democrats and Republicans. Does it imply that Obama's economic strategy has failed? And if so, what does this mean for the US recovery?

The cheer-leader for US capitalism, The Wall Street Journal is clear that the move is an admission by Obama that his economic strategy has not worked.

Equally, John Cassidy in the New Yorker is clear that Obama's move is economic stimulus by any other name and The New York Times is equally clear: 

Obama is playing fast and loose with the fiscal deficit, which remains at around 9-10% of GDP. That the US administration has no plans to tackle the deficit in the short-term has been clear for some time, but to plan to widen the deficit further while the rest of the world is embracing austerity seems bullish .

On the other hand, Obama needs to do something to create jobs. Sitting around and waiting for cash-rich US corporates to start spending again has simply taken too long. Federal Reserve chairman Ben Bernanke was clear in his CBS 60 minutes interview this week when he said that one of the biggest risks facing the US was continued high unemployment and the number of long-term jobless in particular remained worryingly high.

Will this stimulus package do the job? Krishnan Chittur, who writes on the WSJ site is sceptical: "Let's not start celebrating – there are still millions of ways Obama can sabotage any recovery – His cronies who are also like him and hate any profit making enterprise will make sure that regulations are in place to throttle any recovery – they will use their powers to go after anyone who may benefit by working hard for themselves ("We cannot have rich people benefit").

The market reaction was swift and comprehensive. Bond yields on US treasuries rose sharply. This may either have been because economists considered the approach to the fiscal deficit cavalier (the US is now the only major developed economy with a deficit problem without an austerity package in place) or because they believed it would promote growth in 2011.

This is a gamble by Obama. There is a tacit admission that his economic policies have failed, but it is also a much-needed compromise to support recovery in the US. If it is doesn't work to promote recovery, Obama will have very few cards left to play.

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