Obama to the Rescue

Yesterday Barrack Obama’s biggest bill so far into his presidency the massive economic stimulus package worth over $800 bn designed to bail out the American economy from the recession passed into the senate after clearing the House of Representatives comfortably. The challenge now comes in the senate despite comfortably clearing the House of Representatives the bill did not pick up a single republican vote. In the 100 man senate a vote of closure requiring 60 votes must be passed in order for a bill to move on to a full vote. The democrats hold 58 seats so require 2 republican senators to side with them in order to open the bill to a full vote.

As America and the world economy face the deepest economic crisis in many years I think it unlikely that the republicans will attempt to hold up the bill, however they will be demanding alterations to be made to the current bill before it is passed into legislation. Both parties accept the basic idea that a large fiscal injection is needed into the US economy the debate over the best way to do this is likely to be heated.

The republicans favour tax cuts arguing that they act instantly unlike the current plans in which the full amount will not have worked its way into the economy until around a year and a half form the bill been passed. While I appreciate the need to act as quickly as possible with so many American jobs at stake I doubt that tax cuts are the most effective way to deal with the current crisis. During times of economic uncertainty people are far more likely to save any money from tax cuts in order to hedge against the threat of losing their job or a worse downturn in the economy. This issue is further confounded by the fact that the tax cuts of around $350bn are only temporary so increases the likelihood of people saving the money from this tax break.
The problem with this is that money saved does nothing to boost the demand in an economy which desperately needs it at the moment.

On the other hand I do find this issue of "buy American" in the bill which would mean that all manufacturing and infrastructure projects use materials produced in the USA to be highly disturbing. While it is important that the money goes where it is needed and the bill is aiming to keep jobs this could spark a trade war with tariffs been raised across the world as other economies retaliate. As we have seen before during the great depression these “beggar thy neighbour policies” do nothing to help overall and are often harmful. Secondly if The US one of the greatest advocate for free trade over the last decade starts protectionism this will destroy all its moral authority on the subject resulting in other countries copying its example.

In conclusion while the Republican Party does raise serious concerns over the issue of protectionism which do need to be considered and not used as a knee jerk reaction to the recession. However now is not the time for them to haggle when the economy faces deep recession if nothing is done. The electorate have long memories and will certainly not look favourably on the republicans if they prevent this bill when American jobs are on the line.

The death of a tiger?

As the financial crisis tightens its grip on the world and questions are raised about the strength of the Asian economies, a lone tiger in Europe has avoided most of the limelight. The republic of Ireland dubbed the “Celtic tiger” based on its high growth rates. From 1990 to 2001 and again from 2003 to 2007 after a small slow down to return again to the top of the European growth table.

The credit crunch has brought an end to this while economists previously believed that a soft landing was possible it is clear now that has not happened. Ireland was the first of the euro zone economies to fall into recession (two consecutive negative quarters of growth) in September 2008.This was heralded by the collapse of the large property bubble bursting in a similar way to Spain. It is now predicted that house prices could fall from peak to trough by 80% in real terms according to Morgan Kelly an economist form UCD (university college Dublin).The economy is now in dire difficulties due to fiscally irresponsible policies by Charlie McCreevy who led to a near 50% rise in public spending while at the same time cutting the rate of income tax. Now with the collapse of tax revenue the government under Brian Cowen may be facing budget deficit of near 7% of GDP this year.

Any recovery is going to be difficult Irish commentator Fintan O’toole says Ireland “doesn't have a good health service, an end to child poverty, a world-class infrastructure or even an acceptable system of primary education. Nor does it include the much-touted "innovation society" or "knowledge economy". Only time will tell whether the Celtic tiger will be seen again and while I have hope for the recovery of the Irish economy probably for mid 2010 I fear that the Celtic tiger is very much an extinct creature and Ireland has seen the last of its greatest age of prosperity and hard times are ahead.