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Obama's Stimulus Plan Can Either Help or Hinder Growth

Obama's Stimulus Plan
Everyone awaits the effects of the Obama plan.

Less than two weeks before he swears into office, Barack Obama has already a lot of burden on his shoulders. On top of his list is the current turmoil in the economy that has devastated the financial, real estate, retail and manufacturing industries in the past months. There is a lot of dependence that America has put on the country’s president-elect since winning the elections last year. If Bush has failed to regulate Wall Street, then everyone’s counting on Obama to ensure a stronger oversight to the private market this time.

Obama plans to address the crisis through a combination of tax cuts and refunds and of course, the highly publicized public works program. But each proposal has its pros and cons. Tax cuts are supposed to encourage the public to spend their savings and eventually trigger more production in goods and services. But as we know it, theories can be disproved anytime. The country has experienced slower growth in the past year and as consumers, we expect more people to save up for the rainy days instead of dispensing the savings from their tax responsibilities. Furthermore, the Center on Budget and Policy Priorities in Washington, D.C. came up with a study in 2004 that discusses the effects of Bush’s tax cuts. The report states, “The nation faces a serious deficit problem, which permanent extension of the tax cuts would make markedly worse. A recent analysis (by the CBPP) finds that budget deficits are likely to total $5.2 trillion over the ten years from 2005 to 2014. Other analysts have reached similar conclusions. For example, Brookings economists estimate the deficits at $5.5 trillion over the same period.3 Deficits then would rise to still higher levels in decades after that.” If the calculations are indeed precise, the crisis may take longer than what we think it would have been.

On the other hand, tax refunds are aimed at allowing distressed companies to write off their losses up to five years ago instead of the current two-year allowance. That would mean hefty profits especially for large firms who were highly affected by the economic downturn. On the down side, this move can actually turn drastic. First, companies still need to recoup their losses and refunds may only be used to restore healthy balance sheets, not necessarily spurring more manufacturing opportunities that can open more jobs. Second, moral hazard can further develop in the free market. TARP has been linked to this outcome since it was proposed and there’s no reason why tax refunds can’t be a source of conflict too.

Lastly, public works spending, expected to generate thousands of jobs, could never be in a better time than this year when the unemployment rate is expected to hit higher than December’s 15-year high 7.2 percent. It’s one large investment that is predicted to benefit even the next generation where indirect businesses can also burgeon in the recipient cities. However, the country should also be concerned about inflation once the fund for construction and wages become available.

But not everything is left to cynicism. It’s just inevitable that public policies can sometimes be a double-edged sword.

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