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Stimulus package takes shape

The fiscal stimulus package approved by the U.S. Congress is a compromise worked out after considerable debate and hard-fought negotiations. It is an outcome of the Obama administration’s ceaseless quest for bipartisan support, although eventually the Republican backing fell short of its expectations. The package amounting to $787 billion has two components — $506 billion by way of government spending and $281 billion in tax relief. What has emerged is a smaller-sized plan than the ones that failed to go through, and many economists think that it is inadequate, both in quantum and scope, to stimulate the American economy which, by all accounts, is slipping into a moribund state. Yet the fact remains that the package, even in its pruned form, is the largest spending to be ever attempted by an American government since the Second World War to combat recession. From the details available, the proposals would seem to have some limitations. First, more than 74 per cent of the money is to be spent over 18 months which is as fast as public spending programmes could go. Secondly — this perhaps can be said of even the best-crafted packages — many of the projects on which money is to be spent are determined by lawmakers according to their preferences rather than on the basis of any rational assessment of their relative merit in boosting the economy.

More strident however is the criticism against what Treasury Secretary Timothy F. Geithner announced on February 10 — a plan to fix the broken financial system; it is seen as the second element in the salvage operation. Estimated to cost $2.5 trillion, more than three times the fiscal package, it envisages a combination of loans and incentives to bring private capital into the banking system. This, critics say, smacks of tentativeness and makes no significant departure from the Bush administration’s line of incrementalism. It is only proper that setting the financial sector right has received top priority because economic recovery will remain elusive in the absence of a functioning banking system. The adequacy of the rescue packages may be open to question, but the Obama administration’s two-pronged strategy involving a fiscal stimulus and credit infusion would seem to provide a blueprint for the rest of the developed world that is going through a financial crisis and an industrial slowdown.

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