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John Kostrzewa

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john kostrzewa

Obama must act quickly, decisively to fix economy

01:00 AM EST on Sunday, November 9, 2008

The deteriorating U.S. economy, and the recession that has ravaged families in states such as Rhode Island, gave Sen. Barack Obama the issue he needed to win the presidency.

He proved he could use his campaign, organizational and oratorical skills to get elected.

Now, he has to prove he can govern, and the test will be not in the breadth of the recovery plan he puts in place but in the focus, priorities and restraint he can impose on his colleagues in Washington whose help he needs.

Three tests will come up immediately, well before Obama’s inauguration on Jan. 20.

The first involves the stimulus bill being put together for a vote in a lame-duck session of Congress; the second is the $700-billion bailout bill passed by Congress that is being nibbled at by so many interests that its original purpose is in danger of being lost; and the third is the stalled plan to head off foreclosures and curb the decline in house prices.

The stimulus bill has been hatched on the House side of Congress by Speaker Nancy Pelosi. She plans a $60-billion to $100-billion stimulus package this month, followed early next year by another stimulus package that includes a tax cut of some type. Overall, the proposal could swell to more than $300 billion.

Obama’s job is to weed out the pieces of the stimulus bill that do not spark the economy, leaving only the spending that actually helps companies expand and puts people back to work.

For example, it makes sense to unleash a jolt of federal spending for infrastructure improvements, the public works projects that fix roads, highways and bridges. There are 3,000 projects nationwide ready to go out to bid, according to the American Association of State Highway and Transportation officials. The projects can start quickly and put people to work, especially the poorly trained industrial workers who are among the hardest hit in the economic transition to a knowledge-based economy.

There’s also merit in extending unemployment benefits to put money in out-of-work consumers’ hands that they’ll spend for the basics to run a household. That will be a spur to economic activity as well as helping families survive.

Another round of rebates will be considered in the stimulus bill. But the politically popular checks sent directly to taxpayers may not be the best tool to use.

The last stimulus package that included $105 billion in rebate checks helped boost spending a bit in the second quarter, but little beyond. Many people used the checks to buy $4-a-gallon gasoline or to pay off bills. They didn’t go out and spend a lot at the mall. They gave the economy only a temporary lift and may not be the answer this time around.

A tax cut may provide more immediate relief and boost consumer confidence. But there were few details last week about the size of the cut and who would get the break. Obama talked about a tax cut during the campaign but since his election has yet to be specific about his plans.

There’s also a movement to use federal taxpayers’ dollars to bail out states, such as Rhode Island, that are facing huge budget shortfalls. There’s no question that states are suffering. By one count, there are 27 states running budget deficits totaling $26 billion in the current fiscal year. But shoveling federal dollars to them to plug holes will only avoid the tough decisions that state leaders need to make to cut spending, revise tax policy and reorganize priorities to decide what type of government they want. A one-time fix of federal money will not solve the structural problems in many states, including Rhode Island.

The Democrats who control Congress in bigger numbers than before the election are considering two stimulus packages, one smaller package that will be considered during the lame-duck session and another, bigger one in the new year. Obama needs to weigh in on both of them, soon, by setting some priorities.

The second issue is the $700-billion bailout, originally crafted and proposed by the Bush administration to buy troubled assets from financial institutions. The idea was for taxpayers to buy up hard-to-sell assets such as mortgage-backed securities to strengthen banks’ balance sheets to get them lending again. But since its passage, the plan has become a grab bag for other interests.

Already, $250 billion is targeted for the taxpayers to make stock investments in banks. Some institutions, however, have banked the money and not made any more loans. Others have used the money to acquire weaker banks.

Other industries are lining up to make their pitches for a piece of the taxpayers’ money. They include nonbank financial services companies, insurers, transit companies and automobile manufacturers.

President-elect Obama needs to decide, and tell the Treasury Department, where the money should go to make sure the economy gets the biggest bang for the unprecedented taxpayer spending. Spreading the bailout money too thinly may not stimulate economic activity and help put people back to work.

The third test is to find a way to stop the slide in home prices, which has led to record numbers of foreclosures and pushed the country deeper into recession.

Government leaders from the Treasury Department and Federal Deposit Insurance Corporation have been trying to come up with a foreclosure-prevention program. One idea is to help 2 million to 3 million homeowners who owe more on their mortgages than their houses are worth, and are in danger of foreclosure. The plan would use $40 billion to $50 billion of the $700 billion in bailout money to require banks to rewrite mortgages by providing a partial federal guarantee. The plan has seemed to stall, waiting for the new president’s direction for solving the housing crisis, the core of the country’s economic problems.

During a news conference on Friday, Obama said the United States can have only one president at a time, and he will work “immediately” after he is sworn in on Jan. 20 on plans to revive the economy.

But the economy he inherited is deteriorating rapidly. On Friday, the government reported the jobless rate in the United States rose to 6.5 percent in October, with 240,000 jobs lost. Home foreclosures are rising. House values are falling. Consumers have stopped spending. Credit-card delinquencies and bankruptcies are up. And businesses or homeowners are still having trouble borrowing money.

Many economists are forecasting that the deepest recession since the 1980s will hit early next year, unless a targeted federal plan is enacted, and soon.

Obama made the economy the centerpiece of his political campaign. He won. Now, it’s his job to fix it.

jkostrze@projo.com

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