Some say that you must spend money to make money. This paradoxical adage lies at the heart of Barack Obama's fiscal policy, and has its roots in America's Great Depression of the 1930's.
In economic theory, this kind of spending by governments is known as Keynesian stimulus. John Maynard Keynes, an early 20th century British economist, argued that governments should intervene to avoid depressions by spending heavily and controlling interest rates. President Franklin Roosevelt, popularly credited with rescuing America from its darkest financial crisis, looked to Keynesian theory when crafting the New Deal.
Now President Obama and his advisors are hoping history will repeat itself as they push the largest federal spending package since World War II. With U.S. interest rates barely hovering above 0%, drastic spending could be the last weapon in the arsenal. "It's not too late to change course - but only if we take dramatic action as soon as possible," said Obama, "The first job of my administration is to put people back to work and get our economy moving again."
For the last few weeks Obama has broken the tradition of maintaining the low profile of a President-elect, instead he has been on the road drumming up support for his fiscal stimulus plan which comes with an $825 billion price tag. Should Congress approve this bill, the money would be spent on federal construction and research projects, homeland security and alternative energy. It would also cast a larger and wider safety net with new money for social welfare, education and public health programs and services.
The theory goes that government spending on public-sector projects would provide direct stimulus by creating jobs, thus staving off unemployment, home foreclosures, and a further decline in consumer spending. However, should the plan be unsuccessful, it could result in crippling inflation and a staggering budget deficit that already tops $1.2 trillion.
Obama's canvassing has won support among the American electorate, with a recent Wall Street Journal poll showing 43% of people surveyed calling the stimulus package a "good idea," while 27% said it is a "bad idea" and rest didn't have an opinion. By a nearly 2-to-1 ratio, people preferred government spending to create jobs over tax cuts to give Americans more money to spend.
Such support will be helpful in persuading Congress to endorse the bill, which is due in February. Obama has also won a major financial battle by gaining Senate approval to spend the second half of the massive $700 billion fund to bail out the credit-crunched financial system.
Where's the money going?
Tax cuts for families amounting to 40% of the total value of the plan
- $18.5 billion for renewable energy and energy efficiency research, programs and improvements to buildings
$6 billion in federal money for mass transit systems improvements and expansions
- $5 billion for public housing construction and improvements
$4 billion for governments and housing agencies to deal with foreclosed and abandoned homes
- $1.2 billion for state and local summer jobs programs for youth
$1 billion extra for Head Start, preschools
- $8.4 billion for various water grants related to drinking water
$4.5 billion for defense construction projects
- $1.5 billion for worker retraining programs
$300 million in grants for railroad improvements$1 billion for border infrastructure and ports of entry improvements and expansion
- $325 million for new bridge and road repairs
$1.7 billion for national park renovation, rehabilitation and other construction projects
- $6 billion for federal building construction and repairs
- $2.7 billion in loans and grants for rural water infrastructure.