President elect Barrack Obama seems to have a tough job at hand as far as the economic situation is concerned. Deflating stock and real estate markets, falling consumer sentiment and rising unemployment are some of the challenges that Obama will need to address as soon as he steps into the Presidential shoes. We need to see if Obama will need to rob Paul to pay Peter or if he can conjure policies that can make everyone happy. Obama’s pre victory plan proposed the biggest tax cuts for those who earned least, and at the same time raise taxes on average, by $700,000 for 0.1% of the top earners.
Obama election proposals on tax adjustments
This was quite opposed to McCain’s offer of a $269,364 tax cut, for the top 0.1% of the nation’s richest. It is fairly easy to see that Obama’s proposal would win him more votes as the beneficiaries were much larger in number compare to McCain’s plan.
But, not the best news awaits Obama as he moves closer to his new job. As per data released on November 7th, unemployment shot up to a 14-year high of 6.5% in October, while non-farm employment plunged by 240,000 compared to September. Job losses were spread across sectors ranging form around 50,000 in construction, 90,000 in manufacturing, 38,000 in retailing and around 15,000 in hospitality and leisure business. Such massive job losses seem to be adding to the enormity of the situation. Job losses mean that the average American is loosing spending power. That is real bad news for an economy already suffering from a huge loss of consumer spending.
It appears that the US $ 700 billion stimulus package is taking some effect as the three month dollar LIBOR fell from 4.82% level on October 1oth to 2.29% on November 7th, indicating that banks are more willing to lend to each other. However, this does not do much to galvanize consumer spending, which is finally the key to pulling the economy back from recession. It appears that the government has woken up to this reality and is planning to divert part of the $700 billion dollar rescue package to address the needs of the general public. The government now seems to be planning tax cuts ranging form $500 per worker to $1,000 per family, which was also a part of pre-election Obamanomics.
Some of the key challenges that incoming President faces, include finding ways to kick start the economy, soothing the financial markets, helping troubled borrowers, prop the real estate markets, address the needs of the increasing unemployed individuals. And Obama will need to do that without making the fiscal deficit unmanageable or in other words, burdening the tax payer. With the present level of government spending including the already announced bailout packages, Obama is likely to inherit a budget deficit of nearly $ 1 trillion. In this scenario, it will be interesting to see how Obama manages to balance the need for stimulus for boosting investment spending versus boosting consumer spending and how Paul and Peter get affected in the process!