When the news came through that the Troubled Assets Relief Programme (TARP) would cost USD 200 billion less than expected, it was universally accepted that this was good news. As Mitul Kotecha, the head of global foreign-exchange strategy at Calyon, the investment banking unit of France's Credit Agricole said in an Irish Times report, "The fact that they are spending less TARP money means that recovery is better and stronger than expected, and that's all positive for growth.”
Since then however, the extra USD 200 billion has become a political headache for President Barack Obama. With unemployment still above ten percent in the United States, he is under pressure from his party to spend the money on another stimulus package, specifically on a jobs package. The fiscal conservatives on the right of his party and across the aisle however, want the money to be ploughed into reducing the budget deficit. The president looks set to spend the money on a jobs stimulus but either path is problematic.
The budget deficit currently stands at around USD 1.4 trillion. Essentially the federal government spent USD 1.4 TR more than it took in through tax revenue and other revenue streams. The problem with not reducing the deficit is that as long as the deficit is allowed to grow, the federal debt will increase and only makes the US more vulnerable to a dollar sell off by the likes of China as well as potentially making it harder for the United States to raise money on the international bond markets.
The day Treasury Secretary Tim Geithner said the TARP would cost less than previously thought, the Republican leader in the House of Representatives (the lower house of parliament), John Boehner, said that the savings should be used to cut the deficit. Any other spending would only “grow the size of government”. Last night a bipartisan group of budget officials called on the government to reduce the size of the deficit as part of a plan to reduce the overall National Debt. The group includes Douglas Holtz-Eakin, a former head of the Congressional Budget Office and Jim Jones, the former chairman of the House Budget Committee.
The argument to reduce the deficit first is clearly reasonable and nuanced but it would be next to impossible for Mr. Obama to articulate this argument to a country enduring an unemployment rate of ten percent. That figure goes past seventeen percent when it includes people who have given up looking for a job.
Nancy Pelosi, the leader of the Democrats and Speaker of the House of Representatives, has already said legislation is being written to use some of the TARP funds to help small businesses while the White House is “actively looking” at ways to use the TARP to spur job growth.
Last week, the president’s approval rating fell below fifty percent for the first time since he took office. The unemployment rate is thought to have been a huge factor in this, especially as people in trouble financially watch Mr. Obama emphasise the war in Afghanistan and healthcare reform while he also travels to Oslo to accept a Nobel Peace Prize and then goes to Copenhagen to try to strike a deal over climate change.
Mike Barnicle, a former Boston Globe columnist and now a contributor to the cable news channel MSNBC, believes it is creating a perception of an uncaring president.
“People look at this and they think, ‘that’s fine, I want a job’. In what was billed as an economic speech, the president offered a tax incentive to weatherise my house but I haven’t got any work,” he says.
“There is a growing resentment of his celebrity – going to Copenhagen and getting his Nobel peace prize when I lost my job seven months ago. He’s in the White House surrounded academics when I want my job back,” Mr. Barnicle added.
Assuming Mr. Obama chooses to spend the money on jobs, there is no guarantee it will be successful. Despite the multiple bailouts since the recession started, the unemployment rate in the US has continued to rise. Either choice is a gamble for the president. It is a gamble he would rather not make.
