By Irwin Stelzer

In 48 hours George Walker Bush will watch as Barack Hussein Obama is sworn in as the 44th president of the United States. Knowing of Bush’s desire to return to his beloved Texas, one can’t help being reminded of President No 3, Thomas Jefferson, who reportedly remarked as his term ended some 200 years ago: “Never did a prisoner, released from his chains, feel such a relief as I shall on shaking off the shackles of power.”

It is those shackles that Obama will happily don. Bush says that when the new president steps into the Oval Office there will be a moment in which he realises the full weight of his new responsibilities. Perhaps that will come when he glances at his in-tray. He has promised to do a lot of things on “day one” - start a new peace process in the Middle East, accelerate the withdrawal of troops from Iraq and ship thousands more to Afghanistan, open a dialogue with Iran, close Guantanamo, replace “don’t ask, don’t tell” with a policy allowing gays to serve openly in the military, end the interrogation techniques that Bush and Dick Cheney say have prevented attacks on America.

Busy day. And that awesome list doesn’t include Obama’s top priority - getting his $825 billion (£560 billion) stimulus package through Congress.

Which he surely will: the Democrats dare not turn down their new president. After all, his approval rating is above 80%, while Congress’s is barely above 20%. And the minority Republicans, delighted with Obama’s plan to cut taxes, don’t have the votes to deny Obama a victory.

But there is enough unhappiness in Congress to force Obama to do some horse trading to get final approval. Some Democrats think the tax cuts should be replaced with more spending. Some Republicans and Democrats think the deficits the package will create will unleash inflation and a run on the dollar. Larry Summers, Obama’s chief economic adviser and his horse-trader-in-chief, is not noted for his emollient style, or his sympathy with lawmakers who might succumb to what The Wall Street Journal calls “the lobby frenzy now under way”. And on the other side of the table, are congressmen eager to reestablish their relevance after years of playing a subordinate role to the White House.

But in the end Obama will get most of what he wants, not least because the economic situation seems to deteriorate daily. The latest survey of national business conditions by the Federal Reserve Bank of St Louis reported that “overall economic activity continued to weaken”, with retail sales, the labour market and manufacturing activity all falling. And Jamie Dimon, chief executive of JP Morgan Chase, says things will get worse this year as more consumers default on credit-card debt.

One way to understand the severity of the problem is to consider this: it’s one thing when tired old companies such as Delta Air Lines and General Motors announce layoffs, quite another when Google fires 100 recruiters because it expects to need fewer new workers this year, and Microsoft prepares substantial layoffs. The economy’s growth engines are sputtering.

By some measures Obama’s plan makes Franklin D Roosevelt’s antidepression spending look like small change. Diana Furchtgott-Roth, an economist colleague of mine at the Hudson Institute, reckons that in 1934 government spending reached 11% of GDP in Roosevelt’s fight to end the Great Depression, while Obama plans to increase spending to 23% of today’s GDP in 2009. True, Obama’s stimulus plan is only half as large as Roosevelt’s, relative to the size of the economy. But it starts from a much higher base of spending on programmes that did not exist when FDR was deploying his personal jauntiness as a national antidepressant.

In addition to stimulus funds, the new president will have available the second, $350 billion tranche of the Troubled Asset Relief Program (TARP). The Senate approved freeing up those funds late last week, on the condition that between $50 billion and $100 billion is devoted to foreclosure-prevention programmes.

Obama knows one thing. He is inheriting George Bush’s recession, but by the end of 2010 he will own it. If the measures he adopts don’t show signs of working, it will be Barack Obama’s recession.

The new president’s luck might just hold. Credit markets are already responding to the measures taken by the Fed and the Treasury. The commercial paper market (a key source of funding for companies and banks) is showing signs of life, with the portion of these IOUs that the Fed has been required to buy dropping precipitously. The market for mortgage-backed securities issued by Fannie Mae and Freddie Mac is improving. Risk premiums in the interbank lending market have dropped. Investors have shown a willingness to take on more risk by buying the below-investment-grade “junk” bonds offered last week by Cablevision and the natural-gas operator El Paso.

The Financial Times summarises all this: “There is now compelling evidence that the authorities are not simply substituting for private activity in the markets in which they are intervening, but pulling in private capital as well.” Problems in the credit markets are far from over - witness the need of Bank of America for additional billions of bailout cash - but things are improving.

Goldman Sachs economists expect the stimulus to end the recession in the second half of 2009, but the unemployment rate to keep rising “through late 2010”. Economists know that the unemployment rate is a lagging indicator, falling only after a recovery is well under way. Less well-trained voters, focused on jobs, don’t deal in such technicalities, which means they just might turn on Obama’s Democrats in the November 2010 congressional elections.

That would put Obama in mind of Jefferson’s first inaugural address: “I have learned to expect that it will rarely fall to the lot of imperfect man to retire from this station with the reputation and favour which bring him into it.” It is a lesson that George W Bush learned all too well.


Irwin Stelzer is a Senior Fellow and Director of Economic Policy Studies for the Hudson Institute. He is also the U.S. economist and political columnist for The Sunday Times (London) and The Courier Mail (Australia), a columnist for The New York Post, and an honorary fellow of the Centre for Socio-Legal Studies for Wolfson College at Oxford University. He is the founder and former president of National Economic Research Associates and a consultant to several U.S. and United Kingdom industries on a variety of commercial and policy issues. He has a doctorate in economics from Cornell University and has taught at institutions such as Cornell, the University of Connecticut, New York University, and Nuffield College, Oxford.