Top Story

Massive fiscal stimulus could wind up creating jobs offshore as funds are spent on imports

• Plus: Obama Names Volcker to Economic

President-elect Barack Obama has made a promise: to save or create 2.5 million jobs over the next two years. Estimates of the cost of his high-powered spending program to rescue the U.S. economy start at $500 billion and go way up from there.

But a giant issue lurks: How much of Obama's mammoth fiscal stimulus will "leak" abroad, creating jobs in China, Germany, or Mexico rather than the U.S? This is a question with big economic and political implications—and no easy answers.

One problem is that over the past 25 years the U.S. has become the "consumer of last resort" for the world economy. Imports have risen from the equivalent of 9% of gross domestic product to almost 19%. Even more astonishing, the value of imported goods now is equal to almost 40% of the output of U.S. manufacturing. For some types of consumer goods, such as clothing and consumer electronics, it's increasingly difficult to find items that were not made abroad. As a result, fiscal stimulus that boosts consumer spending in the U.S. may be diffused through the global economy, reducing its impact on jobs here.

At the same time, Obama will face intense political pressure to make sure his intended spending on infrastructure, health-care modernization, and green technology creates manufacturing and service jobs in the U.S. Federal procurement is already governed by a complicated welter of laws mandating minimum "domestic content" for many types of federal purchases, including the Depression-era Buy American Act. That's why, for example, steel for federally funded transit projects typically has to be made in the U.S.

No Sideshow

The scale of the fiscal stimulus will likely ensure a frenzy of lobbying to tweak the existing domestic content rules and add new ones. But the more rules and earmarks that are built into the package to ensure domestic jobs, the more expensive it will get and the more the U.S. will look as if it's retreating from free-trade policies. "Job leakage will continue," says Susan Houseman, a senior economist at the W.E. Upjohn Institute. "For better or worse, Obama and Congress will be under tremendous pressure to plug that leak."

The coming debate over "Buy American" restrictions in the fiscal stimulus is no sideshow. The financial crisis was caused, in large part, by U.S. consumers borrowing trillions of dollars from the rest of the world to buy imported cars, clothes, and gasoline, even as jobs slipped overseas. As long as the U.S. is running a big trade deficit and borrowing from abroad, a fundamental cause of the crisis remains.

Now, whether Obama's stimulus package creates 2.5 million jobs or not, economists believe it is a good idea, given the ferociousness of the downturn. "Without it, you could get a protracted period of negative or weak growth," says Nariman Behravesh, chief economist of IHS Global Insight in Lexington, Mass. "With it, you could get the economy coming out of recession in the third quarter" of 2009.

Vanishing Factories

Yet given the U.S. appetite for imports, hitting the Obama jobs target will be tough. When President Ronald Reagan cut taxes during the deep recession year of 1982, the U.S. was still a relatively closed economy. That meant when consumers started spending, the jobs showed up in this country.

Over the past 10 years, however, the number of manufacturing jobs in the U.S. has plummeted, going from 17 million in 1997 to 13 million today. The part of the Obama plan that props up consumer spending will not bring back those lost factory jobs.

In fact, Obama does aim to get money into the hands of consumers, through extended unemployment benefits and aid to state and local governments that might otherwise lay off workers or raise taxes. J. Fred Giertz, a state budget expert at the University of Illinois at Urbana-Champaign, notes that in 2003, $20 billion of federal assistance was allocated to states, with about half earmarked for Medicaid. How much this time? "Something in the range of 5% to 10% of the stimulus package would be a good guess," says Giertz.

The advantage of these types of spending is that they are fast-acting. The disadvantage: They support the same "U.S. as consumer" mentality that got us into trouble in the first place, along with purchases of imports.

What about spending on infrastructure, health-care modernization, and green technology? All these tend to produce less leakage overseas than consumer spending. But even jobs in these areas have a tendency to slip over the border unless carefully constrained. Spending on infrastructure such as rail transit is more likely to create domestic jobs, in part because it is already covered by federal legislation that mandates a certain level of purchases of U.S.-made goods.

For example, new public transit vehicles generally must have 60% domestic content and be assembled in the U.S. Electric streetcars—a mass transit option to cut pollution that's favored by cities such as Denver and Salt Lake City—would likely be imported from other countries if it weren't for the "Buy American" requirements attached to federal funding.

President-elect Barack Obama today named former Federal Reserve chairman Paul Volcker to head a new advisory panel designed to help guide the administration' s efforts to stabilize the nation's struggling financial system and create jobs.

President-elect Barack Obama named Peter Orszag as his budget director on Tuesday and said his job will be to conduct a thorough review of federal spending programs, "eliminating those programs we don't need and insisting that those we do need operate in a cost-effective way."

With the economy in crisis, Obama said, "Budget reform is not an option. It's a necessity."

Echoing Abraham Lincoln, Obama added, "I will ask my economic team to think anew and act anew."

Orszag is the director of the Congressional Budget Office, a man who the president-elect said "knows where the bodies are buried."

Obama's focus on careful federal spending marked something of a contrast from Monday, when he declared that restoring the economy to health took priority over the budget deficit. He called on Congress to prepare an economic stimulus program for him to sign as soon after Inauguration day as possible. Estimates of the measure range from $500 billion to $700 billion over two years.

"We are going to have to jump-start the economy ... but we have to make sure that those investments are wise. We have to make sure we are not wasting money in every area," he said Tuesday, defining the two objectives that will guide his economic program.

Elected in an Electoral College landslide, Obama claimed "a mandate to move the country in a new direction and not continue the same old practices that have gotten us into the fix we are in."

Obama Goes After Farm Subsidies

Obama Goes After Farm Subsidies

In a speech just concluded announcing two more economy appointees -- CBO chief Peter Orszag to the Office of Management and Budget and Robert Nabors (House Approp. Comm.) to be his deputy -- President-elect Obama gave an example of one piece of wasteful government spending: farm subsidies.

Obama cited a GAO report out yesterday that said from 2003 to 2006, "millionaire farmers" got $49 million in farm subsidies despite earning more than the $2.5 million cutoff in annual income.

"If it's true," Obama said, "it's a prime example of waste."

With the announcement, Obama joins a long and largely defeated line of presidents and officials who've tried to kill farm subsidies, a perk as deeply ingrained in a nation built on the Jeffersonian Agricultural Ideal as any other.

Subsidies have been constructed and preserved by powerful Midwest lawmakers and are very difficult to pry loose.

To the president-elect, we say: Good luck with that. Let us know how it works out for you.

Orszag, Obama said, "doesn't need a map to tell him where the bodies are buried in the federal budget."

One place to start digging is the Nation's Breadbasket. The president-elect may be wise to be on the lookout for a Combine Army motoring to Washington to preserve the subsidies.

Obama made clear that his economic team’s first priority is crafting an economic plan that will both revive the economy in the short term and create 2.5 million jobs over the next two years. And he made equally clear that the deficit is secondary, for the time being, despite projections by some that some the budget gap could reach $1 trillion next year.

“We’ve got to focus first on getting the economy back on track,” he said, acknowledging that “we’re going to see a substantial deficit next year, bigger than we’ve seen in some time,” though he declined to put a number on either the deficit or stimulus spending. “It’s going to be costly,” he said.

Nonetheless, perhaps to emphasize that reining in the deficit will be part of his longer-term planning, he said that on Tuesday, he would address plans to “reform how business is done in Washington, how the budgeting process works” with “meaningful cuts and sacrifices.”

Gains in the Dow Jones Industrial Average, which had risen some 320 points when Obama began speaking shortly after noon Eastern time, fell back to about 225 points over Friday's close after the last question before climbing again to a gain of about 264 points over the following hour.

Although Obama said some of the current administration's efforts to address the financial crisis "didn't work exactly as [intended]," he said they had helped stabilize the financial system. "My administration will honor the public commitments made by the current administration to address the crisis," he said in his prepared remarks.

As has been his habit since winning the Nov. 4 election, Obama said the government must move "swiftly and boldly" to prevent the economic slump from becoming significantly worse, saying "we cannot hesitate or delay." But he also reinforced the prevailing assumption that little in the way of economic stimulus is likely before he is sworn in on Jan. 20, urging "the new Congress" to "work on an aggressive economic recovery plan when they convene in early January." Congress left town last week having passed only an extension of unemployment benefits, with the possibility of returning to provide aid to automakers in December.

Obama also appeared to lay the groundwork for shifting his position on some tax changes, leaving open the possibility that his administration would not seek to quickly undo tax-cuts for upper-income Americans, but rather let them expire by 2011 as they would under current law.

He also supported assistance to the auto industry, but said it must be tied to meaningful reforms by automakers to ensure they remain viable once government aid ends. "We can't just write a blank check to the auto industry," he said. "Congress did the right thing, which is saying, you guys need to come up with the right plan and come back" with it before receiving any financial assistance.

The tone of his comments to reporters at the Hyatt Chicago were grave, warning that the country is "facing an economic crisis of historic proportions." But he tempered that with faith in "the spirit of determination and optimism that has always defined us."

"Again, this won't be easy," Obama said. "There are no shortcuts or quick fixes to this crisis ... and the economy is likely to get worse before it gets better." Then, wrapping up his prepared comments, he added: "I know we can work our way out of this crisis because we've done it before."

The economic team announced at the event was largely as reported over the weekend, with New York Federal Reserve President Timothy Geithner named as Obama's Treasury nominee and former Treasury chief Lawrence Summers named as director of the National Economic Council, making him perhaps Obama's top economic adviser. (BusinessWeek.com has more on Geithner and Summers.)

However, Obama tapped Christina D. Romer, a Berkeley economist and co-director of the committee that officially declares recessions, as director of the Council of Economic Advisers. Many had expected Austan Goolsbee, a University of Chicago behavioral economist and senior campaign economic adviser, to take the position. Romer's work includes research into the U.S. recovery from the Great Depression.

Obama also named Melody C. Barnes as director of the Domestic Policy Council, which coordinates domestic initiatives across the executive branch to match presidential priorities. Barnes, who works at the progressive Center for American Progress think-tank and served as a top domestic-policy adviser to Obama's campaign, will focus in part on health-care reform, working with the administration's Health and Human Services secretary. Former Senate Majority Leader Tom Daschle is expected to take that post.

Heather Higgenbottom, a former legislative director for Sen. John Kerry and founder of a national-security think-tank, will be Barnes' deputy.

President-elect's emphasis on the environment means more work for CIOs.

Ed Sperling

Rarely do national political agendas have a direct bearing on CIOs, but next year will be different.

Frank Kelly, Deutsche Bank's (nyse: DB - news - people ) managing director and head of government affairs for the Americas, told the Semiconductor Industry Association Nov. 19 that the Obama administration will look to make swift and deep changes throughout the business world. And while Obama said this is "tech's time," he also said the emphasis will be on everything green.

For many CIOs who believed they could take their time rolling out more energy-efficient changes, including postponing the purchase of new equipment, this should serve as a wake-up call. Here's how things are likely to unfold:

--Pressure will be levied on coal- and oil-fired power generation plants to shift to more environmental-friendly technology. That means new technology, as well as the addition of scrubbers (or, in the case of coal-fired plants, gasification). The problem is this stuff is expensive, which will prompt the utilities--most of which are regulated by their respective states--to apply for rate increases.

While states are likely to approve these increases, they are even more likely to scale them based upon usage. The biggest users will bear the brunt of these changes, and data centers are among the largest consumers of electricity on the planet--and in many cases, the least efficient. That means there will be huge pressure to reduce energy consumption.

--Pressure on companies to cut electricity consumption will mean putting into place long-term plans more quickly, but at a time when budgets are being squeezed by the ongoing economic downturn. The good news is that there will probably be significant tax credits applied to the purchase of more efficient hardware, and a case can be made for sales of virtualization software. The bad news is that no one has the money to speed up these purchases at the moment, which should make for an interesting shuffle of prioritization within corporations.

Ironically, outsourcing is unlikely to reap the same tax benefits, because that's viewed as just handing off the energy problem to someone else. In fact, the numbers may work against software-as-a-service and cloud computing in the short term, because there are no tax benefits. It remains to be seen exactly what benefits will be offered, but this will be an interesting twist to what was viewed as an important cost-cutting trend six months ago.

President-elect Barack Obama tapped New York Federal Reserve President Tim Geithner as his treasury secretary on Monday, turning to a veteran of financial crises at home and overseas to lead the rescue of the nation's swooning economy.

At a news conference 57 days days before his inauguration, Obama also chose Lawrence Summers as director of his National Economic Council. Summers was treasury secretary under former President Bill Clinton.

Obama said that recent news "has made it even more clear that we are facing an economic crisis of historic proportions." Offering a grim prediction, he added, "Most experts now believe that we could lose millions of jobs next year."

He said his newly minted economic aides offered "sound judgment and fresh thinking" at a time of economic peril.

THIS IS A BREAKING NEWS UPDATE. Check back soon for further information. AP's earlier story is below.

CHICAGO (AP) - Eager to calm economic anxieties, President-elect Barack Obama is rolling out an economic vision that will require congressional cooperation even before he settles into his new desk in the White House's Oval Office.

Obama will introduce his new economic leadership team Monday, a key step toward enacting a huge new economic recovery plan that aims to save or create 2.5 million jobs over the next two years.

The plan, which Obama announced yesterday during the weekly Democratic radio address, is more expansive -- and undoubtedly more expensive -- than anything proposed so far to revive the nation's deteriorating economy. Obama said the darkening economic outlook demands that Washington act "swiftly and boldly" to diminish the risk that the nation "could lose millions of jobs next year."

"The news this week has only reinforced the fact that we are facing an economic crisis of historic proportions," Obama said, citing chaotic financial markets, rising jobless claims and the specter of a "deflationary spiral that could increase our massive debt even further." He provided few details and no price tag, but said his economic team is working on "a plan big enough to meet the challenges we face that I intend to sign soon after taking office."

While cast as a response to a rapidly worsening crisis, the plan could enable Obama to shift massive sums to domestic priorities that Democrats say have long been neglected, such as health care and education. It also could provide seed money to reshape major U.S. industries, hastening the production of wind and solar energy and fuel-efficient cars, for example. Obama said the plan would be "a down payment on the type of reform my administration will bring to Washington."

Obama has scheduled his second formal news conference since the election for tomorrow to introduce his economic team, including Federal Bank of New York President Timothy F. Geithner, Obama's nominee for Treasury secretary. According to Democratic sources, Harvard economist Lawrence Summers, a Clinton administration Treasury chief, will be named director of the National Economic Council. In this capacity, Summers will coordinate the Obama administration's overall economic policy.

Obama's advisers are coordinating with Democrats in Congress to craft a proposal intended to spur economic activity. Congressional leaders have said they hope to pass it shortly after the new Congress convenes next year and have it on Obama's desk soon after he takes office on Jan. 20.

Obama's address echoed many of the same ideas Democrats on Capitol Hill have been advocating for nearly a year.

Obama said his plan would launch "a two-year nationwide effort to jump-start job creation in America and lay the foundation for a strong and growing economy. We'll put people back to work rebuilding our crumbling roads and bridges, modernizing schools that are failing our children, and building wind farms and solar panels," as well as producing fuel-efficient cars.

"These aren't just steps to pull ourselves out of this immediate crisis; these are long-term investments in our economic future that have been ignored for far too long," he said.

Economists have called on the federal government to spend at least $150 billion and as much as $500 billion to ease the effects of what is expected to be the most painful and prolonged recession since World War II. A stimulus package signed by President Bush in February cost $168 billion.

House Democrats have been talking about a new package worth at least $150 billion, and possibly much more. During the presidential campaign, Obama proposed a two-year, $175 billion stimulus package with money for cash-strapped state governments and infrastructure projects as well as a $1,000 tax credit for working families.

The campaign did not release an estimate of the number of jobs that his latest proposal would create. But congressional aides who have been involved in developing stimulus proposals said that any plan to create 2.5 million jobs is likely to be significantly larger -- probably well over $200 billion, or between 1 and 2 percent of the gross domestic product.