Page last updated at 07:55 GMT, Tuesday, 29 July 2008 08:55 UK

Obama to revise economic policy

By Steve Schifferes
Economics reporter, BBC News

Jobseekers at a jobs fair in California. File photo
June saw the biggest jump in unemployment in over 20 years

As the IMF warns that the US economic crisis is ongoing, Senator Barack Obama has been holding talks with his advisers to devise new plans to cope with the economic downturn.

The Democratic presidential hopeful, who has been holding bipartisan talks in Washington, wants another economic stimulus package to boost US growth.

Mr Obama also wants to turn up the economic heat on his Republican rival.

Senator McCain says that Wall Street is to blame for the credit crunch.

There was a "lively discussion of views" at the economic summit according to Laura Tyson, a former Clinton aide who is now advising Mr Obama.

This is not surprising, given that the summit brought together trade unionists, Wall Street bankers, and Treasury secretaries for both the Clinton and Bush administration.

But how Mr Obama knits together his diverse coalition of economic interests could be crucial to his electoral chances in the autumn.

Growing crisis

The state of the US economy is the top issue among voters in the US presidential election, and the two presumptive candidates have sharply different plans on how to try and combat the downturn.

Barack Obama speaks in Raleigh, North Carolina
Mr Obama is trying to balance economic prioritie.

Mr McCain has endorsed "supply side economics", calling for more tax cuts for business to boost economic growth and sharp cuts in spending programmes.

Mr Obama, on the other hand, wants more domestic spending, particularly on health care, and has indicated that he is not averse to higher taxes on the rich to pay for it.

But the rapidly deteriorating state of the US economy, led by plummeting house prices and rising foreclosures, has led both candidates to modify their stances.

Both candidates support the rescue plan just passed by Congress to bail out the huge government-backed mortgage institutions, Fannie Mae and Freddie Mac, which provide half of all US mortgages.

But Mr McCain is worried that the bill could offer a free ride to Wall Street firms who acted irresponsibly by offering cheap sub-prime mortgages.

US Federal Reserve Chairman Ben Bernanke. File photo
Fed chairman Bernanke said the bail-out was vital for the financial system

The cost of this bail-out could be as high as $100bn (50bn) according to the non-partisan Congressional Budget Office.

And, when added to the cost of the economic stimulus package, this could more than double the size of the US budget deficit to a record $482bn during the first year of office for the new president.

Mr McCain has indicated that he would deal with the budget deficit by limiting certain spending by individual senators, and argues that the government should not offer a blank cheque to bail out failing banks on Wall Street.

But his economic credibility has been further dented by the resignation of his chief economic adviser, former senator Phil Gramm, who accused the American voters of "whining" about the economy.

Budget debate

If anything, it is Mr Obama's advisers who seem more concerned about how to deal with the growing budget deficit, which could add to the problems of the US economy in the long run.

A worker puts the finishing touches on GM's Cadillac CTS
Unionised workers are angry about job losses to China.

Mr Obama, who flirted with a populist approach to economic policy during his primary campaign, appointed a conservative Democrat, Jason Furman, as his economic advisor in June.

Mr Furman had headed the Hamilton Project, a project sponsored by former Democratic Treasury Secretary Robert Rubin to ensure that the new administration has sound economic policies.

And Mr Obama has consulted Mr Rubin, along with his successor as Treasury Secretary Lawrence Summers, and former US Labor Secretary Robert Reich, who all took part in his economic summit on Monday.

To emphasise the bipartisan nature of his approach, he also invited former Bush Treasury Secretary Paul O'Neill, who fell out with the President over the cost of the Iraq war, and Paul Volker, the chairman of the Federal Reserve before Alan Greenspan, who famously clashed with Ronald Reagan over supply side economics and the budget deficit.

Other people attending the summit were Google chief executive Eric Schmidt, Jamie Dimon, chief executive of JPMorganChase and business investor Warren Buffett, the richest man in the US, as well as trade union leaders John Sweeney of the AFL-CIO and SEIU Secretary-Treasurer Anna Burger.

There is disagreement among Mr Obama's advisers as to how far he should go in pledging further budget measures to revive the economy and provide further help to beleaguered home owners.

Mr Summers argues that the US government should nationalise Fannie Mae and Freddie Mac, assuming their $6 trillion debt and begin a rapid programme of aid for households facing foreclosure.

But more conservative Democrats worry that such an approach would spook financial markets and increase interest rates on US government bonds, thus worsening the budget deficit and the credit crunch.

There are also be clashes on protectionism, with negotiations having reached a crucial stage at the world trade talks in Geneva.

Trade unions argue that the US should not sign any new trade deals that do not have clauses protecting workers' rights, while Mr Rubin believes that a descent into protectionism would exacerbate the world economic slowdown.

Health care

The budget crisis could make it more difficult to Mr Obama to implement his main domestic policy agenda.

He has been campaigning in favour of an expansion of US healthcare to make sure that all children, and ultimately all citizens, are covered.

This could cost some $100bn per year, adding to budget pressures.

Mr Obama could slow plans to implement any healthcare reforms, but he has already lowered expectations by aiming to provide universal coverage only for children under 18 in the first instance.

He has also spoken of his ambitious goals to reverse inequality, which has increased in the US in the last decade despite economic growth and underlies much of the current mode of disenchantment.

And he has pledged to reform social security to ensure it is adequately funded, possibly by raising the ceiling on the level of income that triggers tax payments into the social security trust fund.

But he has indicated that he may delay any plans to raise taxes if the economy continues to worsen, which is further widening inequality.

Peace dividend

Mr Obama was also counting on the peace dividend from withdrawing from Iraq - which costs the US government $15bn per month - to help generate funds for healthcare and other projects.

But it has become clear recently that the deteriorating situation in Afghanistan, and the unresolved tensions with Iran, make it unlikely that the number of US troops serving abroad will be reduced imminently.

So whoever wins the US presidential election in November is likely to be facing a series of sobering economic policy choices in January.

Such challenges could become even more acute if the US economy is actually in recession by then - something that may emerge just a few days before the election when the third quarter economic growth figures are released.

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