Government stimulus packages have virtually the same effect on the economy as a mechanical ventilator has on a patient with breathing difficulty. They get a slumping economy ticking again, but as in medicine the difficulty is in determining when and how to coax the economy to run along unaided. A year after sinking into its worst spell of recession since the Great Depression, the U.S. economy has begun to grow again, surprisingly faster than what most experts predicted. President Barack Obama, of course, has taken the initial credit saying the steps taken have made a difference, yet he readily acknowledges that there is a long way to go before the economy can be fully restored. There is no doubt that the huge stimulus package delivered by his government propelled demand over the past few months. With the “cash for clunkers” scheme and the offer of tax credit for first-time home-buyers thrusting government money in the hands of consumers, there was a substantial jump in car and home sales, the effect of which has been to magnify what might have been a 1.9 per cent economic growth in the June-September quarter to 3.5 per cent. The question is what might happen when the effect of the stimulus wears off. Are U.S. consumers and industry ready to pick up the baton? The answer is no. Sales of cars and light trucks dropped sharply in September, the scheme having ended in August. Unemployment is still hovering uncomfortably close to 10 per cent, and consumer credit continues to fall.
It is not just the U.S. that is hoping that the recovery is for real. Most emerging economies, especially India, have a considerable stake in the process. Their growth momentum was rudely halted by the downturn in the U.S. last year; normalisation in the U.S. will, as the International Monetary Fund says in its latest regional economic outlook report, generate “an outsized Asian upturn.” India’s software industry has always relied substantially on the U.S. engine for its growth; its ability to hire the nation’s engineering graduates in their hundreds of thousands has remained compromised this past year as the U.S. market convulsed and software exports stagnated. Another large employer, the textile industry too had to downsize as U.S. demand fell sharply. While in recent weeks both sectors have scented recovery in their largest overseas market, the question whether this could be a false dawn still nags. Having run up a monstrous $1.3 trillion deficit, the Obama Administration does not have much money left for a follow-up thrust should the economy be found wanting. That is a predicament none would want the U.S. to get into.