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A Good Plan - But Will it Pass?

A Good Plan - But Will it Pass?

US President Obama in a speech today unveiled the "American Jobs Act". This proposed legislation is an attempt to address the two major problems facing America - high levels of unemployment and a structural budget deficit that is pressuring an already concerning debt level.

Economically, this looks like a good plan, offering stimulus for the US economy now and deficit reduction over the longer term. The total cost of the package is estimated at U$447 billion, which President Obama states will be "fully paid for". The spending program is outlined in full, but the funding initiatives are not. The President indicated cuts to Medicaid (possibly through raising the age of eligibility) and further government spending cuts in an announcement on Monday week.

While this legislation should be well received by markets, S&P 500 futures markets initially sold off, possibly expressing doubts that this package can pass Congress. It appears the major obstacle here is political opposition. Fears are heightened by memories of the political debacle surrounding the most recent raising of the US debt ceiling.

However, President Obama has addressed this point as well. He demanded more than twenty times in the speech that congress "pass this bill now", painting opposition to it as unpatriotic and an unfair attack on the most vulnerable in the US to the benefit of companies and wealthy Americans. Invoking past presidents Lincoln (Republican) and Kennedy (Democrat), he characterised this Act as continuing a tradition of political vision that makes America "the greatest nation on Earth".

This puts the extreme elements of the opposition at considerable risk. If they pass the bill it will be considered a humiliating climb down. If they don't pass the bill, they may be seen as an unreasonable and obstructive instrument of the privileged, and therefore at risk of political oblivion.

It's too early to say if this plan will be the turning point in current thinking on US economic prospects. If it can be implemented, it will no doubt speak to the concerns plaguing investors and traders. However, markets will wait to see how the political process plays out.