– Christopher Swann is a Reuters columnist. The views expressed are his own –

Obama’s tax cuts were meant to be the first strike force of the stimulus package. The main selling point — other than political popularity — was speed.

Higher take-home pay in April and May would be the first evidence many Americans would see of their government’s broad effort to rescue the economy. The hope was that this would prop up spending long before lumbering public work projects could get under way.

Yet the financial impact already looks set to be swept away. The recent run-up in gasoline prices and a surge in personal savings have provided an uncomfortable reminder of the diminutive size of the tax cuts.

The cuts are just part of a broad government campaign to revive the U.S. economy — along with fresh infrastructure projects, help to the states and bank bailouts.

Even so, boosting take home pay has been an important part of the White House strategy to prop up spending.

But the “Making Work Pay” deduction in withholding tax will amount to an estimated $116 billion spread over two years.

In April — the first month in which Americans would have noticed the extra take-home pay — the annual infusion was just shy of $50 billion. Even if you add a one-time payment to Social Security recipients and extra unemployment benefits, you still only reach about $80 billion over the year.

Compare this with the impact of rising prices at the pump. Americans have been spending roughly $240 billion a year to fill up their cars. A 38 percent increase in retail gasoline prices since the first quarter — if sustained — will increase their yearly bill by more than $90 billion.

This alone would be enough to swamp the tax element of the stimulus.

A second imposing obstacle has been the increasing desire of Americans to save. Early estimates suggested that jittery consumers stashed away two thirds of Bush’s 2008 tax rebate, turning a bazooka for spending into a pea-shooter.

Obama’s package was drafted with precisely this danger in mind. Behavioral economists, like Richard Thaler, believe that one-off bonanzas are more likely to be hoarded, while consumers will spend inconspicuous monthly sums.

Again, this clever policy making may be overwhelmed by the sheer scale of the problem. Americans are scrambling to pay down debt. In April consumers paid down around $15.7 billion — once again more than double the monthly impact of personal tax cuts.

People with any ability to replenish their savings seem keen to do so. Americans squirreled away an extra $130 billion in April compared with March — a total of $620 billion.

To be sure, the outlook would be even grimmer were it not for this well-timed help to the consumer. An increase in take-home pay may also have a psychological effect that outweighs its financial impact. But little should be expected from the tax cut portion of the “stimulus package”.

Indeed, it might more accurately be called a “damage limitation” package.

– Wei Gu is a Reuters columnist. The opinions expressed are her own –

China investors should care about three major numbers this year: 8 percent economic growth, its 4 trillion yuan ($586 billion) stimulus package, and the 10 industries revitalization plan.

The first is the government’s economic growth target and the second is a spending plan to shield the economy from the global financial crisis.

A lot has been said about the first two numbers, but not enough about the third. Indeed, there are at least three misunderstandings about the latter.

First, perhaps misled by the word “revitalization,” many people talk about the plan as if it is another set of recovery measures to boost investment demand. On the contrary, it mostly contains policy measures aimed at reducing supply.

Thus, there is little reason for investors to be disappointed if their favorite sectors, such as property, are not included.

The 10 industries consist nine sub-sectors of manufacturing and one service sector related to that, logistics, which have all been hit hard by the collapse of overseas demand.

The plan is designed to buy time by achieving an orderly reduction in these industries’ capacity, rather than a reduction that could become disorderly if left to market forces, says Qing Wang, Morgan Stanley’s China economist.

But will that work? That leads to the second myth.

The revitalization plan is mostly about state-owned companies buying other state firms and many in China believe that if the government has a wish, it has a way.

But that is not always the case. Companies and local governments try their best to avoid arranged marriages. History has shown that such deals can take as long as a decade to complete.

In the current economic environment, designated acquirers won’t be interested in taking on more workers and equipment and local governments hate to lose tax revenue from factories on their turf.

Even if the government can drive consolidation, they cannot successfully compel integration, thus little synergy can be extracted out of those deals.

Investors should also bear in mind that Beijing’s top priority is to protect jobs. Any company with plans of cutting more than 20 jobs needs to brief local authorities one month in advance. So far, state-owned companies have largely refrained from staff reduction.

But if Beijing does not allow layoffs and closures, then it will be impossible to reduce capacity even after arranged mergers.

So, don’t expect restructuring plans to lead to much capacity reduction, even though it is desperately needed.

A point in question is China’s steel industry. Now the world’s largest steel maker, China last year produced 660 million tonnes of crude steel, 100 million more than demand.

The government has said it will strive to eliminate just 25 million tonnes of obsolete steel production capacities by 2011, only a quarter of the current extra capacity.

The third myth is that all industries are treated equally. The reality is that policies for those 10 industries differ widely.

The priority for the electronics industry is “rural demand,” for textiles “upgrade and move up the value chain,” for nonferrous “contraction,” and for equipment “strengthening and innovation.”

For steel, the focus is consolidation, as demand is not likely to come back soon.

“The best time for steel is over frankly,” said Larry Wan, a fund manager at KBC Goldstate Fund management in Shanghai.

“The government is motivated to cut capacity, but it will face strong resistance from below.”

Beijing also wants the auto industry to consolidate. It specifically said that it wants the top 14 auto makers to be reduced to 10, but has not set a target for capacity reduction. Instead, it is planning for capacity to grow 10 percent annually in the next three years.

The policy for autos is more about stimulating demand. Measures include reducing the sales on smaller cars, providing subsidies to encourage rural residents to replace old vehicles, and making more financing available for consumers.

It might be tempting for investors to dismiss Beijing’s interventionist approach. But they should still study the plan.

The government has never before come up with such a sweeping package that includes detailed long-term goals for so many key industries. It could serve as a curtain raiser of future industrial policies.

“The plans have made it clear where the government support lies,” said Yang Chengzhang, chief economist at Shenyin Wanguo Securities. “Every company needs to position itself according to the plan to get maximum room for its development.”

– At the time of publication Wei Gu did not own any direct investments in securities mentioned in this article. She may be an owner indirectly as an investor in a fund –

– Bernd Debusmann is a Reuters columnist. The opinions expressed are his own. –

Shock!! Horror!! The United States is becoming more like Europe! The rugged individualism that makes up part of the country’s self-image may be doomed. Paternalism threatens to throttle enterprise and initiative.

That has been the reaction of Republican leaders to the $787 billion stimulus package President Barack Obama signed this week after a contentious debate that echoed arguments made more than 80 years ago on the eve of the Great Depression.

“We were challenged with the choice of the American system of rugged individualism or the choice of a European system of diametrically opposed doctrines - doctrines of paternalism and state socialism,” Herbert Hoover said in his closing campaign speech for the 1928 presidential elections he won comfortably. The European ideas, he said, undermined the initiative and enterprise that propelled Americans to “unparalleled greatness.”

Fast forward to February 2009 and listen to an updated version of conservative philosophy, expressed by Mitch McConnell, the Senate’s minority leader: “This (stimulus package) paints a picture of the Europeanization of America … and if we take all these measures, we will have made a dramatic move in the direction of turning America into Western Europe.”

Why is this such a dreadful prospect? After all, the United States does not fare particularly well on international comparisons of quality of life. It ranks 15th on the United Nation’s annual Human Development Index which measures such things as life expectancy and standard of living. A similar index compiled a few years ago by the Economist Intelligence Unit and using different factors put the United States in 13th place.

In both surveys, some of the European countries routinely derided as “nanny states” by conservative ideologues scored comfortably ahead of the United States.

Still, conservative talk show hosts dubbed the stimulus bill the European Socialist Act of 2009 - not meant as a compliment — and Newsweek magazine followed up the theme with a cover that carried the headline We Are All Socialists Now and noted inside that “Barack Obama sounds more like the president of France every day.”

It warned that slow economic growth in the United States, which has historically grown faster than Europe, “could kill rugged American individualism.”

Which begs the question to what extent rugged individualism can flourish in a deep recession.

IN RECESSION, SAFETY NETS LOOK GOOD

In January alone, almost 600,000 Americans lost their jobs, the biggest monthly drop in 34 years. Over the past year, job cuts totaled 3.6 million. This year alone, 2.4 million people are expected to lose their homes, according to the Center for Responsible Lending, a consumer advocacy group which tracks foreclosures. In the next four years, that figure is estimated to climb to 8 million.

More than 44 million Americans lack health insurance, the highest number in any industrialized country, and another 38 million are under-insured.

In these bleak surroundings, European-style social safety nets look attractive even to rugged individualists, particularly those affected by the downturn. Even before the present crisis, polls showed growing support for government programs to help those in need. A 2007 Pew survey, for example, showed 69 percent supporting the notion that government should take care of people who can’t care for themselves.

Unfettered capitalism this is not. In the Internet debate prompted by Republican warnings of the impending Europeanization of America, one commentator asked: “Does this mean that the half million Americans losing their jobs each month can count on having health care, public transportation, quality education and a public safety net?”

That depends on whether and how fast the stimulus package takes effect and allows Obama to translate promises into actions. Health care reform is high on his list, as are plans to overhaul America’s creaking transportation infrastructure, make college education more affordable, and provide a safety net for the poor and the unemployed.

Call it Europeanization or a 21st century version of the 1930s New Deal designed to end the Great Depression (economists still argue over whether it did or not), it is a sharp turn from the conservative philosophy that government is the problem and can’t be the solution. That was the basic plank of the “Reagan revolution” of small government, low taxes, de-regulation and a belief that the markets know best.

Numbers confirm that the United States is coming closer to Europe: In the late 1990s, U.S. government spending amounted to around 34 percent of gross domestic product, compared with 48 percent in Europe, according to the Paris-based Organization for Economic Cooperation and Development. By next year, stimulus spending is expected to bring the U.S. figure to around 40 percent and 47 percent in Europe. The gap is shrinking.

But in comparisons between America and Europe in an age of economic crisis, one element is conspicuously absent: social unrest. Greece, France, Bulgaria and Iceland have been shaken by riots, mass protests and strikes. No sign of that in the United States - yet.

Are rugged individualists less prone to protests and riots? Or is it just a matter of time?

– You can contact the author at Debusmann@Reuters.com. For previous columns, click here. –

- Eric Auchard is a Reuters columnist. The opinions expressed are his own –

By Eric Auchard

LONDON (Reuters) - With world economies fast running out of steam, it may seem an unlikely time for cash-strapped governments to discover universal broadband access as an urgent national funding priority.

Yet in this financial plague year, the Great Broadband Bailout of 2009 is rocketing up the political agenda as the global economic crisis deepens further.

Massive programs to save the banking sector are failing, so far, to revive business confidence. Instead, governments must stimulate the real economy, creating jobs and income that get the working world moving.

Building faster, more pervasive internet networks creates jobs and opens new avenues for business. It joins traditional ways of priming the economy like ditch-digging and pothole-fixing to save roads and bridges or newer efforts to invest in green energy, health care or education.

The classic complaint against government job creation is that monetary policy is a quicker, more direct way to put money in consumers’ hands. But as interest rates rush to zero percent, policymakers are desperate for alternatives.

The U.S. Congress is negotiating final terms of President Barack Obama’s $800 billion stimulus plan. It includes $6-7 billion to expand broadband networks in rural and other unserved areas and up to $30 billion in tax credits for builders of superfast 100 million bit-a-second networks.

Two weeks ago, Britain’s Labor government said it wanted to make universal broadband access a reality by 2012. Two-thirds of UK households now have broadband. That broader mandate looks designed to frame debate over an eventual stimulus package that goes beyond existing bank bailout measures.

A plan could include funding to push mobile broadband into hard-to-reach rural areas and tax credits for expanding construction of superfast fiber optic cables that would speed up existing broadband networks.

Countries from Australia to Portugal to Finland are investing public monies to build faster networks.

Why now? Because jobs, business and future investments in growth will not happen without networks that efficiently deliver the growing range of text, audio and video services that consumers and businesses demand. Alternative forms of broadband access, including mobile phone networks, only go part of the way to soak up demand for these data-intensive features.

REVIVING BROADBAND INVESTMENT

The communications industry has plowed billions into broadband networks to date, but is strapped to do more. Layoffs have been announced at most major broadband carriers.

Private network operators may be more amenable to government aid following a year in which broadband subscriber growth fell 9.1 percent worldwide after five straight years of healthy growth, according to data from market research firm iSuppli.

Limited government backing at this juncture can provide incentives to private investors to co-invest. Newly government-backed banks could even kick-start the process by freeing up loans for these new infrastructure projects.

An economist at the Communications Workers of America, a union supporting the Obama plan, estimates that each $1 million invested in broadband creates 20 jobs, directly, in terms of construction, installation or network services, or indirectly, from jobs created from money spent by employing broadband workers. A $7 billion grant could mean 140,000 new jobs.

Of course, injecting public money into private industry, even with the best of intentions, is likely to cause its own headaches. No one is talking about outright nationalization, or renationalisation in some cases. Arguments in favor of government intervention depend on speed if they are to have any effect in this economic cycle.

The biggest beneficiaries are likely to be the incumbent carriers — AT&T (T.N) and Verizon (VZ.N) in the United States and BT Group (BT.L) in Britain. Inevitably, there will be issues over who gains rights to broadband network capacity constructed with government funds, especially if tax credits or subsidies are targeted at incumbents.

Rival operators will demand open access to networks built with government funding. Compromises must be reached to avert legal delays. The question of how to structure further financing will have to consider whether private companies pay the money back out of future profits, or work out some sort of regulatory trade-off for shouldering risks at this time.

Brokerage Sanford C. Bernstein has described a more ambitious scenario that could involve the government creating a parallel network by buying up the broadband assets of credit-strapped cable TV and phone provider Virgin Media (VMED.O), the second largest broadband supplier in the UK, then laying new fiber lines.

The argument for bailing out the broadband industry does not rest just on the pressing need to put people to work. New broadband construction is ditch-digging with a purpose. Economists no longer debate whether broadband investments spur follow-on employment and new business prospects. The question now is how much and how soon?

– At the time of publication Eric Auchard did not own any direct investments in securities mentioned in this article. He may be an owner indirectly as an investor in a fund. –

– Diana Furchtgott-Roth, is a senior fellow at the Hudson Institute and former chief economist at the U.S. Department of Labor. The views expressed are her own. –

At the very time that the Senate is debating whether to spend $800 billion or $900 billion to stimulate the economy, the government is considering other legislative and regulatory initiatives that would impede economic recovery.

Growing Protectionism

By inserting protectionist provisions that require some goods financed by the stimulus bill to be made in America, Congress is risking a trade war with important trading partners in Europe and Asia. A trade war would reduce exports, potentially destroying millions of American jobs.

Cutting Defense Spending

Although Congress is trying to revive the economy by expanding domestic spending, the Pentagon is reportedly facing budget cuts next year. But with President Obama promising to deploy more troops to Afghanistan, America needs more defense spending, not less.

America needs to purchase more weapons, ordnance, vehicles, and body armor so that our troops have the best equipment possible. Defense supplies are generally made in America, and production employs Americans with a wide range of skills.

If America increases regular forces by 100,000 and hires 100,000 more civilians to support them, these individuals would acquire useful skills when they leave the Defense Department for the private sector. Their presence would enable the Pentagon to bring home reserve and National Guard troops, some of whom have been deployed for over a year.

Individual Emissions Standards for States

Earlier this week auto companies revealed that sales had reached a 27-year low. Yet, under a new directive from President Obama, states such as California would be able to set their own emissions standards, which will be—you guessed it—stricter than federal law. This would complicate engineering and production, raise costs, and send the industry into an even greater decline.

Since California is America’s largest car market, companies would have to make lighter, more fuel-efficient cars that consumers might not want to purchase. Domestic companies would be particularly hard-hit because they make larger cars. It makes no sense for Congress to bail out Detroit with loans and give tax deductions for purchases of new cars and trucks, while at the same time decimating the market of the Big Three. More red ink for the auto industry, and more layoffs across America.

Employee Free Choice Act

This misnamed bill would change the law to allow workplaces to be unionized without secret ballots. A workplace could be unionized if a majority of workers sign an open card in favor of unionization — a process known as “card check,” exposing workers to union intimidation. This bill passed the House in the 110th Congress and will be soon brought up in this congressional session.

One of the bill’s House sponsors was House Committee on Education and Labor Chairman George Miller. In 2001, he and five colleagues wrote to the state arbitration board of Puebla, Mexico, saying, “we feel that the secret ballot is absolutely necessary in order to ensure that workers are not intimidated into voting for a union they might not otherwise choose.” If Mexicans deserve a secret ballot, so do Americans.

States where employees do not have to join a union in order to work have lower average unemployment rates than other states, so it would not be surprising if increased unionization would raise unemployment rates.

As well as protectionism, cuts in defense spending, unionization by intimidation, and arbitrary environmental standards, the economic stimulus bill would open the floodgates of deficit spending. The ensuing debt would burden Americans far into the future.

The Democrats, who control both the White House and Congress, should know better. No wonder consumers are scared, financial markets are tumbling, and unemployment continues to rise.

Diana Furchtgott-Roth can be reached at dfr@hudson.org. For previous columns, click here.

– John Kemp is a Reuters columnist. The opinions expressed are his own –

Yields on long-term U.S. Treasury debt continued to surge higher yesterday as the market braced for a future upturn in inflation and a tidal wave of long-dated issues that will be needed to fund the bank rescues and the emerging stimulus package.

Yields on three-year notes are up by around 47 basis points from their mid-December low. But yields on ten-year paper have soared 82 points and rates on the 30-year long bond have surged 114 points. Long-bond rates have retraced more than half their decline since the autumn (https://customers.reuters.com/d/graphics/USTREAS.pdf).

Back-end yields would probably have risen even further were it not for persistent hints the Federal Reserve is thinking about buying longer-dated issues to cap them. But the market has started to call the Fed’s bluff.

MANIPULATING THE FRONT END

In the press statement accompanying its most recent interest rate decision, the Federal Open Market Committee (FOMC) gave a clear commitment it will keep short-term rates at “exceptionally low levels for some time.” In practice, the Fed will probably hold rates close to zero for the next two to three years until a cyclical recovery is well underway. But thereafter rates will need to rise to more normal levels to contain inflationary pressures.

The steepening yield curve reflects an assumption the Fed’s zero-interest rate policy will dominate the whole yield on debt maturing in 2009-2011, but have a diminishing effect on securities which mature further in the future.

LENGTHENING THE DEBT PROFILE

Federal debt held by the public has surged almost 25 percent in the last nine months, from $4.64 trillion at the end of March 2008 to $5.78 trillion at the end of December. Net debt is scheduled to increase another $1.0-1.5 trillion over the next twelve months as a result of the cyclical downturn and the huge $700-900 billion stimulus package being considered by Congress.

So far, almost all the increase in debt has been funded by issuing short-term instruments. The proportion of debt maturing within one year has climbed from 38 percent at the end of March to 43 percent at the end of December, and will climb over 50 percent within the next twelve months unless the government’s issuing policy changes.

By increasing the volume of debt that needs to be refunded regularly, the shortening profile is creating a dangerous new form of fragility within the system.

In effect, the federal government is now taking on the maturity-transformation role previously provided by commercial banks, corporations issuing commercial paper, and special investment vehicles (SIVs). Like them, it is borrowing short-term from the money markets to make long-term investments secured against tax revenues receivable over decades.

But like the private borrowers, the government will also face a liquidity crisis if at any point the market balks at rolling over the maturing short-term notes.

For the moment, a liquidity crisis is unlikely. The short-term ultra-safe instruments the Treasury is issuing are a good fit for the type of securities which investors want to hold.

But once conditions begin to normalize, investors are likely to want to withdraw some funds from the short-term Treasury market to deploy them more profitably in other assets. And overseas investors will eventually want to reduce their exposure to dollar-denominated assets.

At that point, short rates will have to jump to persuade investors to keep sufficient funds in the market to roll over all the maturity bills and notes.

This risks creating a highly unstable dynamic. Even the slightest sign of stabilization and recovery will trigger a sharp run up in short and medium term government bond yields, cascading across the rest of the bond market into higher borrowing costs on commercial paper and commercial loans.

With so much short-term debt needing constant refunding, the Fed would struggle to control the pace of future monetary tightening. Both the Fed and the Treasury therefore have a strong interest in lengthening the government debt profile.

A much higher proportion of forthcoming debt issues will be placed in the middle and at the back end of the yield curve, which is why debt prices at these maturities have been falling, and their yields rising fastest.

MANIPULATING THE BACK END

The Fed’s open market operations are normally restricted to short-term U.S. Treasury bills. But the central bank has already expanded them to include purchases of commercial paper and mortgage-backed securities issued by Fannie Mae and Freddie Mac. It will soon start funding third parties to buy securities issued by credit card companies, student lenders and motor manufacturers.

The FOMC has stated it is also “prepared to purchase longer-term Treasury securities if evolving circumstances indicate that such transactions would be particularly effective in improving conditions in private credit markets.”

In effect, the Fed has said it is prepared to enter the market as a “buyer of last resort” for longer-dated Treasury securities if their prices fall too much and yields rise too high. Fed officials have talked about buying longer-dated Treasuries for several months. But so far the Fed has hesitated to pull the trigger, because buying long-dated bonds is fraught with danger.

The principal purpose of open market operations is to provide liquidity by making an active two-way market when other banks and institutions fail to do so in sufficient volume. To the extent the volume of open market operations increases, and the total quantity of securities owned by the Fed rises over time, the central bank is also printing money.

When the Fed first started to expand its open market purchases in early autumn, the cost was covered by additional deposits of Treasury money into the central bank. The Treasury issued short term cash management bills, deposited the proceeds with the Fed, and the Fed used them to buy private-sector debts. In effect, the Fed and the Treasury substituted private borrowing from the money markets for public borrowing, so the impact on the total money and credit supply was neutral.

The Fed and Treasury have since run down the supplementary financing program and allowed the cash management bills to mature without replacing them. The increase in the Fed’s balance sheet has started to expand the money supply. But the increase is mostly showing up in a rise in the volume of excess bank reserves, rather than lending, so the impact on business activity and inflation is muted.

There is more inflationary risk in future once conditions normalize and demand for cash liquidity falls. But at that point the Treasury could issue more government debt, or the Fed could sell some of the government and other securities in its portfolio, absorbing excess cash from the banks. In principle, the Fed is still swapping private debt (now) for government debt (later).

But once the Fed begins to purchase long-dated Treasuries it will be unambiguously creating money. It would be turning on the printing press and monetizing the federal government’s deficit.

Since all the Fed’s operations are ultimately backstopped by the U.S. Treasury, the Fed would be using the government’s own money to buy the government’s own debt. The Fed would find itself bracketed with Germany’s interwar Reichsbank and the central bank of Zimbabwe. This is most definitely not a comparison the Fed wants drawn.

The market would almost certainly respond by labeling a long-term Treasury purchase program “deficit financing” and brace for even higher inflation. The market-clearing yield on long-dated Treasuries would rise further. If the Fed wanted to continue holding yields down below this level, it would be forced to buy a substantial proportion — in the limiting case all — of the new issues.

As in the currency market, limited intervention risks backfiring, while large-scale intervention would stoke fears about inflation. So this is a policy the Fed must hope to hold in reserve, and never have to use.

– John Kemp is a Reuters columnist. The opinions expressed are his own –

Most successful elected leaders must disappoint their most ardent supporters at some point, as the bright hopes of an election campaign give way to the complex realities and constraints of governing, and need to occupy and retain the political center-ground to win re-election.

The trick of really successful leaders is to let supporters down gently to avoid turning disappointment into frustration and anger, retaining allegiance and support even when the maximum agenda goes unfulfilled and compromises must be made. Political supporters have to be given enough policy gains to be kept loyal, even as some cherished objectives fall by the wayside.

Despite the enormous outpouring of goodwill to the incoming president, or perhaps because of it, President-elect Barack Obama will be no exception to this iron rule.

The high hopes for the administration (cultural reconciliation between left and right, poverty alleviation, fairer distribution of economic rewards, renewed growth, financial reform, decisive action on climate change and “peace in our time”, to name but a few) have run far ahead of even the most successful president’s ability to deliver them in four or even eight years.

So the real question as the new administration prepares to take office is where will it dare and be able to be radical, and where will it be forced by circumstances to be more conservative.

Early indications suggest the administration may disappoint its progressive supporters with a cautious approach to foreign policy, the economy and finance, but its moves in climate change and energy efficiency could be far bolder.

CHOOSING BATTLES CAREFULLY

Like any president, Obama will have to decide which battles to fight and which to avoid, where to spend his political capital, and where to conserve it by hewing closer to the status quo. Presidents respond to the agenda forced upon them as much as they shape it.

Despite the “change” rhetoric, the new administration may find its options severely limited. Financial crisis at home leaves little room in the budget for new spending mandates beyond short-term stimulus.

While blaming the banks for causing the financial crisis is attractive, the system is probably not strong enough to withstand wholesale reform at the moment, so the administration may have to settle for more piecemeal changes.

Abroad, the administration also faces the familiar Gordian knot of intractable disputes: how to close the detention facilities at Guantanamo, deal with Iran’s suspected nuclear ambitions, engage European governments and become involved in the Middle East process.

Moreover, Obama’s commanding lead in electoral college votes (365-173) masks a narrower margin in the popular vote (53 percent to 46 percent). For all the enthusiasm about “change”, almost half the nation voted for Obama’s rival Senator John McCain. The president faces re-election in four years and cannot afford to stray too far from the political center.

The new president has two options. Try to enact a raft of radical reforms quickly in the hope of changing the whole political game by the time the next election is fought — the kind of “transformative” presidency with which scholars have credited Lincoln, Roosevelt, Truman and Reagan — though perhaps only in hindsight. Or pick a few carefully chosen battles and settle for competent administration and marginal improvements in other areas.

So far, Obama’s rhetoric implies the former, but his cabinet picks incline to the latter. His most enthusiastic supporters at home and abroad may be disappointed.

In many areas, circumstances may force the new president to be a gradualist rather than a great reformer, which risks disappointing core groups at home and foreign governments hoping for a more radical break with the past.

During the long campaign for the presidency, Obama showed himself to be one of the finest students of politics; despite the soaring oratory, he is well aware that politics remains the art of the possible.

The presidential transition has stressed bringing on board Washington insiders with previous governing and legislating experience (Clinton at State; Gates at Defense; Daschle at Health and Human Services; Blair and Panetta in intelligence; Geithner and Summers at the Treasury and on the White House National Economic Council) rather than innovative or iconoclastic visionaries from outside the Beltway.

Nevertheless, the administration needs to find at least some areas in which it can make a decisive break with the past and stress change rather than continuity, if only to maintain the enthusiasm of its core supporters among progressives and liberals.

Climate change and energy policy is shaping up to be the area where the incoming administration can make some bold gestures designed to reach out to domestic supporters and European governments while disappointing their hopes elsewhere.

THE NEW ENERGY TRINITY

Obama’s selection of Steven Chu to be secretary of energy last month was an indication of the importance he places on using science and technology, as well as a full range of fiscal incentives, to tackle climate change and reduce dependence on imported fossil fuels.

The Department of Energy (DOE)’s primary mission is stewardship of the nation’s nuclear stockpile, which absorbs more than half of the department’s $26 billion budget. DOE funds some research into alternative fuels. But until now the leading role on climate change and energy conservation programs has been taken by the Environmental Protection Agency (EPA) and the White House Council on Environmental Quality, with DOE playing only a minor supporting role.

So picking Chu, who has been one of the most prominent and outspoken advocates of using tax increases to force reductions in energy use, and a strong supporter of technological solutions to climate change in his role as director of the Lawrence Berkeley National Laboratory, sends a strong message about the incoming president’s priorities.

Combined with the selection of other strong climate change advocates to head the EPA and Council on Environmental Quality, Chu’s forthcoming nomination suggests the administration is preparing to be quite radical in this area.

Given the multiplying problems for the incoming administration’s climate and energy agenda, it may need to be.

For previous columns by John Kemp, click here.

– James Saft is a Reuters columnist. The opinions expressed are his own –

The lessons of Japan’s stumbling path out of deflation and recession suggest that government spending can help stave off an extended recession, but it may take years not months and require an unlikely combination of political will and consensus.

That’ll be a lot of bridges to nowhere.

The particular type of recession the United States faces, a balance sheet one, means that cutting interest rates will be really pretty ineffective, and while you can throw everything you have at saving the banking system, you can’t make people and businesses borrow and put the money to work. They too have their own balance sheet problems, having loaded up on debt and holding as they are assets like real estate and stocks that have fallen in value.

Banks too are about to get whacked by another hit to their assets, as corporations respond to newly lousy economic conditions by, well, defaulting.

In short, it’s a negative self-reinforcing cycle that low interest rates do little to break and that is bigger, though related, to the problems in the financial system.

Government spending can break the cycle. Not tax cuts, which will only go to pay down debt or are saved into a banking system that isn’t working, but actual bricks and mortar. Think the New Deal’s Works Progress Administration super-sized or Japan building highways and bridges over seemingly every river, stream and rivulet.

“It was the fiscal stimulus that actually helped end the Great Depression, not the monetary policy,” said Richard Koo, Tokyo-based chief economist at Nomura Research Institute and author of The Holy Grail of Macroeconomics: Lessons from Japan’s Great Recession.

“I don’t think it will be over quickly. I am recommending at least three to five years seamless medium-term fiscal stimulus measures to give enough time for the private sector to repair its balance sheet.”

Three to five years is an eternity in political life. It is an absolute sure thing that incoming President Barack Obama will design and implement a pretty chunky fiscal stimulus package even if President Bush does not pass one in his waning days in office. But think about how difficult it will be to maintain both the will and power to maintain a huge borrow and spend program for several years.

Koo thinks that Japan, which was facing a far more serious destruction of assets, derailed its recovery with premature fiscal reform. “If we had known in advance that this kind of recession will never be over until private balance sheets are repaired and fiscal stimulus is needed to keep the economy growing, we could have done it in seven or eight years perhaps instead of 15,” he said.

NEITHER A PRIVATE BORROWER OR A LENDER WILL

Between 1998 and 2007 credit extended to the private sector in Japan dropped by about 100 trillion yen, but massive government borrowing from banks of 106 trillion yen kept money moving in the economy.

Near zero interest rates were ineffective in Japan because people and business refused to borrow, continuing to pay down debt to repair balance sheets that had been hurt badly by the fall in the value of assets like stock holdings and real estate.

Very low interest rates are needed, certainly, but what they do is to keep the banking system and debtors on life support, giving them the time they need.

Of course, resolving to borrow multiple hundreds of billions of dollars is one thing, finding someone to lend it to you can be quite another.

China approved a huge stimulus package worth 4 trillion yuan ($586 billion) through 2010 to boost domestic demand. China will plough money into infrastructure and social welfare as well as other key sectors. This has raised some fears that China may become a less avid buyer of Treasuries, or even a seller.

But that ignores the fact that in both countries people will be forgoing investment or paying down debt. In other words there will be a new pool of money available domestically to finance increased government borrowing on both sides of the Pacific ocean.

“China’s fiscal stimulus will offset a fall in domestic investment more than it reduces China’s purchases of U.S. debt,” economist Brad Setser, who follows central banks at the Council on Foreign Relations, wrote in his blog. blogs.cfr.org/setser/

“Chinese banks that previously were lending to China’s property developers will be lending to China’s government instead. And the rise in the U.S. fiscal deficit will offset a fall in borrowing by American households and firms. As a result it won’t need to be financed as heavily by the rest of the world.”

Even so, there is no doubt that the United States remains dependent on China’s continued desire to buy and hold its debt.

But the bigger job for the U.S. will be at home. If what is needed is several years of stimulative spending, the U.S. is going to need a level of consensus and resolve that to me just doesn’t seem likely.

— At the time of publication James Saft did not own any direct investments in securities mentioned in this article. He may be an owner indirectly as an investor in a fund –