OECD supports US plan for fiscal boost

by Lesley Politi on December 11, 2008

OECD supports US plan for fiscal boost

PARIS (AP) — The ailing U.S. economy needs more injections of state money to get better and should reform its health care system, a leading international economic organization said Tuesday.

The Organization for Economic Cooperation and Development noted rate cuts and bailout plans have helped the economy, but said that growth will probably deteriorate further before improving and that more fiscal stimulus would be required.

The report by the Paris-based organization was finalized Dec. 5, a day before President-elect Barack Obama said he plans the largest U.S. public works spending program since the creation of the interstate highway system a half-century ago. That could bolster the economy by putting thousands to work building schools and other construction projects.

Obama also said he wants to expand health coverage, although the current recession may make the plan difficult to finance.

The United States has already been in recession for a year and may not be out of it until the spring of 2010 — making for the longest downturn since the Great Depression, many economists say. Recessions in the mid-1970s and early 1980s lasted 16 months.

“Further fiscal stimulus will be desirable if financial conditions and economic prospects do not quickly improve,” the OECD said in an economic survey of the United States.

“It is nonetheless likely that activity will get worse before it gets better.”

The OECD said “aggressive” cuts in interest rates, large tax rebates and the $700 billion bank bailout plan have provided “crucial support” to the economy.

But it said that “sharp downside risks to growth continue,” pointing to uncertainties on bank solvency and credit supply.

The OECD also highlighted the failure of the U.S. health care system which it said deprives many people of “adequate financial access to medical care.”

It recommends replacing the health insurance tax exclusion with subsidies for the individual purchase of insurance, as well as reform of the insurance market.

While backing further spending to ease recession pains, the OECD said the U.S. deficit is unsustainable in the long term and that Obama should give priority to “strong budget consolidation” as soon as possible.

On monetary policy, the OECD said low borrowing costs are needed in the near term but that “interest rates should be raised promptly once the economy revives” to avoid boosting inflation.

Federal Reserve Chairman Ben Bernanke is now expected to ratchet down a key interest rate — near a historic low of 1 percent — by at least a half-percentage point on Dec. 16 in a bid to breathe life into the moribund economy.

The OECD also said that U.S. housing finance needs to be “fundamentally reformed” and that a “major overhaul” of financial regulation and supervision is needed.

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