Leading article: The world must hope that America gets it right

We are all dependent on a recovery in the world's biggest economy
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The Independent Online

The unprecedented £20bn worth of tax cuts and public spending announced this week by the Chancellor is a measure of the plight of the British economy, not to mention the size of the gamble being taken by the Government with the national finances. But it pales, both in absolute size and as a share of gross domestic product, beside the stimulus package that Barack Obama wants to sign into law when he assumes office as the 44th President.

Mr Obama's economic team, led by the future Treasury Secretary Timothy Geithner, is already at work on the scheme, which is likely to inject up to $500bn (£330bn) into the economy. Like Alistair Darling's package, it will greatly increase an already ballooning central government budget deficit.

The relentless global spread of the crisis that began in America's subprime mortgage market has banished any notion that the rest of the developed world and emerging markets like China and Brazil could somehow "decouple" from the US. A return to stability and growth in America is vital for recovery in Britain, Europe and elsewhere, and the sheer size of the envisaged package shows that the incoming administration in Washington has grasped that fact.

The details have yet to be worked out, but the broad outline is clear. In addition to the personal tax cuts promised by Mr Obama during the election campaign, there will be a massive programme of public works spending to create jobs, aid to the states to prevent them having to cut welfare and health care spending, an extension of food stamps and unemployment benefits, and a boost in spending on energy saving and green technologies.

Mr Obama has got off to an encouraging start. First and foremost, he has told Americans the truth: that this crisis is of "historic" proportions, that the economy will get worse before it gets better and that painful sacrifices are unavoidable. Some of his appointments, such as Mr Geithner, currently president of the New York Federal Reserve, and Larry Summers, the former Treasury Secretary who will be director of the National Economic Council, are in part responsible for the decade-long regulatory failure that helped create the present mess. But we have to hope that men of such otherwise proven calibre will learn from past errors.

For the rest however, the omens are good. The new team is centrist and flexible, unburdened by excessive ideological baggage. It has got down to work smartly and its task is being made easier by the co-operation extended by the Bush administration. Obama officials are already in place at the Treasury to monitor events, while Mr Geithner has been a key policymaker even before he becomes Treasury Secretary. Never has a seamless transition been as vital as now. Mercifully, America seem to be getting one.

The outgoing Treasury Secretary, Henry Paulson is also playing his part. Mistakes have been made, in retrospect most notably the decision to allow Lehman Brothers to fail in September. Today, Mr Paulson would be the first to admit he is flying by the seat of his pants. Another day, another bail-out, might be the maxim of himself and the chairman of the Federal Reserve, Ben Bernanke; yesterday brought a $200bn scheme to underwrite consumer debt, in a new effort to loosen frozen credit markets. With luck, this and other moves, including the weekend rescue of Citigroup, will buy a breathing space until the new President formally takes over on 20 January. The rest of the world, including Britain, can only hope so.