It was just a few days ago (Nov. 6th) that I titled my post “Great Expectations”–beating The Economist magazine to it! (That’s the cover of the current issue, pictured above.) The point of my Great Expectations post was that everyone’s expecting President-elect Obama to be like Superman and “save” the economy, even before he takes office. And many assume that the way he will do that is to throw federal money at every cause he cares about and has campaigned on, regardless of whether we actually have the federal money to do that. And they expect him to do that quickly–to not waste his time thinking too much about it, and certainly to not worry about the consequences of such “rescue” spending for the public debt.
But to be a true hero in the midst of these trying times, President-elect Obama needs to remain level-headed, even-handed, diplomatic, and inspiring–all the qualities in him that led most of us to elect him. (At least, that’s why I voted for him.) I agree with what The Economist says about the ”man of steel”-like strength Obama will have to show regarding fiscal policy:
Whoever he appoints, Mr Obama will be constrained by the failing economy. He should not hold back from stimulus packages to help America out of recession. But he has huge promises to keep as well. He has pledged tax cuts to 95% of families. He has proposed near-universal health care—an urgent reform, as America’s population ages and companies restrict the health insurance they offer. He proposes more spending on infrastructure, both physical and human. But if he is to tackle all or any of this, he must balance his plans with other savings or new revenues if his legacy is not to be one of profligacy and debt. He has to start deciding whom to disappoint.
…but I also agree with Steven Pearlstein’s excellent column from a few days ago, where Steven notes these tough challenges present a “golden opportunity” for the Obama Administration (my emphasis added):
…Obama needs to avoid the instinct to try to undo the past or refight the same pitched battles among interest groups and ideologues that have stymied action for much of the past decade. The current crisis offers a rare opportunity to reframe the questions, challenge old assumptions and bring a new vocabulary to the economic conversation.
One good place to start would be taxes. Contrary to the Republican gospel, taxes are not always a drag on the economy. Raising them doesn’t necessarily destroy jobs or discourage risk-taking, and lowering them can’t reliably bring an economy out of recession. It all depends on how the taxes are raised and how the money is spent. As should be evident from the recent housing bubble — the biggest misallocation of capital by free markets the world has ever seen — a dollar spent or invested by the private sector is not necessarily better for the economy than the same dollar spent or invested by a wise and efficient government.
Obama now has a golden opportunity to reframe the stale debate over taxes and spending.
In fashioning a new economic stimulus package, for example, offering another round of tax rebates would only be an invitation to compound past mistakes. It was overspending by households that largely got us into this mess, and the only way we are going to get out of it is by having households live within their means.
Much better to take the same borrowed money and invest it in public goods — not just roads and bridges, but things like public transit, basic scientific research, a modern air-traffic-control system, expansion of state college and university systems and a big push on early childhood education. Those sorts of public investments would not only give an immediate spending boost to the domestic economy, but they would also offer long-term rates of economic and social return that rival anything the private sector can offer.
Along the same lines, Obama might want to ditch that lousy idea of giving employers a $3,000 tax credit for every additional worker they hire — the economic equivalent of trying to push on a string — and send money to states and localities to hire workers to provide worthwhile public services.
Longer term, Obama should consider tying passage of his tax program to specific spending initiatives.
If middle-class and working families want a tax cut, why not make it contingent on offsetting the lost revenue through reductions in spending on farm subsidies or weapons programs? And while we’re at it, why not offer the business community the 25 percent corporate tax rate it seeks, but only if it can get behind a plan to close enough corporate tax loopholes to pay for it.
The current crisis also offers Obama the chance to redefine the role of government in a modern capitalist economy.
…any careful review of what went wrong in financial markets would quickly reveal that the problem wasn’t primarily that regulators had too little authority but rather that they had neither the resources nor the political backing to use it. The goal needs to be better regulation, not more.
So President-elect Obama faces great expectations, yes, but also has been given this golden opportunity to actually “save” the U.S. economy–just not in the way many might be expecting.