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More on PAYGO and the People Who Believe In It

November 21st, 2008 . by economistmom

I promised to post more on Concord’s issue brief (released yesterday) on PAYGO (pay-as-you-go budgeting rules) today.  (I’ve been attending the annual conference of the National Tax Association in Philly starting today, going through Saturday, and today I figured out how to get a good internet connection from my hotel room–ah, all is well again!…)

A cut-and-paste of the conclusion of the PAYGO paper:

The Concord Coalition encourages President-elect Obama to pursue measures that strengthen budget enforcement even as he pursues short-term fiscal stimulus. Specifically, reinstituting statutory PAYGO–enforced through sequestration–would be a good beginning. Statutory PAYGO would put additional teeth into the PAYGO rule by establishing a mechanism that cannot be easily waived. In addition, because levels established in the Congressional Budget Resolution would be written into law, it would force the Executive branch to play an earlier role in the congressional budget process.

It is important to note that while PAYGO can provide positive incentives for fiscally responsible action, it is not a substitute for political will. No strategy for fiscal sustainability will succeed over the long-term unless we find a way to reduce projected costs, particularly for health care. Ideally, PAYGO should be enacted along with a new bipartisan fiscal policy agreement. As noted above, the original PAYGO law came out of the 1990 bipartisan budget negotiations between President George H.W. Bush and the Democratic Congress. Such a new agreement should contain policy measures and budget procedures to promote closure of the long-term gap projected to arise between spending and revenues. A realistic strategy will likely require some mix of spending reductions and revenue increases aimed at preventing total spending, taxes or debt from reaching levels that could reduce economic growth and future standards of living. Consistent with PAYGO, the agreement should explicitly waive timely, targeted and temporary stimulus measures.

Yet even in the absence of such an agreement, which may take some time to negotiate, enforcing PAYGO as it already exists — whether through spending cuts or tax increases — would send a signal that Washington has begun to take its long-term fiscal challenge seriously. Enforcing PAYGO would keep the long-term outlook from getting worse and also force an explicit acknowledgement of the obvious–someone always pays for increases in entitlement spending and tax cuts, even when deficit financed–if not within the five to 10-year budget window, then in the future through higher taxes or reduced federal programs, benefits and services.

If the current crisis in the financial sector has taught us anything, it is that over-reliance on escalating debt is not a sound strategy. The implication for Washington policy makers is that a realistic fiscal sustainability plan must be developed before a crisis hits. The immediate choice is whether to reclaim a measure of fiscal discipline through the budget process while a more substantive plan is negotiated, or to sit by while deficits drift higher in the absence of any procedural hurdles designed to rein them in. In Concord’s view the choice is clear. We believe that reinstating long-term budget enforcement rules, such as PAYGO, remain the best step that can be taken immediately to stop digging the fiscal hole deeper.

Those who would use today’s crisis as an excuse to jettison PAYGO are wrong. Short-term economic stimulus and a long-term commitment to PAYGO budgeting are compatible and necessary for the health of our economy.

So who are these people who believe in the fiscal discipline that the pay-as-you-go budgeting rules help encourage?

Well, Majority Leader Steny Hoyer (D-MD) for one.  In his Tuesday speech at the National Press Club (video here, and transcript here), he said:

We will continue to be committed to the principle of pay-as-you-go, as well. The reality, however, is that recovery legislation will raise the deficit in the short term. Fiscal hawk that I am, I still believe that that is the right course, because a wide consensus of economists tells us that deficit spending is both the way out of recession like this one and the way to prevent even more catastrophic decline.

In the long run, fiscal responsibility can and must be a watchword of our majority. For eight years, the administration lived by the proposition summed up by Vice President Cheney when he said, “Reagan proved deficits don’t matter.”

Businesses, consumers pursued that siren song to the brink of financial destruction, and some, of course, have gone over that brink. We are now experiencing the stark, painful reality that debt does, indeed, matter.

I’ve always believed that fiscal responsibility is at heart a moral proposition. It means that we do not indebt our children to finance our own immediate demands and desires.

It means that we must pay for what we buy, but more than that, we must buy the right things. Wise investments will grow our economy, guard our national security, and protect the health of our people.

Smart spending can help us get back to long-term fiscal health. Spending wisely today can save us money tomorrow. That is why our country needs far-reaching proposals, even in this recession.

In the broad sense, fiscal responsibility should be at the core of our entire governing philosophy. On energy, for instance, a fiscally responsible strategy should invest in new technologies to bring the price of energy down in the long term, because there is nothing more short-sided than acting as if our foreign oil addiction is a problem only when gas costs more than $3 a gallon or only during on oil shortage or only over the summer.

And here are a couple photos from last night’s annual dinner of the Concord Coalition in NYC, of more people who support PAYGO rules and fiscal responsibility more generally… everyone from Pete Peterson (pictured with Diane/EconomistMom):

…to some of the young people of [link CORRECTED Fri. 11/21!:] Concerned Youth of America (with not-young me in center, and Concord’s Chrissy Hovde on R):

(L to R above:  Mike Tully, Caroline Matthews, EconomistMom/Diane, Yoni Gruskin, Chrissy Hovde)

Go, PAYGO!

November 19th, 2008 . by economistmom

No time to write much today/tonight…I have a very fragile connection while on the road… (am doing this from a train at Penn Station–stuck for the moment…)

Today the Concord Coalition issued this paper on the continued importance of PAYGO as a fiscal discipline tool, even in the current economic climate where some deficit-financed fiscal stimulus is justified.

I will highlight and write more about this tomorrow when I have a better connection!  (Will also post a photo or two from tonight’s Concord Coalition annual dinner.)

Are Higher Gas Prices and Bankruptcy Just What Detroit Needs?

November 18th, 2008 . by economistmom

Maybe… according to Allan Sloan and Martin Feldstein, both writing in today’s Washington Post.  Can’t say I disagree with either of them, although I still want the government to do more to help out my friends and relatives who work for the industry (and are neither part of the unions nor among the highly-compensated executives, by the way).

My favorite part of Allan’s column (emphasis added):

This idea [for higher gasoline taxes] has been around for years and has gotten no traction. But it’s an idea whose time has come, given the stomach-churning ups and downs of gas prices, the visible folly of leaving our fate to oil-exporting countries and the speculators who helped drive prices irrationally high and may now be driving them irrationally low, and the fact that we’ll soon have a president who proposed targeted tax increases during the campaign and still got elected.

Yes, a big gas tax would cause economic hardship, especially to people who are barely making ends meet. But we could refund the money to those needy people through the income tax. We could also refund the gas tax to those of us who aren’t particularly needy or else use it for energy research-and-development or public works or – dare I say it — for deficit reduction.

Yeah, who on earth would ever suggest raising taxes for deficit reduction?

Happy Birthday, Daddy!

November 17th, 2008 . by economistmom

It’s EconomistMom’s (my) dad’s birthday today.  (I still call him “Daddy.”)  He’s 76, and still working full-time as the Goodyear Professor of Chemistry at the University of Akron–and productively, too, as you’ll see from this link to his work.  He’s fortunate to be in a profession he loves and has been able to keep working in for so long.  I suppose it’s largely this personal experience watching my dad’s career that leads to my view that the current “normal” retirement age (of 65 for my dad’s cohort, and 67 for mine) doesn’t seem so appropriate these days–at least not for people like my dad.  Personally, I’m looking forward to a long career as well as the best insurance I have for not living beyond my means.  That’s why I take care of myself physically and stay engaged intellectually.  It’s why as a nation, part of our strategy to start living within our means has to go beyond being fiscally prudent, but toward always expanding our means–i.e., sufficiently investing in our human capital.

Happy Birthday, Daddy!

Thinking “Pull” Rather Than “Push” with the Auto Industry

November 16th, 2008 . by economistmom

Nice cartoon by Drew Sheneman (for the Star-Ledger, click on image for larger view), and good article in this morning’s Washington Post by Steven Mufson on the auto industry and the dilemma faced by federal policymakers in considering whether and how to help.  Do we throw life-support money at the industry to “save” it and risk much of that money going to those who made the bad decisions, or do we not, and risk the broader economic consequences of letting the industry “die” a natural death–even if a rebirth and transformation might eventually be possible?  And can the money that was supposed to be used for that longer-term transformation be put out more quickly, and justified, as life support for the industry?  Can we put conditions on the life support so that the shorter-term and longer-term goals aren’t necessarily contrary to each other?  As Steven explains in the article (emphasis added):

In Washington, President Bush and others see the $25 billion in loans Congress has already approved to retool the ailing automobile industry as a convenient pot of money to help automakers survive the economic tumult.

But here [in Detroit], automakers regard that money differently; it was part of a 2007 quid pro quo for helping them meet tough new fuel-efficiency standards. Without it, they’ll need to revamp their fleets to meet that mandate without assistance, and that, they say, is no easy task.

Ron Gettelfinger, president of the United Auto Workers union, said yesterday in a conference call that “the intent on that was to build an industry of the future.” The purpose of getting additional money now is different, he said. “The other thing is let’s keep the industry alive so we can move into the future.”

The tension in Washington is pitting the long-range policy goals Congress had in mind a year ago when it approved the loans against the immediate needs of the financial crisis. Under Energy Department rules, the original $25 billion would only be paid out after companies invest in new advanced technologies. Disbursements would be made over several years. An official at one major automaker said he expected that two-thirds of the money would end up going to suppliers of parts rather than to the Detroit threesome.

Democrats oppose the Bush administration’s bid to dip into the package originally intended to help meet the corporate fuel economy standards known as CAFE.

“That robs the industry’s future to pay for the present,” said Jim Manley, a spokesman for Senate Majority Leader Harry M. Reid (D-Nev.). “The first $25 billion, that was part of the grand bargain for CAFE standards,” said Michigan Gov. Jennifer Granholm (D). “That was to make sure that we in America produce the next engine, the next fuel-efficient engine that will wean us off foreign oil. The other part is a bridge loan to get us through this financial crisis.”

Many long-time critics of the auto industry who had pressed for a link between taxpayer money and higher fuel-efficiency in the 2007 legislation are torn. They find themselves in the surprising position alongside carmakers who want to preserve the purpose of that loan commitment.

“Taxpayers need and deserve these real benefits in return for their investment,” said Michelle Robinson, an auto expert at the Union of Concerned Scientists. “Our core principle is that it does not make sense to provide money for nothing. It would be bad for the industry, especially the workers, if we simply provide taxpayer money, and then in two years when gas prices spike again the companies are not prepared to sell the vehicles that Americans want.“…

To the extent that GM and Ford have steered away from gas guzzlers, the promise of retooling loans has held less sway than this year’s spike in oil prices and the collapse in SUV sales.

The July jump in oil prices to $147 a barrel “spooked everyone,” said Jon Lauckner, GM vice president of global program management. “It will ultimately decide what consumers want to buy.”

“Our view is that oil prices will not stay where they are today,” he said. “Beyond 2010, oil prices will look a lot more like they did in July than the way they look in November.”

Aha!  Can you say “carbon tax“?… Or “higher gasoline taxes”?… Lots of my economist friends–on the left and the right–can and do.  We ask: why are we wasting so much time, money, and energy (pun intended) pursuing policies toward the auto industry that only seem to push back against the surest way to get the “most transformation per taxpayer buck”?  Let’s permit, or even enhance, how market prices can more appropriately “incentivize” the auto industry to produce more fuel-efficient vehicles.  Even the auto executives are admitting (above) that market prices are what really get them to take notice and “transform.”

The Tax Policy Center’s lead blogger (on “TaxVox”), Howard Gleckman, has it just right in this post from a few days ago (sorry, Howard, just catching up…):

The bailout is being peddled as a way to encourage development of energy efficient cars. But money being fungible, most of this cash will go elsewhere—to CEOs, for health care, and for marketing. It is easy for a big corporation to shuffle costs to take advantage of government largess. Just look at what companies do to maximize the R&D tax credit. Besides, if I wanted to encourage technological entrepreneurship, the very last places I’d put my money would be Ford, GM, and Chrysler. As I have written before, if you really want to encourage alternative energy, raise the price of fossil fuel by boosting taxes on its use. If the price of gas is high enough, private research capital will flow like water.

The point is that to the extent that we (in Washington) are claiming we care about truly transforming the industry and not just “throwing money” at the problem, we ought to be thinking about the incentives created by our “assistance” and make sure we’re not pursuing counterproductive policies.  We need to come up with policies that will most effectively “pull” the auto industry (give them the right incentives) to really transform (mostly on their own)–rather than just the old policies that just try to “push” the auto industry out of their ditch–with still no place to go and still nothing “in the gas tank.” 

But to the extent that we really are still willing to “throw money” at the auto industry’s problem, I still hope we’ll throw money to those who really do need the assistance–that is, the unemployed or soon-to-be unemployed–rather than those at the top of the industry who really don’t need more reason to keep doing business in Detroit “as usual.”

Relying On the Chinese Either Way

November 15th, 2008 . by economistmom

When I read about the Chinese government’s big (more than half-trillion-dollar) plans for fiscal stimulus a few days ago, I wondered what this encouraging of Chinese consumption would do to their desire to invest in our Treasuries–i.e., that large credit line China’s been providing to the U.S. government all these years.  We’re used to relying on Chinese saving to fund our consumption; now it seems China wants to fund some consumption of their own.

Here’s some recent (8-year) history on our reliance on Chinese saving to fund our budget deficits…  From the latest Treasury data on foreign holdings of Treasuries, at the end of Aug. 2008, China held $541.0 billion in U.S. Treasury securities.  (Coincidentally, this is quite close to the size of the fiscal stimulus China is now contemplating.)  This is a $479.5 billion (nearly 800 percent) increase from Jan. 2001, when China’s holdings were just $61.5 billion.  Over the same period, total foreign holdings of Treasuries rose from $1,010.8 billion to $2,740.3 billion, and the stock of Treasury debt held by the public, or net debt, rose from $3,388.0 billion to $5,479.1 billion.  These figures imply that since January 2001, 83 cents of every dollar of additional U.S. public debt has been financed by foreign investors, and 23 cents of every dollar (out of the 83 cents) has been financed by China.

This article in today’s Washington Post (by Ariana Eunjung Cha) elaborates on how China is trying to get away from their “Thriftsville” reputation:

For generations, American consumers have been one of the most powerful economic forces on the planet. Whenever the U.S. economy went south, shoppers could be depended on to come to the rescue with their open wallets. With home values falling, credit running dry and jobs disappearing, that’s not happening this time. Retail sales plunged by 2.8 percent — the largest amount on record — in October from the previous month, according to Commerce Department figures released Friday.

The opposite is true in China.

Long known for high saving rates, China’s middle-class consumers are starting to spend like their American counterparts. Of China’s 11.4 percent growth in the gross domestic product last year, the largest segment, 4.4 percent, was in consumer spending. That sector still represents just 38 percent of China’s overall GDP, roughly half the percentage in more developed countries, but in the eyes of retailers that means more opportunity.

“Conspicuous consumerism is on the rise among Chinese,” said Fu Hongchun, a business professor at East China Normal University in Shanghai. He said the trend is driven in part by competitiveness. “If one resident in a community buys a new TV, all residents in the same community will update their TVs,” Fu said.

Increasing consumer spending is a key goal of the $586 billion economic stimulus package unveiled Sunday by China’s leaders. China hopes the cash infusion will help offset slowing exports and investments, which were the foundation of the country’s boom over the past decade…

[S]ome Chinese consumers are also adopting the biggest vice of American consumers: debt. Mesmerized by a banquet of Western-style financial products, some Chinese consumers are juggling multiple credit cards, consumer loans and installment plans to buy an ever-increasing quantity of cars, washing machines and vacations…

James E. Quinn, global president for New York-based Tiffany, said in an interview that Chinese customers are the “fastest-growing segment” of its business. “A lot of American customers have a complete wardrobe of jewelry, passed down from previous generations. That’s not the case in China. Chinese consumers are at the early stage of acquiring a sense of style and appreciation for design in jewelry.”

U.S. companies have been so successful in China because “Chinese consumers have a ‘look up to the rich’ attitude and the United States is the world’s top developed country in their eyes,” said Gao Tao, a consultant for the International Brand Association in Beijing…

Now, having China encourage their own consumption is not necessarily a bad thing for the U.S. economy given that more Chinese demand for consumer goods can mean more U.S. exports to China, at a time when we don’t have much else going for our GDP because we’re (rather startlingly) having a hard time keeping up our own consumer demand.  In the immediate run, we’re worried about keeping up our immediate GDP.  But the other part of GDP we’re clearly relying on to stay afloat is federal government spending, and the fact is we’re doing a lot of deficit-financed government spending lately–i.e., we’re issuing more Treasury debt.  We’re issuing that extra debt and at the same time hoping investors, largely including foreign investors, will keep being willing to scoop it up and hold it for a relatively low price (i.e., interest rate).

So the conflicting economic policy goals the U.S. faces in stimulating short-term consumption versus encouraging longer-run saving actually spread beyond our borders to those other countries we rely on in our global capital and goods transactions as well.  What should we be rooting for–for China to become more of a Squanderville, or for China to stay the Thriftsville they’ve been?  Seems to me that while it’s clearly in China’s self interest to be consuming more than they’re accustomed to consuming, at least during this (global) economic slowdown, for the U.S. economy’s sake, we’ve got to hope that the Chinese people don’t get too good at consuming.  Because Americans will always be some of the best consumers in the world, and American enterprises (private and public) some of the best things in the world to invest in, so “comparative advantage” suggests we’ll always be better off relying on the Chinese not as demanders of American exports, but as suppliers of the capital (the saving) that we can’t seem to (sufficiently) come up with on our own.

Either that, or we’ll have to really get working at trading roles with China and becoming much more like a Thriftsville–at least after we get through this rough spot.

Wisdom From the Kids

November 14th, 2008 . by economistmom

As noted today on the PBS Engage blog, PBS Kids online has launched a really cool “Speak Out” site where kids can contribute to a virtual, evolving “open letter” to President(-elect for now) Obama on their best policy ideas.  From the “about” page:

SPEAK OUT encourages civic engagement among 6 to 12 year olds by prompting them to submit ideas to address prominent citizens’ issues as they most relate to kids’ lives. Community discussion and the democratic process are modeled by allowing kids to choose which ideas they like best. The ideas with the most votes are featured on pbskids.org/speakout in the form of a message to our President. This active, digital message will reflect the youth’s changing concerns and proposed solutions over time.

The categories are “The Earth,” “Our Schools,” and “Being Healthy”–i.e., environmental, education, and health policy.  This is one “blog” I really hope the Obama team pays close attention to.  With so many worthwhile, very forward-looking ideas these kids seem to have, I hope we’ll come out of the current economic crisis with enough left to be able to put some decent money where our kids’ mouths are. 

That’s the Trouble with Troubled Assets

November 13th, 2008 . by economistmom

Should we really be surprised at the latest word on TARP–the acknowledgment by Treasury Secretary Paulson that scooping up these “troubled assets” hasn’t been going so well?:

Treasury Secretary Henry Paulson said Wednesday that the government would broaden the reach of its $700 billion bailout plan to support non-bank financial institutions that provide consumer credit, such as credit cards and auto loans.

In this second stage of the bailout, officials also hope to attract private capital, possibly through matching investments, to give the government’s injections more heft.

Paulson also said the government is no longer planning to buy troubled mortgage assets, the original goal of the plan

When the Treasury Department first announced the rescue plan in late September, it said it could help homeowners because the government could more easily modify mortgages if it owned the troubled securities.

Those “assets” have often been labeled, oxymoronically, not just troubled, but ”toxic assets” after all.  Too bad the federal government had already made the decision that it was worth a $700 billion increase in the federal debt to “rescue” those troubled assets, and too bad that although they’ve now changed their mind, they’ve already burned through (essentially wasted) a lot of that $700 billion.  Combined with this week’s news about relaxing the terms of the AIG bailout, we’re left with the sinking feeling that we can’t trust Secretary Paulson’s “reassurances” about the $700 billion (in what’s still officially the “TARP”) being the end of it:

Paulson said he does not have a timeline for when the Treasury Department would need congressional approval for access to the remaining $350 billion in the rescue package. At this time, he doesn’t think stabilizing the system will require more than $700 billion.

And of course, that’s even before we think about taking on the “troubled assets” in Detroit…  I am worried about Detroit’s auto industry, but not exactly for the same reasons that the auto executives (and perhaps many of the politicians) are.  I say it’s time to stop thinking about rescuing the (bad) assets and start focusing on rescuing the (good) people. 

(See the nice Freudian slip that the Washington Post’s Dana Milbank caught Paulson making–at the bottom of this column.)

Obama Transition Team: Fiscal Responsibility Still Matters

November 12th, 2008 . by economistmom

The Center for American Progress is headed by former Clinton chief of staff, and current Obama transition team leader, John Podesta.  Today they issued this economic policy paper, “Restoring Confidence in the American Economy.”  It outlines necessary policy priorities in the areas of short-term stimulus, health care reform, climate change policy, and education.  But it also contains a section on “addressing the long-run fiscal challenge” where they say (pages 5-7 of the pdf file):

Facing the greatest financial and economic crisis since the Great Depression, we should not let short-term deficits, even large ones, prevent necessary steps to weather the storm. Yet we also have an obligation to restore budget responsibility and confidence that government is careful and uses taxpayer resources wisely and to good effect. After the period of economic weakness when deficit spending is needed to strengthen the economy, we should make the tough choices to limit the deficit so our economy is growing more quickly than the national debt, providing assurance that the federal government will be able to meet its obligations.

The federal budget is in a deep hole due to the Bush tax cuts favoring the wealthy and a costly and ill-conceived war in Iraq that consumes at least $10 billion a month. We have neglected important investments in our future, while Medicare and Social Security spending threatens our fiscal future in the coming decades. We need to reform Medicare and Social Security to make them sustainable. Those reforms should come alongside efforts to promote stronger economic growth, which would help close the programs’ financial gap. Moreover, those reforms should come within the context of broader reform of health care and the retirement security system…

Confronting these long-term budget challenges is critical, but we must be willing to make tough choices in the short term as well. In a crisis as severe as the one we face today, top priority for resources must go to investments that will promote long-term growth and competitiveness, restore America as a land of economic opportunity for all, and ensure that the benefits of our economy are widely shared…

I think this shows that “fiscal responsibility”–in the broader sense that I and Concord have talked about–will still matter to the Obama Administration.

Great Expectations But Also a Golden Opportunity

November 11th, 2008 . by economistmom

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.

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