EconomistMom.com

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.

Brand new story on WashingtonPost.com this morning, on more aid to AIG (emphasis added):

The federal government will invest $40 billion directly into American International Group as part of an expanded bailout plan announced early this morning as the insurance giant disclosed massive losses over the last three months.

The new $150 billion effort to prop up AIG was crafted after officials recognized that an original bid to help the company was in fact weighing down the insurance giant by requiring quick repayment and a high interest rate on government loans…

The enhanced bailout plan — nearly double the original $85 billion loan extended to the company in September — comes with restrictions on how much AIG corporate executives get paid…

The new plan [for] AIG may make it more likely that the Treasury will have to ask Congress for more funds if the financial system continues to suffer and other companies near collapse. The $40 billion stock purchase will be paid for out of a $100 billion fund set aside under the TARP to react to crises like the one that hit AIG. With much of that fund now committed, one Treasury officials said of any future problems, “we can hope they would be few and far between.”

Well, isn’t that reassuring…

And from the front page of the print edition of today’s Washington Post, in the “you know it’s bad when” camp (which includes Marty Feldstein calling for more government infrastructure spending), we learn that China–which Warren Buffett affectionately labeled “Thriftsville” in the movie I.O.U.S.A.–is apparently now pursuing more than half a trillion dollars in fiscal stimulus (emphasis added):

China on Sunday night announced an aggressive $586 billion economic stimulus package, the largest in the country’s history, at a time when it is struggling with increasing social unrest due to factory closings and rising unemployment.

In a wide-ranging plan that economists are comparing to the New Deal, the government said it would ease credit restrictions, expand social welfare services and launch an infrastructure spending program that would include the construction of new railways, roads and airports…

President Hu Jintao is expected to join other world leaders in Washington on Saturday to discuss joint efforts at preventing a deep and prolonged global recession. China’s leaders have been saying for months that the best way China can help is to keep its own economy on track.

The stimulus funds, to be used through 2010, represent roughly 15 percent of China’s yearly GDP. China last year accounted for 27 percent of global growth, more than any other nation.

The head of China’s central bank, Zhou Xiaochuan, said at the Brazil meeting that by increasing domestic consumption, China could help international markets.

So the question on my mind is:  if “Thriftsville” is going to stop saving so much and start consuming more, then who will keep investing in U.S. Treasuries–i.e., lending money to “Squanderville”?

There’s a nice little article in today’s Washington Post (by Annys Shin) that quotes my friend, Bill Gale, speaking wisely of how we shouldn’t necessarily hold President-elect Obama to all of the campaign promises he made regarding fiscal policy:

So how will President Obama’s pocketbook promises evolve as he moves from campaigning to governing?

The financial crisis and the tottering economy will be the top priority and will probably slow the rollout of polices that would help improve the personal finances of individuals.

“That has to just take precedence over the other stuff,” said William Gale, director of economic studies at the Brookings Institution. “Remember, the plans were created at a time when we weren’t in this situation. Something has to give. Significant flexibility is required.”

What probably has to give is swift action on the myriad tax cuts that candidate Obama laid out on the stump, analysts said. His proposals would slash taxes by $2.9 trillion from 2009 to 2018 and boost the national debt by $3.5 trillion by 2018, according to the nonpartisan Tax Policy Center. House Democrats say they plan to move quickly to implement Obama’s tax plan. But a recession and the ballooning deficit may leave little leeway for the president-elect to speed his tax plan, analysts say.

That’s interesting that Annys seems to suggest that when President-elect Obama becomes President Obama, he might not be able to afford all the tax cuts he’s promised because of the deteriorating conditions in the economy and the “ballooning deficit.”  It seems to me we’re hearing the opposite argument just as often these days–that we can’t afford NOT to significantly increase the deficit as the appropriate response to the recession we’re obviously in.

I’ve written before here that I don’t think the two positions are contradictory.  The additional deficit spending has to happen immediately to deal with the immediate weakness in the economy.  We can pursue that deficit spending and yet still do it in a “fiscally responsible” way–pursuing policies that maximize economic bang per buck and that direct the assistance to those Americans who are suffering the most.  And meanwhile, the Bush tax cuts do not expire until the end of 2010, by which time I really hope this recession will be over, so that at that time we can decide, thoughtfully (rather than in a panic), which of the tax cuts (if any) we wish to extend and how we will pay for them.

Until then, President Obama’s tax policies might turn out to be slightly different from what he promised on the campaign trail, but the general shape of his tax agenda will stay the same.  If and when we decide we need to raise more revenues, the Obama Administration will favor raising taxes on the rich and keeping taxes on middle- and lower-income Americans as low as possible.  Annys makes that point in the article, but what got my attention, inspiring the title of this post, was the financial advice given (my emphasis added):

Some households, particularly those with higher incomes, may want to make some financial adjustments, advisers said. The planners stressed that it’s impossible to know exactly what shape the policies will eventually take, but they offered some general thoughts. If your family falls into Obama’s definition of wealthier Americans making more than $250,000 a year, then you might want to think about reducing your taxable income. Obama has proposed raising capital gains and dividend taxes, estate taxes, income taxes and possibly payroll taxes for this group.

“The question for those folks is how many different places can it possibly hit their income or portfolios?” said Barry Glassman of Cassaday & Co. in McLean.

Even if you earn less than $250,000, you may also benefit by reducing your taxable income. For instance, if Obama and Congress wipe out income taxes for seniors earning less than $50,000, as he has proposed, and you are a senior who earns a bit more, one strategy could be to turn taxable income into tax-free income by putting money in municipal bonds, Glassman said.

I just thought it should be clarified:  President Obama won’t raise marginal tax rates to more than 100 percent–not even close.  Everyone’s still better off earning more income, not less.  So what the financial advisors mean to say is that you should try to reduce the taxable portion of your income, not try to reduce your income.  In other words, the Obama Administration’s tax policies might encourage folks to reduce their TAXABLE income, not their taxable INCOME.  It’s tax avoidance that these financial advisors advise, not income avoidance. 

I think this Dilbert cartoon well captures the helpless feeling executives and government policymakers have about the auto industry these days.  As the Washington Post editors explain today, there’s not much we can (or should) do to keep the industry from shrinking:

For all his sympathetic words, Mr. Obama did not commit himself to any particular policy but left himself room to consider what kind of aid might be appropriate. In fact the only sensible bailout of Detroit would be one with strict conditions. Congressional Democratic leaders have suggested assurances that GM, Ford and Chrysler would use taxpayer money to create high-tech, “green” cars; for their part, the Big Three are willing to discuss an equity stake for Washington.

That’s better than a blank check but is hardly sufficient. Post columnist Steven Pearlstein has suggested that these companies need to be reorganized top to bottom, through a kind of “prearranged” bankruptcy greased with federal aid…

We doubt that this is the kind of rescue the car companies or the United Auto Workers have in mind, but it points to what should be an essential principle of any government charity. If the result is not a viable, albeit smaller, U.S. car industry, Washington will be simply throwing good money after bad.

And although plans for a possible GM-Chrysler merger have been “called off” (at least for now), both companies will continue to look for ways to cut “to the bone” (as a GM official called it), with the “key focus” of “returning…to profitability” (as a Chrysler official put it).  The layoffs and buyouts will continue, and thousands more autoworkers will lose their jobs each month. 

Anything the federal government can do to assist the industry and its workers in the immediate term (from now through early next year) is frankly going to seem like the “cookies and lemonade” kind of buyout packages that the auto companies are offering to the lucky of their job-losing workforce. 

But they say when life hands you lemons… 

Just turn on the news or visit the CNN-Money homepage today, and you’ll hear/read all the latest bad news on the economy, which today seems to highlight the particularly bad situation in the Detroit auto industry.  The headline story is the employment report, which shows that 240,000 jobs were lost in October, bringing the year’s total job losses to nearly 1.2 million.  And the year isn’t over, of course; we’ve surely got two more months of bad news to go.

The employment news looks particularly bleak for the auto industry, and that’s even before projecting the employment implications of the (more) bad news about operating losses, pay cuts, and layoffs coming from Ford and GM today.  Looking at the details in the October employment report, I note these trends:

• 263,000 private-sector jobs were lost last month, and 1.3 million private-sector jobs have been lost since a year ago (October 2007).
• 90,000 manufacturing jobs were lost last month (and 96,000 manufacturing production jobs), and 517,000 manufacturing jobs (and 449,000 manufacturing production jobs) have been lost since a year ago.
• In the automobile production industry (motor vehicles and parts), “just” 9,100 jobs were lost last month, accounting for “just” 10 percent of the total manufacturing jobs lost.  But since a year ago, 131,500 auto manufacturing jobs have been lost, which is 25 percent of the total manufacturing jobs lost.  (To put this in perspective, the auto industry accounted for about 7 percent of all manufacturing jobs a year ago, now down to closer to 6 percent.)
• Those auto industry job losses don’t count what has happened to the retail sector.  Last month alone 21,400 auto retail jobs were lost (more than half of the decline in total retail jobs), and compared with a year ago, 91,300 jobs have been lost (nearly a third of the decline in total retail jobs).
• While the overall unemployment rate shot up (from 6.1 percent in September and just 4.8 percent a year ago) to 6.5 percent in October, the breakdown of the unemployment data shows particularly bad trends for production workers and hints at more than a temporary, cyclical downturn in auto manufacturing…
• For example, out of the 5.1 million unemployed workers who lost their jobs or completed temporary jobs, 3.2 million (63%) were reported as permanent job losers.  And that is as many people suffering from permanent job loss now as was the total number of unemployed “job losers” a year ago.
• The unemployment rate among production occupations (as a whole, not just auto industry) has increased from 5.6 percent a year ago to 8.9 percent now.
• There are now 2.3 million people who have been unemployed for 27 weeks or more–22.3 percent of the total unemployed–compared with a year ago when 1.3 million of the unemployed (or 17.9 percent) had been unemployed for that long.
• The broader measures of “labor underutilization” (which account for discouraged workers who have stopped looking, and under-employed part-time workers) are all up this month and are dramatically larger than a year ago.  The broadest measure was 8.4 percent a year ago and is now at 11.8 percent.

So today’s news is bleak, particularly for the auto industry and employment in the auto industry.  And today talks continue on Capitol Hill about more federal assistance to the automakers.  I’ve said before that I’m not sure how much the government can or should do to help the auto industry, especially if the industry will be purged and downsized regardless, and especially if the additional money is more a bailout of executives for their bad decisions rather than assistance to the workers who are the ones really suffering from those bad decisions.  In terms of “stimulus” it seems the best the government can do in the immediate and shorter run is to help those who will lose their jobs keep living (”consuming” sounds more frivolous than I mean), and perhaps help at least some of those workers start to train for new jobs (outside the auto industry) in new places (outside Detroit). 

In terms of the health of the Detroit economy over the longer term, the government needs to pursue those policies that will encourage the industry to “transform” to the production of more energy-efficient vehicles and technologies–as President-elect Obama has proposed.  That “transformation” will take time, however, and I think it involves much more time, effort, and money, than the term “retooling” suggests.  In the meantime lots of blood will spill, and at least for awhile, Detroit will need to shrink.

Sorry, Governor Granholm, but fighting against the economic tide to try to keep all the auto jobs and people in Detroit is probably not the best thing we could do for your people right now.  I think we need to help them move on.

Let’s face it:  expectations for what President-elect Obama can do to “rescue” our economy are very, very high. 

CNN’s Elaine Quijano suggests that Obama will live up to our expectations if he follows through on everything he’s promised on the campaign trail:

When it comes to priorities, many polls suggest Americans want President-elect Barack Obama to fix the economy first when he enters the Oval Office in a little more than two months.

Getting Congress to approve tax cuts promised on the campaign trail may be a good start toward tackling the problem, analysts say.

If that goes well, experts say, the political momentum will help make it easier for Obama to keep his other campaign promises on alternative energy and getting health care for millions.

“In Washington, winning leads to winning, and losing breeds losing,” said Stuart Rothenberg of the nonpartisan The Rothenberg Political Report.

But is that the way President-elect Obama will really be our ”Superman” on the economy?  Does it take a “superman” kind of leadership to stick to campaign proposals that were laid out long before the current economic crisis?  And does it take a “superman” ability to say “yes” to any other deficit-financed proposals that will come his way?

Will President-elect Obama’s amazing ability to inspire and unite be wasted by staying on the ”politics as usual” course, where fiscal “compromises” typically amount to “I get my (deficit) spending if you get yours”?  Or does President-elect Obama understand the need to get back to “living within our means”–which means “living”, yes, but which also means caring about fiscal responsibility, in a broader sense?  Could Obama’s “superman” ability to inspire and unite be used to encourage the politicians to change their language of fiscal compromise to “I will sacrifice this bit of (deficit) spending I wanted if you sacrifice some of yours–for the sake of our and our children’s economic security” ?

Didn’t we just hear President-elect Obama say in his victory speech:

This victory alone is not the change we seek. It is only the chance for us to make that change. And that cannot happen if we go back to the way things were.

It can’t happen without you, without a new spirit of service, a new spirit of sacrifice.

As the Washington Post’s Lori Montgomery reports, everyone’s already lining up to ask President Obama for money, arguing that that’s what he can best do as our “Superman”–but there are still some who understand that it’s a fiscally-responsible approach our economy really needs for the long haul:

“You can do your energy plan. You can do a massive infrastructure investment that includes rebuilding schools and repairing schools. You can do public housing that helps poor people and gets the construction guys going,” said Robert Borosage, president of the liberal Institute for America’s Future. “There are a whole range of things that are progressive that liberals want that can come under this shelter” of stimulating the economy.

On the downside, stimulus spending will further bloat a budget deficit that already is spiraling toward a record $1 trillion in the fiscal year that began last month. And key lawmakers said they will demand that Obama keep his promise to restore fiscal responsibility to Washington by paying for any other new programs, including his marquee proposals, to permanently cut taxes for the middle class and to offer health-care coverage to the uninsured.

Democratic leaders “believe there’s a need for stimulus. But we also need to focus very carefully on the deficit in the long term,” said House Majority Leader Steny H. Hoyer (D-Md.). “We feel very strongly that we’ve done a lot of debt incursion, a trillion dollars this year. It’s probably necessary in the short term. But unless we get a handle on the long-term debt, it will do permanent harm to the country.”

Lori Montgomery goes on to quote my boss Bob:

Like his GOP opponent, Sen. John McCain of Arizona, Obama “made campaign promises that didn’t add up, and everybody knows they didn’t add up,” said Robert Bixby, executive director of the Concord Coalition, a nonprofit group that advocates deficit reduction. “He could say, ‘The situation is very bad, and I can’t do everything I wanted to do.’ And I think everyone would then breathe a sigh of relief and say, ‘Now let’s get down to work.’ ”

But others said abandoning the tax cuts would be politically devastating.  

And so that’s where I think we really need President-elect Obama to come through as our true “fiscal superhero”:  we need him to courageously pursue wise, fiscally-responsible ideas which may at first seem politically unwise, but which through his giftedness as a leader, a communicator, and a uniter, he can turn into politically popular ideas as well.

First, congratulations to President-Elect Obama.  We are truly participating in an historic moment and all have a reason to celebrate.  And hopefully there is much more good history to make going forward.

Yesterday Stan Collender wrote in his “Fiscal Fitness” column in Roll Call that there has been:

…no credible leadership on the credit and stock market crises and economic downturn at a time when the country desperately seems to want it.

At this point in its last year in office, no one in the Bush administration, including the president, is able to provide this leadership. If it ever existed at all, that opportunity passed a long time ago. And the House and Senate leaders on this issue don’t have the national credentials to take control.

That leaves only one person: whoever is elected president.

Unlike the situation in almost all previous elections, the country is likely to look to the president-elect for guidance and reassurance almost immediately after the results have been announced.

Stan is right.  This morning the inside-the-Beltway policy wonks (and the media as well of course) are excitedly, anxiously speculating about who will be in President Obama’s cabinet–but in particular, who we expect will immediately be put to work on economic policy in the (very short) “transition” to the Obama Administration.

The real work on the economy has to begin right away, and it’s going to involve hard choices and a coming together of lots of ideas and personalities that are pretty out of practice in terms of “getting along.”  And I believe President-elect Obama understands the critical need for cooperation, compromise, and broadly-shared sacrifice in any solution to our economy’s very challenging problems, and he understands that Americans are now relying on him to encourage that coming together.  From his victory speech last night:

This is your victory.

And I know you didn’t do this just to win an election. And I know you didn’t do it for me.

You did it because you understand the enormity of the task that lies ahead. For even as we celebrate tonight, we know the challenges that tomorrow will bring are the greatest of our lifetime — two wars, a planet in peril, the worst financial crisis in a century…

There’s new energy to harness, new jobs to be created, new schools to build, and threats to meet, alliances to repair.

The road ahead will be long. Our climb will be steep. We may not get there in one year or even in one term. But, America, I have never been more hopeful than I am tonight that we will get there.

I promise you, we as a people will get there.

There will be setbacks and false starts. There are many who won’t agree with every decision or policy I make as president. And we know the government can’t solve every problem.

But I will always be honest with you about the challenges we face. I will listen to you, especially when we disagree. And, above all, I will ask you to join in the work of remaking this nation…

It can’t happen without you, without a new spirit of service, a new spirit of sacrifice.

So let us summon a new spirit of patriotism, of responsibility, where each of us resolves to pitch in and work harder and look after not only ourselves but each other.

Let us remember that, if this financial crisis taught us anything, it’s that we cannot have a thriving Wall Street while Main Street suffers.

In this country, we rise or fall as one nation, as one people. Let’s resist the temptation to fall back on the same partisanship and pettiness and immaturity that has poisoned our politics for so long.

As the Washington Post’s Dan Balz writes today, Obama’s first challenge on economic policy will be how to balance his “big and ambitious agenda” with a feasible “strategy to reach those goals over time”–in other words, how to listen to the advice of all of his economic advisers, both the Jared Bernstein (bigger government) types and the Bob Rubin (fiscal hawk) types:

Obama advisers, who agreed to talk about the future only on the condition that they not be quoted, said they are well aware of the dangers of interpreting the results as a mandate for unabashed liberal government.

One top adviser recalled what happened after the Democrats regained control of the House and Senate in the midterm elections and suggested they were ready to end the war in Iraq and enact a bold Democratic agenda. “We’re all wary of the lessons of 2006, when expectations were raised so high prematurely,” he said.

This adviser said Obama knows that he must move strategically to balance his pledges to govern inclusively while promoting a progressive agenda. “It’s up to him to educate people on a strategy to move forward.” Part of that strategy, he added, will be persuading people to be patient about the pace of change.

Obama advisers take seriously the senator’s rhetoric about governing in a bipartisan fashion. They are ready for potential conflict with some Democratic constituencies or with some liberal Democrats in Congress, whose pent-up demand for action may clash with Obama’s priorities, and are prepared to say no.

Obama has yet to truly confront the realities of a domestic platform that calls for significant increases in federal spending and a fiscal problem that has worsened dramatically. Given the projected spending of $700 billion for a financial rescue package and hundreds of billions more for an economic stimulus package that Democrats say is needed, the deficit could approach $1 trillion or more next fiscal year, even without any of Obama’s other priorities.

In the final stages of the campaign, Obama spoke in generalities about scrubbing the federal budget line by line, looking for cuts. He has yet to identify specific reductions, but soon after he is sworn in, his administration will have to present an alternative budget. At that point, Obama will reveal more of who he is. 

And toward the end of last night’s (brilliant and inspiring) speech, Obama clearly articulated that who he is and who he intends to be as President is a “uniter”:

…while the Democratic Party has won a great victory tonight, we do so with a measure of humility and determination to heal the divides that have held back our progress.

As Lincoln said to a nation far more divided than ours, we are not enemies but friends. Though passion may have strained, it must not break our bonds of affection.

And to those Americans whose support I have yet to earn, I may not have won your vote tonight, but I hear your voices. I need your help. And I will be your president, too.

…That’s the true genius of America: that America can change. Our union can be perfected. What we’ve already achieved gives us hope for what we can and must achieve tomorrow…

America, we have come so far. We have seen so much. But there is so much more to do. So tonight, let us ask ourselves — if our children should live to see the next century…what change will they see? What progress will we have made?

This is our chance to answer that call. This is our moment.

This is our time, to put our people back to work and open doors of opportunity for our kids; to restore prosperity and promote the cause of peace; to reclaim the American dream and reaffirm that fundamental truth, that, out of many, we are one; that while we breathe, we hope. And where we are met with cynicism and doubts and those who tell us that we can’t, we will respond with that timeless creed that sums up the spirit of a people: Yes, we can.

So there’s plenty of hope and inspiration for all of us.  Now we just have to get to the real work, working together.

It was just yesterday when I wrote:

Call me naive, but I’m hopeful that going forward and working with the next Administration and the next Congress, that the Dean Baker-type critics of the fiscal hawks will start to realize that there’s actually a lot of common ground between us, and not so much “one side” versus “the other.”

And in an op-ed in today’s New York Times, fiscally-conservative Bob Rubin and liberal-leaning Jared Bernstein, both Democrats who support and advise Obama, together explain this common ground:

As economists and policy advisers try to sort out where we are, how we got here and where we must go for both the short term and the longer term, we are surrounded by polarizing dichotomies: Fiscal recklessness versus fiscal rectitude; capital versus labor; free trade versus protectionism.

The next president, the prevailing wisdom goes, will have to choose between these polarities. But how real are these differences? Our view — and we come from pretty different analytical perspectives — is that in many important ways, they are false, and serve as more of a distraction than a map.

Fiscal rectitude versus stimulus and public investment: The Bible got this right a long time ago (paraphrasing slightly): there’s a time to spend, a time to save; a time to build deficits up and a time to tear them down. Though one of us (Mr. Rubin) is often invoked as an advocate of fiscal discipline, we both agree that there are times for fiscal discipline and times for fiscal largess. With the current financial crisis, our joint view is that for the short term, our economy needs a large fiscal stimulus that generates substantial economic demand.

We also jointly believe that fiscal stimulus must be married to a commitment to re-establishing sound fiscal conditions with a multi-year program that includes room for critical public investment, once the economy is back on a healthy track.

One of us (Mr. Rubin) views long-term fiscal deficits — in combination with a low national savings rate, large current account deficits and foreign portfolios that are heavily over-weighted in dollar-dominated assets — as a serious threat to long-term interest rates and our currency and, therefore, to our economic future. The other views these economic relationships as much weaker.

At the same time, we both agree that our economic future also requires public investment in critical areas like education, health care, energy, worker training and much else. In our view, then, the next president needs to proceed on multiple tracks, with both the restoration of a sound fiscal regime and critical public investment.

These are themes I’ve repeated many times here on this blog, and I’ve pointed out that the Concord Coalition emphasizes them, too (see our recent issue brief).  Deficit-financed economic stimulus can still be “fiscally responsible“…

[F]iscal responsibility is a much broader concept than having a goal of a balanced budget.  It means prioritizing those fiscal policies that would contribute the most to economic stability and economic growth, then determining how to finance those policies in the most efficient and fair way possible.  It means formulating our fiscal policies to maximize their net benefits to society. (10/18/08)

And indeed, given how we got into this “mess” in the first place, over the longer run we’ll need to do better about saving more and expanding our “means.”  Now is not the time to abandon that broader notion of fiscal responsibility, but instead to make sure that we make wise choices about how we spend our money and what is worth increasing our indebtedness for: 

Now is exactly the time we need to be smart about fiscal policy: any stimulus should not encourage the same bad behavior–on the part of either the government or the private sector–that got us into this trouble in the first place.  Temporary, deficit-financed fiscal stimulus may be needed to simply keep the economy going–to allow us to “keep living” (consuming).  But we shouldn’t enact permanent proposals that permanently encourage consumption over saving (living beyond our means); we should be moving toward policies that encourage investments in workers and new technologies that are likely to pay off in the longer run, steering more of our limited resources toward boosting human capital–in other words, increasing our means.  But such investments will cost a considerable amount of up-front money.  Given that our budget constraints have gotten much tighter, it’s important that the next president set clear priorities and be willing to make tradeoffs, so that we will pursue policies that over the next several years (beyond these next several weeks or months) are most likely to get us back on the path of higher national saving and a stronger economy. (10/10/08)

As Bob and Jared explain, we can pursue more public investment and be willing to pay for it, too, and have both priorities provide that winning combination that we saw in the 1990s in terms of economic growth:

We both agree that individual income tax rates and other taxes for those at the very top could be moved back to the rates of the Clinton era. It’s worth remembering that rates at this level helped finance deficit reduction and public investment that contributed to the longest economic expansion in our history.

In addition to restoring a sound fiscal regime, we could improve our personal savings rate and expand retirement security by establishing some kind of individualized account separate from Social Security, financed by an appropriate revenue measure…

Capital versus labor: Here again, for all their alleged friction, our dynamic and flexible capital and labor markets have combined to generate impressive productivity gains in recent years. The problem is that the benefits of this productivity growth have largely eluded working families…

Tight labor markets, the kind we saw in the 1990s, are another source of bargaining power, helping to rebalance the claims of labor and capital on growth. Sound public policy, like public investment in education, health care, energy, infrastructure and basic research, financed by progressive taxation, can also drive strong growth and business confidence to invest and hire. Moreover, the policies that are requisites for strong growth also increase wages by better equipping workers to succeed in a global marketplace and by encouraging businesses to create jobs.

And Bob and Jared seem to be asking the same question I’ve asked about the pitfalls of economic policymaking when in “crisis” or “life support” mode:  are we really helping the people who need the help when we frantically throw the money out there?…

We know, too, that Wall Street and Main Street are intimately connected. The consequences of the financial market crisis are profound for Americans in terms of lost jobs, lower incomes and reduced retirement savings. Measures to reform and strengthen the financial system should be evaluated by this measure: Do they ultimately translate into improving the jobs, incomes and assets of working Americans?

In other words, an enlarged federal budget deficit is inevitable over the next couple years.  The question for the next Administration and Congress is:  can we make it worth it?  We’re much more likely to come up with a successful policy strategy if those who support more and better government spending work together with those who still believe fiscal responsibility matters.  As Bob and Jared conclude:

False choices, grounded in ideology, have kept us from effectively addressing all these issues. The next president must do his utmost to avoid being drawn into these Potemkin battles. At this critical juncture, we face both the most significant economic upheaval since the Depression and the long-term challenge of successfully competing in the global economy. We have no choice but to move beyond such false dichotomies and toward a balanced pragmatism whose goal is broadly shared prosperity and increased economic security.

I think Senator Obama gets that.  And I’m therefore hopeful that the next Administration and the next Congress will recognize the need to avoid the bickering and get along–and not just “get along” but really work together (Democrats and Republicans, fiscal conservatives and bigger government types)–to start turning this economy around.

I won’t call this a “response to a response to a response to a critique”–but just call it “my two cents” on the debate over IOUSA that’s taken place here over the past few days.  Having read over the initial critique and the back and forth here and in response to Dean Baker’s post on Huffington Post, I don’t want to be reflexively argumentative, but calmly observant. 

Perhaps I’m being naive, but I don’t see a lot of disagreement on the substance of the issue.  Without getting into the weeds, here’s what I interpret as what I think all of us actually agree on:

• Rising health care costs present the biggest challenge to the longer-term fiscal and economic outlook, because the per-person costs of health spending (both public and private spending) are growing faster than the economy, and that factor compounds with the changing demographics (of larger retiree-to-worker population).  (And we can all agree on the same sources for our facts–such as CBO projections.)
• Rising health costs are an economy-wide problem, not just specific to the health spending done through federal entitlement programs.
• Such severe upward pressure on health spending throughout the economy means that in both the public and the private sector, the ability to save more to avoid unsustainable increases in debt (public and private) is severely challenged–i.e., rising health expenditures, all else constant, will reduce national saving.
• Given that rising health costs will continue to reduce national saving if policies are not changed, economic growth will be jeopardized if policies are not changed.
• The statement that economic growth is threatened by reduced public and private saving is not a claim that the dollar-size of the economy in the future will be smaller than the economy of today (the economy will still grow over the longer run), but a claim that it will be smaller than it would otherwise be if the imbalances were reduced and hence national saving higher.  The intergenerational fairness issue is whether future generations should be entitled to the same rate of growth in the economy that current and prior generations have enjoyed.  (See my “Buffett pie” post on this issue, and here too, and here in this Concord issue brief.)
• Policymakers need to do all we can to “bend (down) the curve” on overall health care spending, while ensuring adequate (and hopefully better-quality) health care to all Americans, but…
• If after all we try to do to control health costs we’re still swimming upstream (i.e., still contending with health care spending rising faster than the economy is growing), then we’ll still be “living beyond our means” (in the economy overall, not just specifically within our entitlement programs).  (This is the “basic math” problem that counters the argument that it’s a spending problem so it’s that same spending that we should attack/cut.) 
• We then need to consider other policy options to help us either spend less (decrease our “ways”) or earn more (increase our “means”).  That’s why we have to be willing to reexamine the entire federal budget to get public saving up (dissaving down), and why we also have to consider how federal policy influences private saving.  We need to consider reform of the federal entitlement programs, yes, but also improving efficiency in government spending more broadly, and tax reform.
• The sooner we work on the variety of ways we can start living within our means, the sooner we are able to bend down the overall curve of total government spending, and indeed economy-wide spending, because we reduce the costs of debt service (compounding interest).

The bottom line is that in my view, the Dean Bakers of the world don’t dispute the facts or forecasted trends that the IOUSA folks highlight; we’re all looking at the same ones, and we often even use the same words to describe what we see.  The Dean Bakers of the world are not questioning the analyses of the fiscal hawks–they’re questioning our motives….even the motives of someone like me who’s speaking as an economist mom.  If they don’t trust our policy intentions, there’s no point in us fiscal hawks getting into debates with them about the details of our respective assumptions and analyses, because those details have nothing to do with why they dislike us. 

Call me naive, but I’m hopeful that going forward and working with the next Administration and the next Congress, that the Dean Baker-type critics of the fiscal hawks will start to realize that there’s actually a lot of common ground between us, and not so much “one side” versus “the other.”

Having the federal government “rescue” or “stimulate” the U.S. economy isn’t an easy thing to do.  In Friday’s Washington Post, Steven Pearlstein writes of “Hank Paulson’s $125 billion mistake.”  That would be referring to the $125 billion in new capital provided by Treasury to the nine biggest banks, in what was billed as ”partial nationalization.”  (Hard to believe that was just a couple weeks ago.)  My view at the time was that having the federal government hold some sort of equity stake in these banks was at least better than having no stake at all and holding only “bad paper” (sometimes referred to, oxymoronically, as ”toxic assets”).  But Steven explains why some who advocated the move now think it’s not going so well:

Now, many of the same people are shocked — shocked! — to discover that the banks aren’t using the money to make new loans to households and businesses, as they had assumed, but are using it to maintain dividend payments to shareholders, pay this year’s bonuses to executives and traders, or squirrel it away for future acquisitions.

I hate to say it, but I told you so. Sprinkling money around a highly fragmented banking system when markets were panicked and everyone was scrambling to reduce leverage was always akin to shoveling sand against the tide…

[M]aking modest investments in dozens of banks, whether they needed it or not, produces little for the public beyond the small profit for the Treasury. What it does do, however, is open the door for every politician and populist to second-guess every decision and expenditure the banks make, based on the false assumption that everything they do is with “our money.”

In other words, it is still just partial nationalization, and market prices and private profit-seeking are still the major forces at work.  Just because the government is effectively a shareholder now, doesn’t mean the government can actually control how these banks choose to run their businesses. 

Then Steven goes on in a way that leads my mind to wander past the banks and the government’s $125 billion “mistake”…

[I]n trying to persuade banks that don’t need the money to take it, the Treasury has wound up offering everyone the same sweetheart deal that gives the government little say in how the money is used or how the banks are run. That’s particularly dangerous in the case of weaker banks, which might be tempted to take big risks in the hope of recouping past losses or to divert money to shareholders and executives before the inevitable government takeover.

In the case of some of the stronger banks, however, much of the carping about bonuses and dividends and refusal to lend are a bit overblown…

…and which leads me to wonder:  if we’re worried that the $125 billion “partial nationalization” of the biggest banks could turn out to be a “mistake”–because the government has little control over how the money gets used by the assisted industry–then might this be just the first of many mistakes to come?  Gee, look at that story in the paper right next to the continuation of Steven’s column on page D6, “Government Urged to Help Auto Industry“… and the story in today’s Washington Post about how Michigan voters have been unusually sympathetic to the $700 billion rescue plan, “in large part because voters think the auto industry needs a similar boost.”

Steven seems to think the worries about the lack of new lending are overblown.  He reminds us that the banking industry has not really been nationalized (not fully, and maybe that means not really at all–like a woman can’t be partially or sort of pregnant?), and that what we’re really worrying about here is that some of the money is being saved rather than lent out:

[B]anks like J.P. Morgan, Wells Fargo, State Street and the newly chartered Goldman Sachs remain highly profitable and well-capitalized. It ought to be up to them to decide whether to use those profits to add to capital reserves or pay them out in dividends and executive bonuses. We might not like their choices, or their values, but this is still a market economy, and these are still shareholder-owned companies. The industry hasn’t been nationalized just yet.

It is also useful to remember that the way banks make money is to lend it out, not hold it in the vault or invest it in low-yielding Treasury bonds. Hoarding is not generally a winning strategy for maximizing share prices or executive bonuses. It is also useful to remember what got us into this mess in the first place. If banks are using their new capital to reduce their own leverage, or are more cautious about whom they lend to, that’s probably a good thing.

Yes, there’s what I’ve talked about a lot before–the really tricky thing about immediately “stimulating” the economy (boosting consumption) given what brought us to the more fundamental and longer-lasting “mess” in the economy as a whole (too much consumption/too little saving).  It’s a very general challenge in the current economic climate:  how can we ”rescue” and “stimulate” the economy without encouraging the “living beyond our means” mentality that is so harmful to the longer-term health of our economy?  (The Concord Coalition suggested some ways to think about it in our recent issue brief.)  It’s interesting that a Business section story in today’s Washington Post on stimulus ideas highlights the contrary short-term versus long-term prescriptions, in listing the “downsides” of many of the stimulus proposals as they might decrease national saving!  (…which is actually what we want it to do, at least in the short run.)

Then Steven wraps up his column as if he’s known all along where my thinking was going, especially with my recent preoccupation with the auto industry:

Perhaps the worst part of this misguided effort to recapitalize the banking system is that it has prompted other industries to line up for similar sweetheart deals. Automakers, insurers, auto finance companies and local governments are already besieging the Treasury, and you can be sure that others are refining their pitch. One can only hope that the terms of future deals will be sufficiently onerous that going to the Treasury will be become a last resort, not a first instinct, for industries in trouble.

That’s the basic (and tough) challenge facing policymakers (when they come back for the lame duck session after the election): how to get federal support out there in our economy where it will make a difference and where it will turn out to have been “worth it” to current and future taxpayers.