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More Pain to Come, Even if He's Perfect

So Obama will have to push for major changes, in both regulations and the overall systems of carrots and sticks, to restore confidence, spur lending and ensure that our financial markets do what they are supposed to do. This may require, for instance, restricting some of the special benefits (such as easy-to-get Federal Reserve loans) granted to the banks in recent months only to well-behaved institutions that actually lend more and use publicly provided funds responsibly. And it means that the financial sector should not only fully repay the bailout funds it has received but also give taxpayers a return commensurate with the risks the country has undertaken. If that means taxing the banks, so be it. Wall Street would demand no less if it were doling out its own money.

Obama will also need to deal with some vast inefficiencies in our economy if we are to prevent further erosions in our standard of living. Some U.S. sectors are global leaders, such as our world-beating universities and the high-tech firms that thrive on the ideas hatched in our ivory towers. Others are embarrassing, such as health care, where Americans spend far more than citizens in many other industrialized countries and get underwhelming results. We need a bold approach here, reforming not just the way we provide medicine but also thinking more broadly about health. That means doing more about diseases associated with alcohol, drugs, tobacco and obesity, which have increasingly come to symbolize American over-consumption.

Similarly, we should think more broadly about the bang we get for our buck in international affairs. Our current military expenditures are a serious drain; we could get more security for far less money if we didn't waste so much on weapons systems that don't work or are designed to fight enemies that don't exist. (Think the Air Force's multibillion-dollar program for a new deep-strike bomber that would be completely useless against terrorists.) Moreover, we might be the richest country in the world, but we have been among the stingiest of the advanced industrial countries when it comes to fighting global poverty and disease. We devote only 0.16 percent of our world-leading GDP to foreign aid, among the lowest rates in the developed world. If we make the World Bank and the International Monetary Fund more democratic, we will lose some voting power, but we will gain tremendously in "soft power," or global influence.

Obama is also inheriting a climate crisis. The United States and China have been racing to see which nation will contribute most to the greenhouse gases that cause global warming. It looks as though China will win in absolute terms, but on a per capita basis, America takes the smoggy cake. We cannot save the planet without a global agreement, and we cannot get such an agreement without massive reductions in U.S. emissions. This transition could have upsides beyond the environmental ones. A carbon tax -- or the auctioning of emissions permits -- could generate huge revenues; some of those could be used to help Americans adjust to the new "green economy," while the rest could be used to reduce the deficit or lower taxes on workers. But we really have little choice here: Europe and other global players are likely to slap a carbon tax on U.S. goods if we don't deal with the issue at home. Their firms will not tolerate giving U.S. firms a competitive advantage simply because we refuse to bear our responsibility for the global environment.

We may be witnessing the birth of a new economic model. We have been treating two of the world's scarcest resources, air and water, as if they were actually free. No wonder we have paid so little attention to resource-saving innovations. Perversely, the U.S. tax code has actually been subsidizing the production of the very fossil fuels that contribute to global warming. We have been pursuing a policy that amounts to "Drain America first." It has made us even more dependent on oil imports -- a stunningly short-sighted plan.

And in the rare cases when we have turned to renewable sources of fuel, we have done so in a manner driven by special interests, not by common sense. Subsidies to corn-based ethanol, for instance, offer little if any benefit to the environment; such handouts have been justified in the name of helping out an infant industry that will stand on its own feet if given a good start. But ethanol is an infant that has refused to grow up.

The new economic model will require changes in the ways and places where we live and work. There will be some losers (including the oil industry, which has done jarringly well in recent years), but there will be even more winners.

In so many ways, the United States has reached a low point. Picking ourselves up off the ground is itself no mean achievement. But I hope that our new president will do even more for us than that.

Joseph Stiglitz, a professor at Columbia University, won the Nobel Prize in economics in 2001. His latest book, with Linda J. Bilmes, is "The Three Trillion Dollar War."

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