Obama's Hurdles Down the Track

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.

Now that even Alan Greenspan has finally discovered that markets are not always self-correcting, there is a temptation to declare deregulation a failure and expanded regulation inevitable. But 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.

This is also the moment to transform the regulatory process from one based on rigid rules that invite gamesmanship on the part of business to one based on broad principles that will give government officials flexibility and discretion to respond to changing market conditions. And when the first industry steps forward to challenge his regulators, Obama needs to bring the full weight of his legal, political and moral authority to bear in beating it back, much as Reagan did with striking air-traffic controllers in the early days of his administration.

It would be a misreading of the Treasury's $700 billion rescue of banks and other financial institutions to assume it heralds a new era of direct government management of the economy. This isn't France. But the necessity of a massive government rescue has exposed the heads-I-win, tails-you-lose quality of financial risk-taking and the hypocrisy of free-market fundamentalism. It suggests not only the need for enhanced oversight of financial markets but also the imposition of a global transaction tax to pay for the inevitable rescues.

For years, Republican congressmen could count on getting a good laugh by showing up at local Rotary Club luncheon and announcing, "I'm from Washington, and I'm here to help." Now that the American people have learned that the joke is on them, they anxiously await that cold, crisp day in January when a new president will take the oath of office and declare that government is not the problem but a vital and welcome part of the solution.

Steven Pearlstein can be reached atpearlsteins@washpost.com.