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Obama's Hurdles Down the Track

By Steven Pearlstein
Friday, November 7, 2008

Now comes the hard part.

Come January, President Obama will inherit the weakest U.S. economy in 25 years, with output shrinking, unemployment rising, the federal deficit out of control and a financial system on government life-support. The new president will probably spend his first year in office careering from crisis to crisis, throwing lifelines to hard-hit households, local governments, industries and developing countries. The job will feel a lot less like that of a ship's captain and a lot more like that of a triage nurse.

Parallels have been drawn to Franklin Roosevelt and Ronald Reagan, two presidents who came to office in the midst of economic crisis and wound up reshaping and redefining American capitalism for the ensuing generation. Obama now has the same opportunity, along with a strong mandate to pursue it.

Obama's immediate challenge is to not allow himself to be trapped by his victory.

He will need to make clear that though he intends to pursue the broad agenda he laid out during the campaign, the timing and details -- many of which were laid out more than a year ago -- may need to be adjusted in light of dramatically changed circumstances.

This next year, for example, is probably not the ideal time to try to tackle the politically complex issue of health care. Better to focus on laying the foundation for reform by investing serious money in research into cost-effective medical treatments, as well as into information technology infrastructure that could control costs and improve quality.

And rather than engender the enmity of the business community right off by pushing labor's top priority -- allowing unions to organize workers by collecting pledge cards from half of a company's workers -- he might first try to repair the current system of secret-ballot elections that has been rendered useless by thuggish union-busting techniques.

Indeed, given enhanced Democratic majorities in both the House and Senate, Obama will need to demonstrate, early on, a willingness to stand up to traditional Democratic interest groups -- and the ability to beat them back if necessary by reaching out to moderate Republicans. Appointing Joel Klein, New York City's crusading schools chancellor, as secretary of education might be one place to start. It would send a strong signal that teachers unions will not have a veto over education policy.

Obama will also need to remind the transition staff that he won the election because he promised a fresh approach, not a restoration of the Clinton administration. The lists of candidates for economic jobs that have been floated so far reflect a stunning lack of diversity in terms of background, geography, political loyalties and academic pedigree. Having some old Washington hands is surely important, but an Obama economic team also needs to reflect the entrepreneurial sensibility of Silicon Valley, a Rust Belt urgency about global competitiveness, a healthy skepticism toward Wall Street and a community organizer's passion for social justice. The pool of talent that could contribute to economic policy extends well beyond the names on Bob Rubin's speed dial.

Most importantly, 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.

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.

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