Obama's Economic Choice
As he assembles his economic team, Barack Obama faces a central strategic decision that only he can make. Starting with his "economic stimulus" plan, will he focus mainly on reviving the economy and relieving the financial crisis? Or will he use the economic crisis as a vehicle to advance a more ambitious social and economic agenda? The two approaches are at odds. The first aims at building political consensus and economic confidence; the second would intensify political conflict and economic uncertainty.
The decision ought to be easy. Every new president is assaulted by his own supporters, who want him to put their particular agendas atop his "to do" list. That's happening, as Obama allies clamor for speedy action to provide universal health insurance, combat global warming and support trade unions. But Obama -- and the nation -- would be better served if he concentrated for his first year on stabilizing the economy while patiently laying the groundwork for more far-reaching proposals.
The hallmark of this economic crisis has been its capacity to surprise: The desperate plight of the Big Three automakers is the latest reminder. We can expect more surprises, because the U.S. and global economies continue to weaken at a worrying pace. Consumer confidence has plunged. In October, U.S. factory orders for durable goods (machinery, autos, appliances) dropped 6.2 percent. Abroad, signs are no better. Worldwide manufacturing production is declining at an 8 percent rate. Germany is in recession; China's growth has slowed sharply.
Against this backdrop, the parallel pursuit of crisis management and sweeping domestic reform is at best distracting. In practice, it may be politically poisonous. Superficially, the two objectives can be made to seem compatible. Obama can plug "green" investments as a way to restore job growth; he can tout a more efficient health-care system as a way to control health costs. But these rhetorical debating points obscure as much as they reveal.
Any program to refashion the energy and health-care sectors -- to take two obvious candidates -- would be complicated and contentious. Some producers and consumers would win; others would lose. Proposals would create massive uncertainties for businesses and raise the probability of higher costs. To succeed in curbing greenhouse gas emissions, for example, any cap-and-trade program must involve higher energy prices.
The notion that green investments would be large, permanent net creators of jobs is mostly a mirage. Somehow these investments must be paid for. If that happens through higher prices, higher taxes or cuts in other government programs, then most green jobs will substitute for other types of jobs. As for curbing health-care costs, that's desirable. The trouble is that the first effect of Obama's health-care program would probably be the opposite. Expanding insurance coverage would initially raise health spending as greater demand for medical care met a (relatively) fixed supply of doctors, hospitals and clinics.
Obama won the election, and in normal times, his campaign agenda ought to be front and center. But these are not normal times, and what's most important now -- as he repeatedly emphasizes -- is to prevent the recession from feeding on itself. This is a clear danger. Consumer spending (70 percent of the economy) has declined for five consecutive months. Eroding tax revenue may result in state budget deficits of $200 billion to $250 billion through mid-2011, estimates the Center on Budget and Policy Priorities, a liberal advocacy group. Required to balance their budgets, states face increased taxes or large spending cuts.
The compelling case for a big economic stimulus package is that it would cushion these and other spending declines. The odds are that any package will include some direct payments to states; a renewed extension of unemployment benefits; tax cuts -- reflecting Obama's campaign pledge -- of $500 for most single workers and $1,000 for most two-earner families; spending for infrastructure (roads, bridges, schools and, perhaps, windmills). Obama wants Congress to pass a stimulus package soon after his inauguration. Assuming he gets his wish, it's then that he must make his crucial choice.
The temptation will be to press ahead with a "bold" legislative agenda -- to ape the New Deal. This would be a mistake. The psychology of bruising legislative battles will not bolster confidence. The country does need to face its health and energy problems as well as deficit-ridden federal budgets. But trying to do too much too soon risks doing none of it well. We -- and he -- are caught up in a web of contradictions. In the long run, we need to discipline our appetite for health care and energy; we need to reconcile our desire for government benefits and our willingness to be taxed. Obama's first job is to avert an economic freefall.