Top Priority Is Stabilizing the Patient
By DAVID LEONHARDT
Barack Obama and his advisers have spent much of the last three years
devising policies to deal with the economy's big, long-term problems,
like inequality, health care, the budget deficit. In the process, they
came up with an agenda that's serious, detailed and mostly cogent.
Yet none of it will be their first priority.
Instead, the initial thrust of their economic policy will be on
keeping the economy from falling into a recession that's nastier than
most of us have ever experienced.
This year's election coincided with an important moment in the
financial crisis. The credit markets have stabilized in the last few
weeks and even improved a bit. But the rest of the economy is
deteriorating fairly rapidly. It's now in danger of falling into a
vicious spiral, in which spending cuts by consumers and businesses
lead to further layoffs and then more spending cuts.
To prevent that from happening, the Obama administration will need to
move quickly — before it takes office — to put together some emergency
plans for the financial markets and the broader economy.
Mr. Obama and his advisers acknowledge that their focus has to shift,
but the change is still likely to be challenging, and a bit
disappointing. "Unfortunately, the next president's No. 1 priority is
going to be preventing the biggest financial crisis in possibly the
last century from turning into the next Great Depression," says Austan
Goolsbee, an Obama adviser. "That has to be No. 1. Nobody ever wanted
that to be the priority. But that's clearly where we are."
Throughout the campaign, whenever Mr. Obama was asked about the
financial crisis, he liked to turn the conversation back to his
long-term plans, by saying that they were meant to solve the very
problems that had caused the crisis in the first place. Back in
January, he predicted to me that the financial troubles would probably
get significantly worse in 2008. They had their roots in middle-class
income stagnation, which helped cause an explosion in debt, and the
mortgage meltdown was likely to be just the beginning, he said then.
His prognosis was right — and the pundits now demanding that he give
up major parts of his economic agenda in response to the financial
crisis are, for the most part, wrong. When you discover that a patient
is in even worse shape than you thought, you don't become less
aggressive about treatment. But you do have to deal with the most
acute problems first.
And Mr. Obama has a big incentive to do so. The hangover from a
recession typically lasts more than a year, and this recession isn't
over yet. So he will be at risk of the same kind of midterm drubbing
in 2010 that Ronald Reagan received in 1982 and Bill Clinton did in
1994. In the days leading up to this year's election, as they
confidently reviewed the polls, some Obama aides took to joking darkly
that 2010 was already looking bad.
Their best hope for changing that outlook starts with a serious
stimulus bill. House Democrats have been pushing for such a bill for
weeks, but the Bush administration has been opposed, largely because
the House proposals have focused on government spending rather than
tax cuts. Now that an Obama administration looms, Congress has two
It can look for compromise with the White House and pass a bill in the
coming weeks, even if it's incomplete. Or it can wait until January
and have a bill on Mr. Obama's desk within days of his inauguration.
There is at least one obvious area of potential compromise: Mr.
Obama's call for a $1,000 payroll-tax rebate for almost every family.
That would cost the government about $65 billion. But a stimulus
package should probably be a lot bigger than that — maybe $200 billion
or so. And at this point, drafting it well matters more than passing
Economic research is quite clear about what works best. As Martin
Feldstein, the dean of Republican economists, has pointed out,
households saved more than 80 percent of the money they received in
tax rebates this spring. "The only way to prevent a deepening
recession," Mr. Feldstein wrote last week in The Washington Post,
"will be a temporary program of increased government spending."
That means starting work on new construction projects that government
agencies have already deemed worthy but that lack financing. It also
means sending money to state governments to close their budget
shortfalls, in addition to softening the blow of the downturn by
extending jobless benefits (as flawed as the unemployment insurance
All this will worsen the deficit. But the true cost won't be as large
as the price tag on the bill will suggest. Every dollar in new
government spending tends to increase the gross domestic product by
about $1.50 on average, according to Moody's Economy.com. This $1.50
results in about 40 cents of additional tax revenue. So a well-written
stimulus bill can pay about 40 percent of its own cost.
The second big issue is the credit markets. Banks have become somewhat
more willing to make loans lately. But the financial system is still
much closer to crisis than normalcy, which argues for vigilance during
the transition and from the new Treasury Department.
The two leading candidates for Mr. Obama's Treasury secretary —
Timothy Geithner and Lawrence Summers — seem likely to be more
aggressive than Henry Paulson, the current secretary. Mr. Geithner,
the president of the Federal Reserve Bank of New York, has at times
lobbied for a more proactive approach to the current crisis. He
favored direct equity injections into banks, for instance, before Mr.
As early as last December, meanwhile, Mr. Summers criticized policy
makers for being "behind the curve." Both he and Mr. Geithner are fond
of quoting Ernesto Zedillo, the former Mexican president, as saying
that since markets overreact, policy makers must overreact, too.
Of course, it won't be easy to distinguish between acceptable
overreaction and reckless overreaction. Just consider the current
debate about how to reduce home foreclosures.
Some Democrats have suggested that the only reason the Bush
administration hasn't done more to help homeowners is that it doesn't
care. But that's not really fair. Coming up with a substantial
mortgage rescue plan that doesn't end up helping millions of
homeowners who neither need nor deserve help is inherently tricky.
Mr. Obama seems to grasp this. His own campaign proposals for a
mortgage rescue were more restrained than either John McCain's or
Hillary Clinton's. Yet he waffled a bit in the campaign's final weeks
and never spelled out exactly what he believes. So this issue will be
a good early test of his election night pledge to "always be honest
with you about the challenges we face."
Whatever he decides, it probably has to involve more money — which
will make the government's budget problems even worse. Some economists
think next year's deficit could potentially exceed $900 billion.
Relative to the size of the economy, that would be the largest deficit
since the years just after World War II.
A deficit like that will indeed force Mr. Obama to change his approach
to the economy's long-term problems, mainly by coming up with new ways
to pay for his solutions. But that is tomorrow's problem. Today's are
big enough as it is.
Copyright 2008 The New York Times Company