Week of 11.28.08
Excerpt: "Obama's Challenge"
Repairing a Damaged Economy
By Robert Kuttner
Make no small plans. They have no magic to stir men's blood.
When Barack Obama takes office as America's forty-fourth president, he will face an acute, three-pronged economic challenge. The financial system will be in crisis to a greater degree than at any time since 1933. America's international imbalances will be on a worsening downward slide. And the economy will be in a deepening recession supercharged by falling consumer purchasing power, declining housing values, and cascading business losses.
In addition, he faces four chronic problems that recession will only intensify. The recession will exacerbate a thirty-year trend of increasing inequality and insecurity. The crisis in energy and climate change will be deepening; the unreliability and cost of health care will be relentlessly worsening. The decay of America's public spaces and facilities will persist. All of this will require a more activist use of government than we've seen in at least four decades.
As we saw in chapter 3, real obstacles to change are compounded by attitudinal ones. Assuming that he is not disabled by an undertow of dubious counsel, what exactly should Obama do? He will have no shortage of advice, much of it contradictory, and the risk will be either to aim too low or to run off in several directions at once before having a clear strategic plan.
At every step, he needs to restore confidence—not just with inspiring words or grand aspirations, but by demonstrating that help is on the way. He also needs to transform prevailing ideological assumptions, so that the practical help attracts wide support and builds public approval for even bolder measures using activist government that will take longer to enact—and to reclaim support for the more fundamental progressive idea that government plays a constructive and necessary role.
In Roosevelt's famous First Hundred Days, FDR launched dozens of initiatives. Within just over three months, fifteen pieces of landmark legislation had passed Congress and remade the relationship between economy and government.
Obama does not need to match that record. But at the outset of his first term, he does need to address the economic emergency on three tracks. Longer-term reforms such as universal health insurance can come a little later.
First, Treasury Secretary Paulson's policy of ad hoc financial bailouts needs to be turned into a more systematic program, with explicit principles of prudential regulation. The recapitalization of America's damaged financial system must continue, perhaps at an expanded scale. But it needs to be part of a coherent strategy for restoring a sound financial system—one that the Bush administration has been incapable of creating. Second, since the housing collapse is so central both to the damaged condition of America's credit markets and to falling consumer demand, Obama needs to work with Congress on a much more robust housing and mortgage rescue program. The Frank-Dodd mortgage refinancing law and Fannie Mae-Freddie Mac guarantee enacted in late July was not a bad start, but it is not enough to do the job. And third, we will need a dramatic expansion of public spending, well into the hundreds of billions of dollars, as classic anti-depression medicine.
Begin with Low-Hanging Fruit
Obama's earliest measures should be devoted to delivering practical help to individuals, families, and communities. That will both relieve economic suffering and establish him as a leader, as well as moderate the recession. By spring 2009, we will need an immediate recovery package in the range of $200 to $300 billion, and not primarily in the form of tax cuts. That money will be needed to extend unemployment benefits; deliver money to states and localities whose falling revenues cause them to cut services in a recession; and provide the first installment on a long-term effort to rebuild public infrastructure, with an emphasis on both deferred basic maintenance and efficient renewable energy. Such public outlays can also speed development of technologies that will improve America's competitiveness and provide such twenty-first-century basics as universal broadband service.
The public works funds could be combined with an increase in job training subsidies to reduce bottlenecks in the supply of skilled workers. For example, retrofitting homes and offices for energy efficiency, building on pilot programs already operating in some small cities, could be a quick source both of good jobs and local economic stimulus. This would also yield savings on America's energy bill—which would reduce our trade imbalance and put more money in consumers' pockets.
As of early August, when this book was going to press, Obama has offered three versions of this kind of public outlay, each getting bolder as the crisis has deepened. In a speech last April, he included:
A National Infrastructure Reinvestment Bank that will invest $60 billion over ten years and generate millions of new jobs. We can't keep standing by while our roads and bridges and airports crumble and decay. We can't keep running our economy on debt. For our economy, our safety, and our workers, we have to rebuild America.
This is exactly what's needed, but the scale should be bigger. Later he proposed a second stimulus package of $50 billion, of which $30 billion was to be tax cuts. That was far too feeble.
And we need to invest in green technology. We can't keep sending billions of dollars to foreign nations because of our addiction to oil. We should be investing in American companies that invest in American-manufactured solar panels and windmills, and in clean coal technology. That's why I've proposed investing $150 billion over the next ten years in the green energy sector.
Then, on July 31, after his economic summit meeting and the Labor Department's announcement of higher unemployment, came stronger medicine. Obama proposed $25 billion for a "State Growth Fund to prevent state and local cuts in health, education and housing assistance or counterproductive increases in property taxes, tolls or fees." The fund would also fund home heating and weatherization assistance. Second, he proposed another $25 billion for a Jobs and Growth Fund to replenish the highway trust fund, prevent cutbacks in road and bridge maintenance, and fund new fast-tracked projects to repair schools. All of this, he said, would "save more than 1 million jobs in danger of being cut."
This proposal was a welcome down payment on an idea that progressives have been proposing for three decades—a "ready-to-go" program of standby anti-recession investment in public infrastructure. The idea is that localities can qualify in advance for preapproved projects, which can then be launched on relatively short notice. When recession strikes, the federal government would release the funds, with the money divided among localities according to a formula. With the economy in serious trouble and a $1.6 trillion infrastructure backlog, this program is probably necessary for several years, and should be continued as an ongoing standby measure.
In the first phase, federal public works outlay could begin delivering badly needed public funds and decent jobs within as little as ninety days—money to repair and refurbish roads, bridges, mass transit, parks, schools, and public buildings, or to prevent cuts in state and local budgets. Gearing up a planning system for a more expansive second phase should take about six months. During the Depression, Roosevelt got money flowing in a matter of weeks. Later, the Public Works Administration not only delivered tangible public improvements and good jobs but also created a local planning system in which proposed projects were discussed and debated by citizens, who played a role in setting local priorities.
Why begin here? Three big reasons. First, this approach would deliver tangible, visible help, and quickly. Second, it would be politically irresistible—for the very reason that conservative opponents of public outlay love to hate: It would have elements of what is disparaged as pork-barrel spending. Every congressional district would get its share (would you like to be the congressman who voted against such a measure in a serious recession?). Harder-hit regions of the country would qualify for extra aid.
Third, an economic downturn supercharged by a credit contraction is a different creature from an ordinary business-cycle recession. About 16 percent of America's homes have mortgages worth more than the value of the house. As economic activity slows, business defaults are rising. Loans that would be considered perfectly sound in normal times are being turned down or charged higher interest costs, because panicky banks have suddenly turned risk-averse. When businesses and consumers have trouble getting credit, economic activity slows and recession becomes a self-fulfilling prophecy. We saw this first in the subprime collapse, which gradually spread to the entire banking sector, and then to the rest of the economy. As a consequence, public spending needs to do heavier lifting than usual to counteract the depressive effect of a credit crunch.
Reprinted with permission from Chelsea Green Publishing Company
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