A time for boldness beyond the New Deal
On Capitol Hill, in the corridors of the Treasury Department and from President Obama’s bully pulpit, the federal government moved forward Tuesday on the most ambitious economic recovery plan since the Great Depression.
No, strike that. In its embrace of the principle of stimulus by deficit spending, the Obama administration is launching a program infinitely more ambitious than anything Franklin D. Roosevelt proposed as a peacetime initiative in his entire tenure in the White House.
The White House is taking to heart one of the most important lessons of the New Deal -- that it wasn’t stimulative enough.
The stimulus package -- $838 billion as approved Tuesday by the Senate, pending dickering with the House over its own $819-billion plan -- will account for a larger proportion of gross domestic product than anything promulgated under the New Deal. In each of the next two years, the stimulus plan alone will represent as large a share of GDP -- roughly 3% -- as the entire federal budget did for most of the ‘30s.
And that’s not counting the hundreds of billions of dollars pumped into the financial system over the last few months by the Treasury and the Federal Reserve, with many more billions yet to come.
Like the New Deal, today’s program won’t unfold without glitches. Treasury Secretary Timothy F. Geithner proved that Tuesday morning by presenting a nonplan plan for banking recovery brimming with principles -- transparency, taxpayer protection, public-private investment partnerships -- and devoid of particulars.
Geithner’s presentation revealed, perhaps unwittingly, that the nation’s new fiscal policymakers are stymied by the same two issues that confounded their Republican predecessors in fashioning a bank bailout.
The first is the difficulty in valuing the banks’ distressed assets (mostly mortgages and mortgage bonds): Everyone would like to take these off the banks’ books, but no one knows what the price should be. Pay too much, and the taxpayers get hosed; pay too little, and the banks will have to take write-downs that, in financial terms, may be a cure worse than the disease. Geithner suggested that the solution lies in enticing private investors to take the plunge, but thus far he has failed to describe a mechanism to do that.
The second issue is figuring out how, or even whether, to force banks receiving bailout dollars to lend them out. The Treasury says banks will have to show that every dollar they receive will “preserve or generate new lending.” But that may conflict with the system’s obvious interest in making sure that new loans don’t go to the same species of lousy borrower that got us into this mess.
The stock market, which evidently expected Geithner to outline a battle-ready mobilization plan, sold off to the tune of 381 points, or 4.6%, on the Dow Jones industrial average, reacting to the lack of specifics the way my dog does when her chew toy is snatched away for a washing. (Geithner’s mention of a plan to subject banks, including the nation’s largest, to a “stress test” to determine their fiscal health probably helped drive down the prices of financial stocks.)
But a financial bailout can’t take place on CNBC time, with no more than an hour or two elapsing between the news leak and the reality. That’s the way former Treasury Secretary Henry M. Paulson operated, and he had to rejigger his program two or three times without ever getting it quite right. Geithner had to pass the afternoon fending off questions about whether, as the cable network asked on-screen within minutes of his speech, his head isn’t already on the chopping block. Great caption writing, but not the best way to make policy.
To a greater extent than most people understand today, Roosevelt was constrained by the political and economic orthodoxy of his era. He was uneasy about the cost of the New Deal, constantly pestering his aides for signs that the time was ripe to abandon deficit spending and balance the budget. Treasury Secretary Henry Morgenthau Jr. confided in his diary that in 1936 he had to dissuade FDR from giving a speech promising a balanced budget in 1938. (When you fail to deliver, he told the president, the administration’s credibility will be shot.)
In terms of the scale of the program, the Obama administration and congressional Democrats have demonstrated that, by contrast, they’re uneasy with timidity.
FDR tried continually to moderate his budget deficit by taking money from his public-works program, and vice versa. The result was to hamstring both efforts.
Obama believes that a balanced budget is something to worry about in the future, not during the conflagration. Among the advantages he has that Roosevelt lacked is the fundamental assumption that government must act when the private sector falters -- the exact opposite of ‘30s thinking, which, as UC Berkeley economist J. Bradford DeLong has written, held that recession and depression were “good medicine” for the economy. Roosevelt’s policies, as it happens, are what drove this notion out of government.
Not that it has entirely disappeared: Before the Senate passed the stimulus bill, it was tinkered with by a coalition of Republicans and “moderate” Democrats to shave it by $100 billion or so. They cut out $40 billion in aid to fiscally crippled states, $20 billion in school construction, and billions more for food stamps and other relief programs, a cheese-paring approach designed to secure three Republican votes.
This achieved so little in economic terms while raising the prospect of more unemployment and more household pain that it looks like something designed strictly for show; in any event, Obama has hinted that he may seek to restore the cut provisions.
In 1933, the British economist John Maynard Keynes wrote an open letter to FDR exhorting him to take a then-novel approach to crisis. In the past, he wrote, it was thought that a government was justified in borrowing only in wartime. FDR had a unique opportunity to borrow for good -- “in the interests of peace and prosperity” instead of “the purposes of war and destruction.”
Yet, as at least some people in Washington seem to recognize, we are at war.
Michael Hiltzik’s column appears Mondays and Thursdays.
You can reach him at michael.hiltzik@latimes .com and read previous columns at www.latimes.com /hiltzik.