Checklist for the economy
Less than a day after the federal government rode to another bank’s rescue, President-elect Barack Obama confirmed his intent to raise the ante on the Bush administration’s intervention in the economy. Obama held a short news conference Monday to introduce his top economic advisors, including New York Federal Reserve chief Timothy F. Geithner (Obama’s pick for Treasury secretary) and former Treasury Secretary Lawrence H. Summers (his choice for director of the National Economic Council). The two represented, if not the opposite poles of policy, at least a very different set of constituents: On Obama’s right stood Geithner, who has helped funnel huge sums of tax dollars to troubled financial institutions, and on his left stood Summers, who wants Washington to spend an extraordinary amount on another stimulus package.
This two-pronged approach is appropriate. As the precipitous decline of Citigroup Inc. demonstrated, deep problems linger in the financial industry and will continue to do so until lenders scrub vast numbers of bad loans and related financial instruments from their books. Yet those troubles feed and are fed by the contraction in the economy at large. Hence the support even among some conservative economists for more deficit spending to revive growth. Put it all together and it spells, well, not free-market capitalism, but not socialism either. Call it a marriage of Keynesian economics and the hold-your-nose interventionism practiced lately by Treasury Secretary Henry M. Paulson.
But the new administration needs to do more than just broaden its focus beyond Wall Street. It needs to come up with a better rationale for when and when not to intervene in the market. Washington has increasingly acted as the insurer of last resort for the financial industry, sweeping in with a variety of rescues whenever a large institution’s slide threatens a significant number of its business partners. By that faulty logic, there’s no reason not to provide a bailout to any other supplicant with a large network of suppliers and investors, such as Detroit’s automakers.
Obama’s team needs to establish principles that clearly connect the aid supplied, the conditions imposed and the benefit to taxpayers. The same argument applies to efforts to stimulate the economy. Unlike the $168-billion package Congress approved in February, whose income-tax rebates provided a short-lived spike in spending, the new administration’s plan needs a disciplined focus on boosting productivity and sustainable job growth. And it needs to send a clear message to the markets that Washington will play a limited and predictable role, rather than being the risk takers’ rescuer on call.
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