Simon’s reaction to Obama’s speech last night is up at The New Republic.
I think Simon and I agree that the speech was strong on long-term issues, but did not shed much-needed light on how we can emerge from our short-term challenges. One way to position this is to say that if we really are facing a potential “lost decade,” then talking about the long term is a bit premature. Imagine ten years of zero real GDP growth as opposed to 2.5% real GDP growth (with population continue to grow at 1-1.5% or something like that). That would take decades to make up (if it is even possible) and could outweigh any well-meaning efforts to bolster our long-term government finances.
On the other hand, I’m a bit more positive than Simon, because I wasn’t expecting the details of the banking rescue plan in a major speech to the whole country, for both practical reasons (I don’t think they are ready yet) and political ones (Obama wants to keep some measure of distance from whatever Geithner does). If I have time later today I’ll say something about the long-term issues.
Update: Now it’s later. The main thing I liked about the Obama speech is that it reflected what I believe to be the true long-term economic priorities of the country. The day after Obama was elected, I listed what I think are our top four long-term challenges (economic and non-economic): global warming, terrorism and nuclear proliferation, retirement savings (both the insufficiency of retirement savings, and the fact that retiree benefits threaten to break the federal government’s balance sheet), and health care.
Obama’s speech yesterday was mainly about four things: energy, health care, education, and fiscal sustainability. That maps pretty closely to what I think our priorities should be. He was willing to say that these are urgent, serious problems. And when it comes to the government deficit and the national debt, he has chosen to forgo the gimmicks used in the past: not only keeping the Iraq War out of the budget, but also pretending that the AMT will not be fixed every year in the future.
Admitting you have a problem, and recognizing its magnitude, is a necessary, though not sufficient, step on the way to solving it.
What If You Only Had $350bn To Spend?
Larry Summers made a convincing case yesterday that Congress should release the remaining $350bn of the TARP. It’s good to see the Obama team emphasizing themes beyond the fiscal stimulus, including banks and housing. Stronger governance and greater transparency are timely commitments for this program, and who can object to limits on executive compensation in today’s environment? Some Congressional debate makes sense and could be productive, but it’s hard to see this request being turned down.
Still, what exactly should the money be spent on? I’m tempted to say: housing, because this continues to be a major unresolved problem that looms over both consumers and their balance sheets. Unfortunately, however, the banks remain a greater priority. The latest developments for both Citigroup and Bank of America suggest the banking situation is (again) seen by insiders as more desperate than we outsiders wished to believe.
The next round of bank recapitalization (again) needs to be big and bold, for example along the lines we have been suggesting for some time (but I’ll take another comprehensive plan, if you have one, with strong expected taxpayer value). The problem today is that we just don’t know if any major bank is well capitalized; there are too many black boxes that may contain toxic assets. At best, this is a brake on the positive effects that should come from the fiscal stimulus. At worst, we still have a major system issue on our hands.
And there is no reason to think that $350bn is enough to handle this problem. The original $700bn was obviously an arbitrarily chosen number, and the money has been spent so far in a rather unplanned manner. What we do next should not be constrained by the fact that there is a check for $350bn waiting to be picked up. We should design a systematic recapitalization program, figure out what it will cost, and get on with it. My working assumption, based on the published analysis of the IMF regarding losses relative to private capital raising, is that $1trn – properly deployed – should do the trick.
Then we should get to work on housing (yes, this needs more money).
Update: Ben Bernanke seems to be thinking aloud along similar lines.
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Posted in Commentary
Tagged Obama Economic Plan, TARP