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Tuesday, November 11, 2008

How will Obama Tackle the Economy?

Some have suggested that Mr. Obama should push for infrastructure spending, to repair roads and bridges and sewer systems, as a way to stimulate the economy and provide jobs while attacking long-term problems. The tax rebates earlier this year provided a temporary lift to spending, but the effect faded almost immediately, and a repeat of that tactic could increase the deficit without much offsetting benefit. But an infrastructure bill could easily degenerate into a pork-laden measure that benefits regions with powerful lawmakers, rather than serious needs.
How to cushion the foreclosure crisis will be a major issue for Mr. Obama and the increased Democratic majorities in Congress. Doing that without creating unintended and undesirable side effects could be difficult. Measures that delay the adjustment in house prices could postpone the day that the housing market is able to recover. Measures that help those in danger of losing their homes could encourage some who are now paying their mortgages to default.

Reshaping the financial system, and its regulation, will be a major challenge in 2009, perhaps made more difficult by the fact that most major financial institutions are now partly owned by the government.

Mr. Reagan’s major challenge was soaring inflation, which his three predecessors — Richard Nixon, Gerald Ford and Jimmy Carter — had tried to confront without much success. The Carter recession was over when Mr. Reagan was inaugurated, but a focus on short-term economic growth would have made it much harder to bring down inflation.

The course Mr. Reagan adopted was to cut taxes at the same time he allowed a Federal Reserve chairman appointed by Mr. Carter — Paul Volcker — the freedom to attack inflation by sharply raising interest rates.

Mr. Volcker, now an adviser to Mr. Obama, is remembered as an economic hero and has been suggested as a possible Treasury secretary in the Obama administration even though he is 81 years old.

But in the early 1980s Mr. Volcker was blamed for causing a severe recession that began early in Mr. Reagan’s tenure and continued through November 1982. The Republicans suffered losses in the 1982 midterm elections, and Democrats thought they were in good shape to win back the White House in 1984.

Instead, the economy was clearly in recovery by then, and inflation was down sharply. Mr. Reagan was re-elected in a landslide, and was so successful that he became the first president since Calvin Coolidge to leave office and be succeeded by a member of his own party, George H. W. Bush.

George W. Bush, the son of the elder Bush, came into office determined to follow the Reagan course and not make the mistakes that his father had made, which led to his being a one-term president. He too confronted a weak economy early in his administration, and like Mr. Reagan he was able to push through substantial tax cuts as a way of stimulating the economy.

But unlike Mr. Reagan, who later allowed taxes to be raised to combat soaring budget deficits, the younger Mr. Bush refused to contemplate such an action. When the economy was booming, he saw no need to apply the brakes, and neither did the Federal Reserve chairman he had inherited, Alan Greenspan. Had they been willing to do so, the current bust might have been avoided, or at least been much milder.

Like Mr. Reagan, Mr. Obama will have to confront taxes in his first year. The Bush administration’s large tax cut in 2001 was temporary — a strategy that under Senate rules made it possible to push through the cut without having to win Democratic votes — and needs to be changed in 2009. Had Mr. Bush chosen a bipartisan approach, the tax cut would have been smaller, and the new Congress would not have to pass a tax bill immediately.

Read it all here.

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