The Magazine

It's Your Job Now

Bush hands over the reins.

Jan 26, 2009, Vol. 14, No. 18 • By IRWIN M. STELZER
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No surprise, given mounting concern about the economy, and fears that unless the government does something, we are in for worse. Every day brings more bad news. The latest survey of business conditions released by the Federal Reserve Bank of St. Louis last week reported that "economic activity continued to weaken" across the country, "retail sales were generally weak" as was the labor market, and "manufacturing activity continued to fall." One way to understand the severity of the problem is to consider this: It's one thing when tired old companies such as Delta Airlines and General Motors announce layoffs, quite another when Google fires 100 recruiters because it expects to need fewer new workers this year, and Microsoft prepares for substantial layoffs. The economy's growth engines are sputtering.

Obama is doing his best to combine a show of confidence with warnings that it will take time to get the economy moving again. And to leave himself room for error. He has taken to citing Franklin D. Roosevelt as his mentor, a name more familiar to voters than the real father of his stimulus package, John Maynard Keynes, the great British economist who contended that hiring the unemployed to dig holes makes sense. Obama points out that FDR continually experimented, and if one plan didn't work, he would scrap it and try another. After cartelizing the economy in a bid to end the depression by raising prices, FDR reversed field and called for a vigorous antitrust attack on cartels. He spent money on roads, bridges, dams, and other infrastructure projects, some that yielded benefits to society, others that did not.

Obama plans to do both--change course if necessary in pursuit of "whatever works" and spend money. Indeed, by some measures he will make FDR look positively parsimonious. Diana Furchtgott-Roth, an economist colleague of mine at the Hudson Institute, has compared the magnitude of U.S. spending under Obama's planned stimulus with spending in Roosevelt's day. In 1934 government spending reached 11 percent of GDP in the fight against the Great Depression, while Obama plans to increase spending to 23 percent of today's GDP in his effort to put the economy on a growth path. True: Obama's stimulus plan is not as large as Roosevelt's relative to the size of the economy. But it starts from a much higher base of government spending on programs that did not exist when FDR was deploying his jauntiness as a national antidepressant.

In addition to stimulus funds, the new president will have available the second $350 billion tranche of the Troubled Assets Relief Program (TARP). As a courtesy, Bush asked Congress to authorize that expenditure so the money will be available to Obama on "day one." Congress complied, but only after Obama promised to use between $50 billion and $100 billion for a foreclosure-prevention effort, and to place greater restrictions on recipients' use of the funds. Originally intended to fund the purchase of toxic assets from troubled banks, the first half of the TARP money ended up in the hands of the auto companies ($19 billion), AIG ($40 billion), Citigroup ($25 billion), and sundry banks in exchange for preferred shares. Congress feels that it voted for one thing and got another; Obama promises that won't happen again--no more free ride for those bankers whose greed so offends liberal congressmen and whose sheer incompetence so offends almost everyone else.

Obama knows one thing. He is inheriting George Bush's recession. But by year end, or certainly by the end of 2010, he will own it. If the measures he adopts don't show signs of working--unemployment no longer rising, credit flowing again in reasonable amounts, foreclosures down--it will be Obama's recession.

That will put the small rump of anti-Keynesians on the spot, for they will be called upon to recommend their own remedies. No, a call for lower interest rates won't do, since the Fed's short-term rates are already zero. No, a call to increase the money supply won't sound plausible: It would be drowned out by the roar of the presses that are already turning out billions in new money. And no, a call for less regulation won't pass the laugh test, since the existing regime is already discredited.