The Magazine

More to It Than Meets the Eye

The hidden coherence of Obama's recovery plan.

Feb 2, 2009, Vol. 14, No. 19 • By IRWIN M. STELZER
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It grieves me to say so, but President Obama's conservative critics just don't get it. The new president has put forward a plan for economic recovery that is more coherent than they are willing to admit. Start with the stimulus package of some $825 billion. A lot of money, more even than George W. Bush's $700 billion Troubled Asset Relief Program, but not much more as money is counted these days, especially as Obama's will be spent over two or three years. Critics complain that stimulus spending will add to the swollen federal debt. True: President Bush did leave his successor a $1.2 trillion annual deficit. To which Obama will add about $400 billion per year. Query: What empirical evidence is there that deficits of $1.6 trillion are more harmful during a period of economic recession than deficits of $1.2 trillion?

True, too, such deficits might in the long run make foreigners worry about holding onto dollars and Treasury IOUs, which would trigger a bout of sales of Treasury bills and notes, and drive interest rates up to recovery-squashing levels. But so far, so good, as the man who jumped from the Empire State Building shouted at the 50th floor. The dollar has not sold off for two simple reasons. First, where is a seeker-after-safety in this troubled world likely to find a safer haven than the U.S. currency? Second, China and other holders of trillions in our dollars and dollar-denominated assets are not eager to start dumping their holdings on the market, a move that would drive down the value of their remaining dollar assets.

Conservatives have also jumped on the report by the Congressional Budget Office that about half of the planned $355 billion in infrastructure spending will not occur until after the 2011 fiscal year starts on October 1, 2010. True. But if--and this is a big if--the projects to be funded have a net social value, that is, are likely to yield net returns to society for decades to come, they should be built whether part of a stimulus package or not. The objection should not be to the construction of the projects, but to the assumption that they cannot be built by the private sector, given proper incentives. Toll roads, schools financed with vouchers, health care facilities selected by patients and paid for with health care vouchers--all are possible, but all are off the Obama radar screen.

Democrats are, in the end, Democrats after all, and unlikely to be swayed by such as Harvard economics professor Robert Barro, who pointed out in last week's Wall Street Journal that it might be better to "emphasize instead reductions in marginal income tax rates." But the need for the projects themselves is in no way diminished if they get built next year, or the year after that, so long as they "pass muster from the perspective of cost-benefit analysis," to use Barro's--and Larry Summers's--test. Whether the Harvard crowd will be able to persuade Nancy Pelosi, Barney Frank, Charlie Rangel and other key Democrats that they have it right is another matter.

In fact, there is something to be said for the postponement of the expenditures. The Great Depression was characterized by a modest recovery, followed by a relapse when monetary and fiscal policy were tightened, a so-called "W" pattern. The postponement of some of the stimulus spending into the out years, coming at a time when the economy is healing but still vulnerable to a relapse, might, just might, turn that "W" into a "V" and provide the juice to keep the upswing moving along.

That leaves open the question of whether we are living in a fool's paradise, like the chap at the 50th floor. Here is where the hidden coherence of the Obama plan shows itself, in a two-part fiscal and monetary policy strategy.

When the time comes to unwind the stimulus, and finally slow the Fed's keep-the-presses rolling monetary policy, Obama is counting on two developments. The first is a grand bargain to bring the potentially budget-busting entitlements programs under control. The president plans to convene a "fiscal responsibility" panel before he presents his first budget to the Congress, and then move on to an attack on the unsustainable projected costs of Medicare, which is a far bigger problem than getting the Social Security system on a firm footing.

The outlines of a health care deal seem obvious. The cost of Medicare can be cut by a means-tested system of copayments, to prevent the current overuse of the system by patients for whom a visit to the doctor or some optional procedure has no cost. Friends living among their retired colleagues in Florida tell me that folks in their community often schedule an away-day to include a visit to some doctor, perhaps en route to a movie. That health care, when it's a free good to the user, is over-consumed should come as no surprise.