The Magazine

Geithner Lays an Egg

And that's only one of the problems with the Obama economic strategy.

Feb 23, 2009, Vol. 14, No. 22 • By LAWRENCE B. LINDSEY
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Elections have consequences. That is what democracy is about after all. Barack Obama is correct when he states that his victory last November gives him the right, or more specifically the power, to have things his way when it comes to handling the nation's economic challenges.

The country, moreover, could use some decisive economic action. The financial system is a mess, unemployment is rising and will keep increasing. The government will likely run a deficit of 10 percent or more of GDP both this year and next--roughly twice the share of the Reagan deficits and roughly three times the size of President Bush's deficits. To fight the credit contraction, our central bank is expanding its balance sheet at a pace that might lead a visitor from another planet to confuse the United States with Argentina.

This makes it all the more frustrating that less than a month into his presidency, Obama has made a complete hash of economic policy, utterly squandering his mandate in a series of missteps that suggest he has not made the transition from campaigning to governing. This, even as Obama never stops reminding us in his constant televised appearances that the economy is slipping fast and time is of the essence.

The problems began with the inexplicable decision by the administration not to submit its own economic stimulus package, but instead delegate the job to Nancy Pelosi and the barons on the House Appropriations Committee. Appropriations is the reptilian brain of the political process. It is where all the back scratching, logrolling, and pork barreling gets done. Macroeconomic coherence is just not part of the skill set of House Appropriations members. So even rebuilding the nation's infrastructure got short shrift. Instead, the package was loaded with largesse for fellow politicians and civil service employees back home. The standard was not the proclaimed "shovel-ready" but "social-worker ready."

This package was marginally improved by the House Ways and Means Committee. Ways and Means gave money directly to workers as opposed to local politicians. It also ramped up the various medical spending conduits, which will push more money to health care providers--though not necessarily provide more health care. But there was no improvement in the tax system, which might, say, encourage job creation and retention by lowering the tax burden on employment or investing.

So the package the House produced was not "stimulus" in any normal understanding of the word. Of the $820 billion package that emerged from the House, only 20 percent would be spent in fiscal 2009 and only another 40 percent in 2010. That left 40 percent of the package to be spent in 2011 or later, when even the more pessimistic forecasters (of whom I am one) expect the economy to be in full recovery. This plan delivers the stimulus at precisely the wrong time.

The package was so bad that it made criticism of the new president socially acceptable, a rare development for the first initiative of a president elected with a large mandate. Alice Rivlin, doyenne of Democratic party policy economists, criticized the lack of macroeconomic benefit in the plan. Her sentiments were echoed by just about every leading economist in both parties who was not employed by the administration.

The new administration fell into this hole by belatedly discovering the fiscal realities of the country. Government spending takes time to get going, and, once flowing, is difficult to stop. During the transition, Team Obama surveyed the agencies for "shelf ready" spending needs and found them woefully inadequate as a credible stimulus package. The incoming Obama policy-makers had been focused on spending, not tax cuts, because they wanted to draw a line between themselves and their predecessors. But, faced with the facts, they made a virtue out of necessity by having the president call for taxes to be 40 percent of the package. This annoyed the more left-leaning Democrats of Congress, who were then appeased by being given the power to craft the spending.

The legislation was written by Democratic committee chairmen with no Republican input. The president covered this up by going to the Hill and meeting with the Republican caucus. But, since Obama had no direct role in writing the package, the signal to congressional Republicans was twofold: Bipartisanship was just a façade the president needed to maintain his approval ratings, and Nancy Pelosi and Harry Reid were the ones with the power, not Barack Obama.