DEL.ICIO.USObama not first president to face hard economic choices
Democrat should take a lesson from history, particularly FDR’s tenure, one expert says
The Atlanta Journal-Constitution
Friday, November 14, 2008
When we got into office, the thing that surprised me the most was that things were as bad as we’d been saying they were.
— John F. Kennedy, five months after becoming president
FRANK POLICH/Bloomberg News
For President-elect Barack Obama, expectations have grown ever-higher as news grows steadily worse.
President Herbert Hoover shakes hands with Franklin D. Roosevelt (right) prior to Roosevelt’s inauguration in March 1933. Barack Obama should take note of how Roosevelt handled tough times, one expert says.
A candidate can criticize the incumbent and promise better economic times, but only when he moves into the White House does he confront the challenge of making the payoff match the pledge.
That can be especially hard if the picture is just as dismal as the one painted by the campaigner.
For President-elect Barack Obama, expectations have grown ever-higher as news grows steadily worse. So the tests he faces can be divided between the urgent-right-now and the sooner-or-later.
Yes, he talked about health care, energy and a new tax framework, but “structural, long-term” questions can wait, said Jared Bernstein, senior economist at the Economic Policy Institute and an adviser to Obama’s economic team.
Action should come quickly for a stumbling economy with escalating job loss, he said. “It’s pretty clear what you need to do.”
Yet stretching toward the horizon are a host of challenges. Among them:
• Find a way to quickly stimulate the economy without wasting money, setting off a political maelstrom or digging too deep a deficit hole.
• Soothe financial markets without tossing too much taxpayer money to people and companies who created the problems.
• Stem the tide of foreclosures without rewarding irresponsible borrowers who are delinquent or encouraging people who are still making their payments to stop.
• Stanch the bleeding in real estate without prolonging the necessary correction in prices.
• Postpone reforms in health care, then make a proposal that doesn’t wreak havoc on the budget.
• Ease the pain of the jobless and support the working poor without losing sight of larger policy changes.
• Manage an American response to the crisis without getting sandbagged by global forces.
Other presidents have taken office during economic turmoil.
But it was Franklin D. Roosevelt who provided the template for mixing response and reassurance — and Obama should take note, said Jeff Rosensweig, a finance professor at Emory University.
“If people keep thinking that we are heading into a depression, consumers won’t spend, business won’t invest or create jobs and we could fulfill that dire expectation.”
Roosevelt became president in perhaps the nation’s darkest economic moment, with a wave of bank failures rolling across the country and roughly one of every four workers unemployed.
He tried to stabilize the financial system while creating a string of programs aimed at putting people to work. But relative to the economy, new spending was modest. Recovery was erratic and incomplete — until the massive spending of World War II supercharged the economy.
John F. Kennedy took office in 1961 at the tail end of a recession. He proposed tax cuts, while beefing up military spending.
The economy took off.
Ronald Reagan pegged much of his 1980 campaign to economic recovery, then presided over a steep slide as the Federal Reserve cranked up interest rates to strangle inflation.
He cut taxes, boosted spending and ran up a large deficit — and watched the economy recover.
George W. Bush took office just as the tech boom was turning to bust and the economy was slipping into recession. His response too was tax cuts and aggressive deficit spending, and the economy went from contraction to growth.
With that bipartisan history, it is perhaps no surprise that a short-run stimulus package has a wide range of political and economic support.
“That train — if it hasn’t left the station, it sure is loading,” Bernstein said.
But what freight will that train be hauling? Options for Obama and Congress include programs to build bridges and roads, more tax cuts, business incentives, aid to the states, extended jobless benefits, more food stamps to working people.
Pick some, pick all.
The malaise has been in motion for more than a year.
As the economy slowed and job losses began in early 2008, Congress and President Bush agreed on a tax rebate — tens of billions of dollars in checks to taxpayers. Those payments were popular, but with so many consumers using the money to cut their debts, the impact was relatively modest.
In the third quarter of this year, consumer spending crashed and the economy contracted. Many economists expect the current quarter to be worse.
The unemployment rate has arched higher — jumping to 6.5 percent in October — while payrolls this year have lost 1.2 million jobs.
Something must be done, even if it adds dramatically to an already deep federal deficit, Bernstein said. “This is not the time for budget austerity. Everyone knows the deficit is going up next year.”
Ironically perhaps, it was consumer borrowing over the past several decades — especially after 2001 — that is blamed for the buying binge and the economic hangover the nation is now feeling.
Households used money they didn’t have to power up consumption of homes and vehicles, granite countertops and big-screen televisions.
Now, the housing bubble has burst, toxic mortgages have poisoned financial markets and many households are scrambling to cut back on debt. As consumers back away from borrowing, the economy slows.
To spur growth, government should not encourage more borrowing and spending by consumers, argued Dorsey Farr, a principal in the Atlanta-based investment firm of French Wolf & Farr.
“It would be like drinking ‘the hair of the dog’ the morning after a drunk,” he said. “It doesn’t address the core problem — it may exacerbate the problem. We know you spent too much. But here’s some more.”
At the epicenter of the crisis was the housing bubble — a surge of housing prices and sales, a surplus of homes.
When that bubble burst, homeowner wealth was dampened, millions of mortgages were shaken and millions of jobs were affected — or eliminated.
One of the biggest challenges will be knowing how to be patient, Farr said. “The bottom line is that we built too many houses.”
Propping up a market may just prolong the problem, he said. “When you have a misallocation of resources, it hurts to redress that imbalance.”
Farr thinks the new administration should use tax incentives to encourage companies to make more investments — capital expenses, or capex in business parlance. “Capex creates jobs,” he said.
But consumers account now for roughly 70 percent of the nation’s $14.4 trillion-a-year economy, and millions of them either face foreclosure — or have already lost homes.
The new president must respond to their needs, said Dimitri Papadimitriou, president of the Levy Economics Institute of Bard College.
Throughout the boom, Papadimitriou warned that there would come a time when American borrowing and buying had to shrink to sustainable levels.
“This is the reckoning,” he said. Yet he too, says the Obama administration should avoid setting off a new borrowing binge to get that spending.
“It is the responsibility of government to get the country moving, and the way to get the country moving is to get people back to work.”
Overall, a package of $300 billion to $500 billion is needed, he said. “If you get that kind of stimulus. We could have the beginning of recovery by the end of next year.”
But the government must do more than just throw money at the economy, Papadimitriou said.
For example, Obama must help homeowners without creating more problems in mortgages and real estate. Meanwhile, a solution also depends on the willingness of financial companies to renegotiate mortgages.
Housing may be ground zero in the crisis, but Obama will encounter trials across the economy, Papadimitriou said. “We don’t need just leadership. We need spectacular leadership.”
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