turning around the economy

In my last post (“the meltdown”), I summarized where the economy stands. It’s not pretty.

Where do we go from here?

Berkeley professor and former Clinton Labor Secretary, Robert Reich had a good blog post (“How Obama is Already Taking Charge”):

Obama's immediate challenge is to fill the leadership vacuum created by a lame-duck president with historically-low approval ratings who seems to have lost interest in his job (at this writing, he's out of the country) and who's disappeared from the media, and a Treasury chief who has all but punted on coming up with any workable solution to the crisis. But Obama doesn't become president until 12 noon eastern standard time on January 20 -- and the national economy is imploding right now.

How does Obama manage this feat? Two ways: (1) appointing a highly-capable economic team, and (2) telling the nation what he plans to do starting the afternoon of January 20. Specifically:

(1) The members of Obama's new economic team fit the bill. They're reported (I have no inside knowledge) to include Tim Geithner at Treasury, Peter Orszag at the Office of Management and Budget, Jack Lew and Jason Furman at the National Economic Council, and Austan Goolsbee at the Council of Economic Advisors. All have several things in common. They're relatively young, in their late 30s or 40s, representing a generational change and a fresh start. Despite their youth, they're also experienced; almost all were up-and-comers in the Clinton Treasury, NEC, and OMB.

All are pragmatists. Some media have dubbed them "centrists" or "center-right," but in truth they're remarkably free of ideological preconception. All have well-earned reputations as hard workers, well-versed in the technical details of public and
private finance. They are not visible veterans of the old battles over supply-side economics or deficit reduction, nor are they well-known to the public. They are not visionaries but we don't need visionaries when the economic perils are clear and immediate. We need competence. Obama could not appoint a more competent group.
(2) The President-Elect has also signaled the country what he wants to do: enact an "Economic Recovery Plan" that will mean 2.5 million more jobs by January of 2011. In his words (from Saturday's radio address) a plan "big enough to meet the challenges we face ... a two-year, nationwide effort to jumpstart job creation in America and lay the foundation for a strong and growing economy." Again, I have no inside knowledge, but I'd expect it to be about $600 to $700 billion.

Its focus will be on infrastructure of a sort that will not only put people to work but also improve the productivity of the economy. His words: "We’ll put people back to work rebuilding our crumbling roads and bridges, modernizing schools that are failing our children, and building wind farms and solar panels; fuel-efficient cars and
the alternative energy technologies that can free us from our dependence on foreign oil and keep our economy competitive in the years ahead."

In short, Obama's job-stimulus plan will be a down-payment on his larger plan to
increase the nation's public investment. "These aren’t just steps to pull ourselves out of this immediate crisis," he says, "these are the long-term investments in our economic future that have been ignored for far too long. And they represent an early down payment on the type of reform my Administration will bring to Washington." He could not be more specific, at least while still President-Elect.

At a time when aggregate demand is shriveling because consumers aren't spending and investors have stopped investing, and exports are shrinking, Obama recognizes that government must be the spender of last resort. He will combine old-fashioned Keynesian economics with newly-fashioned public investments to pull the economy out of its slump.

By putting his economic team in place barely three weeks after he was elected, and telling the nation what he plans to do immediately after he takes office, the President-Elect is asserting leadership at a time when the Bush administration has all but abdicated.

Let’s take both of the elements Reich cites. First, Obama’s economic team.

My previous post (“the meltdown”) described conditions in the financial markets as of last Thursday. On Friday, the markets were essentially flat until mid-afternoon when the un-official announcement came out that Obama would pick New York Fed chief Tim Geithner as his Treasury Secretary. The markets liked it:



The S&P 500 was up more than 6.3% in just the hour after word of the likely Geithner nomination hit the newswires.

A GREAT choice. Geithner is the same age as Obama (both born in August of 1961) and shares the same temperament – cool, fit, energetic, and non-ideological, with an easy-going manner and a good sense of humor. To an even greater extent than Obama, he spent much of his childhood overseas, living in East Africa, India, China, Japan and Thailand (where he went to high school). He is not particularly partisan. He worked for Robert Rubin and Larry Summers in the Clinton Treasury Department (where he worked on various financial crises, including those in Mexico, Thailand, Brazil and Argentina and the Long Term Capital Management crisis – excellent experience for his current assignment). But he also worked briefly for the Reagan Treasury Department, for Kissinger and Associates, and for the IMF. He is part of the Group of Thirty, a an international body of financial industry and academic economics types, including Paul Krugman, Paul Volcker and Larry Summers among others, that work to develop financial and economic policies.

It is also helpful that as New York Fed chief he already is at the heart of efforts to manage the financial crisis. He is already on the job. That is huge right now.

The Economist has a good piece on Geithner. Here is a bit:

Investors were … relieved that their darkest fears of a Sarah Palin-like shock announcement did not come to pass and that Mr Obama, as in his other important appointments, has chosen ability over connections. Mr Geithner does not know Mr Obama well and has no notable ties to the Democratic Party. But for this cabinet post more than any other, an overtly political appointment would have been corrosive to investor confidence.

Assuming he is nominated Mr Geithner brings two crucial qualities. First, he represents continuity. From the first days of the crisis last year, he has worked hand in glove with Ben Bernanke, the Fed Chairman, and Mr Paulson. He can continue to do so while awaiting confirmation. If Citigroup, for example, needs federal help, Mr Geithner will be involved. An unknown when he joined the New York Fed in 2003, he is now a familiar face to the most senior executives on Wall Street and to central bankers and finance ministers overseas.

Second, he represents competence. He has spent more time on financial crises, from Mexico and Thailand to Brazil and Argentina than probably any other policymaker in office today. Mr Geithner understands better than almost anyone that in crises you throw out the forecast and focus on avoiding low probability events with catastrophic consequences. Such judgments are excruciating: do too little, and you undermine
confidence and generate a bigger crisis that needs even bigger policy action. Do too much, and you look panicked and invite blowback from Wall Street, Congress and the press. At times during the crisis Mr Geithner would counsel Mr Bernanke on the importance of the right “ratio of drama to effectiveness”. …

Mr Geithner looks a lot younger than his 47 years (though not as young as he did
before the crisis began). He skateboards and snowboards and exudes a sort of
hipster-wonkiness, using “way” as a synonym for “very” as in “way consequential”
and occasionally underlining his point with the word “fuck”. In temperament he
seems similar to Mr Obama: he is suspicious of ideology, questions received
wisdom, likes a competition of ideas and is keenly aware of how uncertain the
world is.

Mr Geithner learned about crisis management as an aide to Lawrence Summers who rose to Treasury Secretary under Bill Clinton. Mr Summers was the other candidate for the job under Mr Obama, and his appointment would probably also have been greeted enthusiastically. He will reportedly join the administration in a White House advisory role. …

Mr Obama is assembling a formidable economic team. With the economy perhaps on the precipice of its worst recession since the Depression, he will need it.

Last June, Portfolio magazine also had a good, long piece on Geithner.

We’ve come a long way from the recent past when we had a hack like John Snow at Treasury essentially acting as a salesman for economic policies devised in the White House by the likes of Dick Cheney and Karl Rove on the basis of right-wing ideology and short-term electoral politics.

Getting to Reich’s second point: The need for Obama to outline early what he plans to do upon taking office. That is exactly what Obama did in his radio address (and YouTube video) yesterday. Here is the four-minute video and transcript in full:

Good morning.

The news this week has only reinforced the fact that we are facing an economic crisis of historic proportions. Financial markets faced more turmoil. New home purchases in October were the lowest in half a century. 540,000 more jobless claims were filed last week, the highest in eighteen years. And we now risk falling into a deflationary spiral that could increase our massive debt even further.

While I’m pleased that Congress passed a long-overdue extension of unemployment benefits this week, we must do more to put people back to work and get our economy moving again. We have now lost 1.2 million jobs this year, and if we don’t act swiftly and boldly, most experts now believe that we could lose millions of jobs next year.

There are no quick or easy fixes to this crisis, which has been many years in the making, and it’s likely to get worse before it gets better. But January 20th is our chance to begin anew – with a new direction, new ideas, and new reforms that will create jobs and fuel long-term economic growth.

I have already directed my economic team to come up with an Economic
Recovery Plan that will mean 2.5 million more jobs by January of 2011 – a plan
big enough to meet the challenges we face that I intend to sign soon after taking office. We’ll be working out the details in the weeks ahead, but it will be a two-year, nationwide effort to jumpstart job creation in America and lay the foundation for a strong and growing economy. We’ll put people back to work rebuilding our crumbling roads and bridges, modernizing schools that are failing our children, and building wind farms and solar panels; fuel-efficient cars and the alternative energy technologies that can free us from our dependence on foreign oil and keep our economy competitive in the years ahead.

These aren’t just steps to pull ourselves out of this immediate crisis; these are the
long-term investments in our economic future that have been ignored for far too
long. And they represent an early down payment on the type of reform my
Administration will bring to Washington – a government that spends wisely,
focuses on what works, and puts the public interest ahead of the same special
interests that have come to dominate our politics.

I know that passing this plan won’t be easy. I will need and seek support from Republicans and Democrats, and I’ll be welcome to ideas and suggestions from both sides of the aisle.

But what is not negotiable is the need for immediate action. Right now, there are millions of mothers and fathers who are lying awake at night wondering if next week’s paycheck will cover next month’s bills. There are Americans showing up to work in the morning only to have cleared out their desks by the afternoon. Retirees are watching their life savings disappear and students are seeing their college dreams deferred. These Americans need help, and they need it now.

The survival of the American Dream for over two centuries is not only a testament to its enduring power, but to the great effort, sacrifice, and courage of the American people. It has thrived because in our darkest hours, we have risen above the smallness of our divisions to forge a path towards a new and brighter day. We have acted boldly, bravely, and above all, together. That is the chance our new beginning now offers us, and that is the challenge we must rise to in the days to come. It is time to act. As the next President of the United States, I will. Thank you.

This is EXACTLY what the country and the economy need right now. In addition to being badly-needed short-term fiscal stimulus it would also be a down payment on badly-needed long-term infrastructure investments.

I wrote a previous post (“the two trillion dollar deficit”) on the need to err on the side of aggressive fiscal stimulus over budgetary discipline in the near term. Another long-time deficit hawk, policy wonk Matt Miller (author of “The Two Percent Solution”), wrote on the same subject in FORTUNE last week (“How to Love Trillion Dollar Deficits”):

I used to be a deficit fetishist, an oddball who read one of Pete Peterson's budget doomsday books on his honeymoon, and who has bored countless friends with filibusters on our fiscal follies. But I've changed.

What's a fallen fiscal conservative to say? When a character in Hemingway's The Sun Also Rises was asked how he went bankrupt, he famously replied, "Slowly, then suddenly."

My journey into the heart of the New Deficit Indifference feels the same. I came of age as an economics student just as Ronald Reagan was on his way to quadrupling the national debt. I imbibed the wisdom that deficits crowd out private investment, hurt productivity growth and living standards, and pass big burdens to the next generation. All because politicians were afraid to make a few unpleasant choices!

By 1992 I was the kind of New Democrat who thought Ross Perot performed a tremendous public service when his charts and graphs proved that 20% of the electorate could be roused to care about our fiscal mess. In the early Clinton White House I was the resident deficit monomaniac, the guy who griped that we weren't moving fast enough to shrink the debt even as we skimped on needed investments in health care, infrastructure and education. ...

In the face of all this, how can a deficit hawk like me now blithely countenance the coming trillion-dollar gap? It's apt to invoke the godfather of deficit spending himself. "When the facts change, I change my mind," John Maynard Keynes once growled when grilled about an inconsistency. "What do you do, sir?"

In ways that 9/11 didn't, today's economic meltdown really does change everything, at least for a few years. Every day brings fresh proof that the credit crunch and the exhaustion of debt-fueled consumer spending threatens to dangerously collapse aggregate demand. There's simply no way to avoid a major recession without the federal government stepping in to bolster demand until we work through the subprime hangover.

Toss in reasonable down payments by the Obama administration on expanded health coverage, green energy, infrastructure and schools, and the only question is how the new president can manage appearances so that this trillion dollar milestone doesn't become a political millstone to boot. ...

Even though he is still two months from taking office, Obama is getting off to a excellent start. But based on how he ran his campaign, would you have expected anything less?