Steady As She Sinks


By speaking of a two-year recovery plan, President-Elect Barack Obama has made it clear that the gathering economic gloom is going to continue gathering for some time. The stretching of time horizons is politically astute: If the economy picks up ahead of schedule, he will have beaten expectations; if not, he will have done what he can to avoid blame.

Obama’s economic team has been more reassuring. Timothy Geithner, the New York Fed chief, will become Treasury secretary, which promises continuity under circumstances in which we could do worse. Lawrence Summers, who is likely to head the president’s economic council, has been clearer-eyed than most Democrats about the role of Fannie and Freddie in causing the financial crisis. Christina Romer, who has been floated as a Treasury official, has even had kind words for tax-rate cuts.

Still and all, the policies that command Democratic attention right now are orthodox Keynesian ones: have the government put money into the economy, and give it to those recipients who are most likely to spend it. Which neatly fits Democratic proclivities: They are happy to give federal money to lower-income workers and state and local governments. We are less enthusiastic. Confidence will return when it is objectively warranted, and it will not be until the housing market finds its bottom and the extent of losses arising from it are known. A stimulus plan that does not advance this process will fail.

A happy side-effect of the Keynesian moment in the nation’s capital is that tax increases are being deferred. The Obamites suggest that rather than immediately raise the top income-tax rate, capital-gains taxes, and dividend taxes, they will wait for those tax rates to rise automatically in 2010 — just in time to endanger their two-year recovery? Deferring those tax increases permanently would be more bullish, as would a reduction in the corporate tax rate. At the very least, regulators should change the mark-to-market rules so that companies do not have to hold fire sales of their assets to meet capital standards.

Obama has assembled as solid a team as those of us who do not share his worldview could reasonably expect. It is his aides’ views, not their competence or sobriety, that we question. If his economic team fails, it will not be because of factors specific to Obama but because the Democratic party as a whole was not up to the formidable challenge.


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