Obama's Team Isn't Exactly a Break With The Past
I WATCHED with a sense of both satisfaction and foreboding as President-elect Barack Obama introduced his economics and finance team last week.
First, I am the world’s most ardent fan of Paul A. Volcker and Lawrence Summers, but I am a bit puzzled by the choice of Timothy F. Geithner to be Treasury secretary. During the presidential campaign, I heard Mr. Obama talk many times about “change you can believe in.” But what does Mr. Geithner have to do with change?
He’s the pre-eminent careerist of old-time finance, and a basic part of the team that got us into this mess. He was pro-deregulation for most of his career. He went along with failing to rescue Lehman Brothers, a decision now generally considered a catastrophic mistake. He led the Federal Reserve Bank of New York while money-center banks made lethal mistakes of faulty risk management — and he did zero to stop it, as far as is known.
In what sense is he “change you can believe in”? How is he part of the solution, not part of the problem? I know he is a protégé of Robert E. Rubin. But isn’t Mr. Rubin himself the essence of the Washington-New York finance axis of power? He was a fine Treasury secretary while the tech boom made all things new, but Citigroup hasn’t exactly thrived during his tenure. Again, where is the change?
It’s not just Mr. Obama’s personnel choices that bear watching, but what he’s said about his economic programs. Public works seem to be the centerpiece of his effort to jolt the economy back into high gear. But recall the history of national attempts to “jolt” economies this way. In a word, their success is limited.
New Deal programs like the Works Progress Administration and Civilian Conservation Corps were highly visible but accomplished little on a macro scale. Yes, they employed hundreds of thousands, and that was great. They built post offices and bridges. But they created friction with unions because they paid sub-union wages.
Will the new administration be prepared to require that public works employees be union members? If so, of what union?
No matter how this is handled, someone will be unhappy. It will cost some real money if they are union members, and will cause some anger if they aren’t. Business won’t like it if wages rise in an area where it has flourished with low-wage workers.
But the main thing is that public works, except on a truly gigantic scale, don’t really work to jump-start the economy. The strategy didn’t work in Japan during the “lost decade” of the 1990s. It didn’t work here during the Depression. Unemployment was still high on the eve of Pearl Harbor and the United States’ entry into World War II.
Many capable economists believe that by causing wage and price rigidity, the New Deal actually prolonged the Depression. I’m not sure this holds water, but causes have many effects, not all welcome.
Again, though, if public works are to succeed, they have to be of world-war-rearmament size if there is a real depression. It took an enormous increase in federal spending as we entered the war to move us to full employment.
Obviously, we are not in anything like the Great Depression. But even in smaller recessions, there is no clear evidence that public works — while they may be desirable in and of themselves — can get us to anything resembling full employment.
And how will that public works money be spent? There is little indication that spending more on school buildings creates better-educated students. I offer the beloved District of Columbia as an example: superhigh spending, superpoor results.
Next, I note with much alarm Mr. Obama’s intention to make cuts in government spending. Based on comments over his career, I suspect these might be in the military. It’s important to weigh how dangerous a world we live in before reducing funds for an already inadequate military.
But also note that in a depressed economy, the last thing we need are spending cuts anywhere, except where there is fraud, waste or abuse — those familiar campaign-trail demons. In bad times, we want large deficits and lots of government spending.
To read the budget’s every line for possible cuts is, first, impossible for one man (the budget has a lot of lines) and, second, a waste of a leader’s time. One president who pored over the budget line by line, Jimmy Carter, had results the country might not want to repeat.
On the positive side, Mr. Obama will have some fine economists on his staff, including Mr. Summers, the powerful Mr. Volcker and Christina D. Romer of the University of California, Berkeley. They can help figure out what works and what is fantasy. Already, their waiting in the wings is jolting the current administration’s team into a giant-sized monetary stimulus. This will be of enormous impact and is long overdue. It is a relief that we will have a team, the Obama team, that has a plan and will get something done, and is goading Henry Paulson and Ben Bernanke into action.Mr. Obama’s own experience is limited, but with a team like this, by and large, I have hope.