Economic Scene: Top Priority is Stabilizing the Patient

So the Obama first priority will be various bailouts but including people at least rather than just corporations. Interesting that the issue of moral worthiness creeps into the article when discussing bailing out homebuyers but it seems to have gone by the board when it came to banks or other financial institutions who are hardly moral paragons! At least those greedy people who looked to make a buck on flipping houses are not asking for bonuses. Spending on more public projects and helping states deal with budget deficits also seems like a good idea. However all of this is going to produce more debt. There does not seem to be much of a hullabaloo nowadays in most circles, even conservative ones, about debt. The Bush administration through its imperialist push, tax cuts, stimulus program, and huge corporate bailout has already set the tone as far as balanced budgets are concerned!

The New York Times
/ November 6, 2008
Economic SceneTop Priority Is Stabilizing the Patient
By DAVID LEONHARDTWASHINGTON
Barack Obama and his advisers have spent much of the last three yearsdevising policies to deal with the economy's big, long-term problems,like inequality, health care, the budget deficit. In the process, theycame up with an agenda that's serious, detailed and mostly cogent.Yet none of it will be their first priority.Instead, the initial thrust of their economic policy will be onkeeping the economy from falling into a recession that's nastier thanmost of us have ever experienced.This year's election coincided with an important moment in thefinancial crisis. The credit markets have stabilized in the last fewweeks and even improved a bit. But the rest of the economy isdeteriorating fairly rapidly. It's now in danger of falling into avicious spiral, in which spending cuts by consumers and businesseslead to further layoffs and then more spending cuts.To prevent that from happening, the Obama administration will need tomove quickly — before it takes office — to put together some emergencyplans for the financial markets and the broader economy.Mr. Obama and his advisers acknowledge that their focus has to shift,but the change is still likely to be challenging, and a bitdisappointing. "Unfortunately, the next president's No. 1 priority isgoing to be preventing the biggest financial crisis in possibly thelast century from turning into the next Great Depression," says AustanGoolsbee, an Obama adviser. "That has to be No. 1. Nobody ever wantedthat to be the priority. But that's clearly where we are.Throughout the campaign, whenever Mr. Obama was asked about thefinancial crisis, he liked to turn the conversation back to hislong-term plans, by saying that they were meant to solve the veryproblems that had caused the crisis in the first place. Back inJanuary, he predicted to me that the financial troubles would probablyget significantly worse in 2008. His prognosis was right — and the pundits now demanding that he giveup major parts of his economic agenda in response to the financialcrisis are, for the most part, wrong. When you discover that a patientis in even worse shape than you thought, you don't become lessaggressive about treatment. But you do have to deal with the mostacute problems first.And Mr. Obama has a big incentive to do so. The hangover from arecession typically lasts more than a year, and this recession isn'tover yet. So he will be at risk of the same kind of midterm drubbingin 2010 that Ronald Reagan received in 1982 and Bill Clinton did in1994. In the days leading up to this year's election, as theyconfidently reviewed the polls, some Obama aides took to joking darklythat 2010 was already looking bad.Their best hope for changing that outlook starts with a seriousstimulus bill. House Democrats have been pushing for such a bill forweeks, but the Bush administration has been opposed, largely becausethe House proposals have focused on government spending rather thantax cuts. Now that an Obama administration looms, Congress has twooptions.It can look for compromise with the White House and pass a bill in thecoming weeks, even if it's incomplete. Or it can wait until Januaryand have a bill on Mr. Obama's desk within days of his inauguration.There is at least one obvious area of potential compromise: Mr.Obama's call for a $1,000 payroll-tax rebate for almost every family.That would cost the government about $65 billion. But a stimuluspackage should probably be a lot bigger than that — maybe $200 billionor so. And at this point, drafting it well matters more than passingit immediately.Economic research is quite clear about what works best. As MartinFeldstein, the dean of Republican economists, has pointed out,households saved more than 80 percent of the money they received intax rebates this spring. "The only way to prevent a deepeningrecession," Mr. Feldstein wrote last week in The Washington Post,"will be a temporary program of increased government spending."That means starting work on new construction projects that governmentagencies have already deemed worthy but that lack financing. It alsomeans sending money to state governments to close their budgetshortfalls, in addition to softening the blow of the downturn byextending jobless benefits (as flawed as the unemployment insurancesystem is).All this will worsen the deficit. But the true cost won't be as largeas the price tag on the bill will suggest. Every dollar in newgovernment spending tends to increase the gross domestic product byabout $1.50 on average, according to Moody's Economy.com. This $1.50results in about 40 cents of additional tax revenue. So a well-writtenstimulus bill can pay about 40 percent of its own cost.The second big issue is the credit markets. Banks have become somewhatmore willing to make loans lately. But the financial system is stillmuch closer to crisis than normalcy, which argues for vigilance duringthe transition and from the new Treasury Department.The two leading candidates for Mr. Obama's Treasury secretary —Timothy Geithner and Lawrence Summers — seem likely to be moreaggressive than Henry Paulson, the current secretary. Mr. Geithner,the president of the Federal Reserve Bank of New York, has at timeslobbied for a more proactive approach to the current crisis. Hefavored direct equity injections into banks, for instance, before Mr.Paulson did.As early as last December, meanwhile, Mr. Summers criticized policymakers for being "behind the curve." Both he and Mr. Geithner are fondof quoting Ernesto Zedillo, the former Mexican president, as sayingthat since markets overreact, policy makers must overreact, too.Of course, it won't be easy to distinguish between acceptableoverreaction and reckless overreaction. Just consider the currentdebate about how to reduce home foreclosures.Some Democrats have suggested that the only reason the Bushadministration hasn't done more to help homeowners is that it doesn'tcare. But that's not really fair. Coming up with a substantialmortgage rescue plan that doesn't end up helping millions ofhomeowners who neither need nor deserve help is inherently tricky.[Leonhardt had an earlier column on this.]Mr. Obama seems to grasp this. His own campaign proposals for amortgage rescue were more restrained than either John McCain's orHillary Clinton's. Yet he waffled a bit in the campaign's final weeksand never spelled out exactly what he believes. So this issue will bea good early test of his election night pledge to "always be honestwith you about the challenges we face."Whatever he decides, it probably has to involve more money — whichwill make the government's budget problems even worse. Some economiststhink next year's deficit could potentially exceed $900 billion.Relative to the size of the economy, that would be the largest deficitsince the years just after World War II.A deficit like that will indeed force Mr. Obama to change his approachto the economy's long-term problems, mainly by coming up with new waysto pay for his solutions. But that is tomorrow's problem. Today's arebig enough as it is.