Barack Obama’s economics team is short on new faces. And the US President’s $825 billion (Rs40.4 trillion now) stimulus plan appears to be a massive version of old-school Keynesianism, albeit with some trendy tweaks. Yes, his advisers can hit the ground running, and that’s a big plus in a crisis. But to salvage the US economy, Obama must ensure they don’t just run in the same old directions.
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Despite some setbacks with his choice of experienced hands and the lack of imagination reflected in Obama’s stimulus package, having seasoned hands in key positions makes sense. First, several of his other appointments—such as top economics advisers Larry Summers, Paul Volcker and Christina Romer—are unconventional and innovative thinkers. Also, while enthusiastic Young Turks with fresh ideas are valuable, it’s good to have some old hands in key roles who know how to turn those ideas into action.
Still, the worry remains that a lack of new blood will make Obama’s economic policy tend towards the conventional and politically expedient. For example, the proposed stimulus legislation focuses on infrastructure, support for fiscally embattled states, energy, health and education.
But they have widely varying “multiplier effects”—the size of the boost in gross domestic product for each dollar invested. Fragmenting the spending among so many projects is probably less efficient than targeting those that will have the biggest impact.
Obama will also start his term with the second half of the Troubled Asset Relief Program (TARP) funds at hand. He has been openly critical of the Bush administration’s use of the first $350 billion of TARP funds, and says he will disclose more about his strategy and demand greater concessions from banks that receive bailouts.
His advisers have also promised to spend a chunk of the TARP money—$40 billion is the figure bandied about—to buy and restructure troubled mortgages. That will be a drop in the bucket, but may have mollified TARP critics in Congress such as Barney Frank. Apart from those changes, Obama’s TARP strategy may end up as reactive to events as his predecessor’s.
Of course, that may not be entirely bad. Having some flexibility to deal with a still unfolding crisis has its advantages. And the TARP chequebook is one of the few areas where Obama will have a fair degree of policy latitude.
By comparison, look at monetary policy. With interest rates at essentially zero, and the Fed’s balance sheet ballooning as it pumps money into the banking system, it is already courting inflation. And growing concerns about the government’s massive borrowings will eventually erode demand for the US treasury securities it needs to sell to finance its stimulus measures.
These and similar factors will eventually force the government to scale back its massive fiscal interventions. If that’s done clumsily, it could open another painful chapter in the financial crisis. Before reaching that point, Obama’s team needs to devise ways to wean the economy off government life support gradually, without killing the patient. This is where the new President will really need to demand new tricks from his old dogs.