Ways for Obama to improve US economy

Ways for Obama to improve US economy
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First Published: Fri, Aug 29 2008. 12 10 AM IST

Updated: Fri, Aug 29 2008. 12 10 AM IST
Breakingviews has five recommendations on the US economy for Barack Obama. Of course, the Democratic presidential hopeful won’t be able to slaughter any “sacred cows” beloved by the party faithful. Given that, here are five ways he could improve the US economy:
Replace Bernanke
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Replace US Federal Reserve chairman Ben Bernanke. Rapid money supply expansion has created bubbles and encouraged outsourcing, with consequent US job losses. Bernanke, however, keeps finding new reasons not to raise interest rates. Obama is advised by Paul Volcker, who tackled inflation in the 1980s with a much tougher stance. Bernanke’s term is up in January 2010. Replacing him with a “hard money” supporter is essential—and politically desirable since the Democrats haven’t nominated a Fed boss since Volcker.
Cut budget deficit
Running a deficit of $500 billion (about Rs22 trillion) even before a recession has hit is irresponsible. Obama would reverse many of Bush tax cuts and wind down US involvement in Iraq. He must also seriously attack corporate welfare and agriculture and ethanol subsidies, few of which benefit core Democrat constituencies. A moderate rise in social security contributions on very high incomes is fine—but needs to happen immediately.
Tackle global warming
That means a carbon tax rather than a more distorting emission permitting and trading system. The proceeds—which could include higher taxes on petrol, perhaps on a sliding scale based on pump prices—should as a rule be used to cut other taxes, but may initially be needed to address the budget deficit.
Exploit his international credibility
This means restarting the Doha Round of trade talks and pushing them to a conclusion. Tighter domestic monetary policy should reduce the impact of free trade on employment—and gaining full access to Indian, Chinese and other emerging markets should produce new jobs in the US.
Go after Wall Street’s excesses
Financial institutions that are “too big to fail” must be prevented from gambling with taxpayers’ money. That suggests higher capital requirements, tighter oversight of risk management and perhaps regulation of remuneration practices, at least for some big firms.
Fannie Mae and Freddie Mac, in their current form, are in this category and should be capitalized accordingly. Smaller, high risk financial businesses of the Bear Stearns Cos. Inc. variety should be explicitly disowned by government and trading partners assess the risks properly.
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First Published: Fri, Aug 29 2008. 12 10 AM IST