Financial Times Editorial Comment: A new start for US economic policy
Copyright The Financial Times Limited 2010
Published: October 3 2010 20:49 | Last updated: October 3 2010 20:49
http://www.ft.com/cms/s/0/ec429262-cf1c-11df-9be2-00144feab49a.html
After next month’s elections, Barack Obama will have the opportunity and obligation to rethink his administration’s approach to the economy. With a new chief of staff, a new economics team and most likely a re-energised opposition in Congress, the difficult task of economic management will become even harder for the president.
Premature tightening of fiscal policy is the greatest danger. Members of Congress are leaving big questions unresolved as they embark on their campaigns – notably, whether and how to extend the Bush tax cuts of 2001 and 2003, due to expire at the end of this year. Though almost nobody wants it, post-election gridlock might cause all income-tax rates to rise in January, each side blaming the other.
With the economy still weak, the quarrel over extending the cuts for the higher paid should not be allowed to lead there. Democrats and Republicans ought to compromise – say, by extending the cuts for all households except those earning more than $1m a year (rather than $250,000, as the president and his Democratic allies prefer). Public spending should not be squeezed to meet the fiscal cost of the extension. For the moment, US fiscal policy can and should be kept loose.
As the economy recovers that will change. So it is important that all the tax-cut extensions are temporary, not permanent – something that both parties have opposed up to now. Again, Mr Obama should take the lead and insist that both sides give ground.
Uncertainty over income taxes should have been resolved already; the delay should not extend beyond November. Questions about the medium and longer term come next. This will be a political challenge of the highest order. Difficult as it may be to imagine, agreement between Democrats and Republicans will most likely be required. Nothing will happen otherwise – except that the likelihood of a fiscal crisis will mount. As on the tax-extension question, both sides will have to give way on the issue.
The instinct of both parties has been to rule out broad categories of fiscal remedy. Democrats will not countenance cuts in Social Security or many other spending programmes: the burden of retrenchment, they say, should fall mainly on taxes paid by corporations and the rich. Republicans rule out tax increases of every kind, vow to defend Medicare, and are reluctant to prune defence spending.
If either side gets its way in putting so much off-limits, the problem is insoluble. The problem is readily solved, on the other hand, if nothing is off-limits, if the tax base is broadened and most categories of spending are gradually squeezed when conditions allow.
Overwhelmingly, this is a political challenge not an economic or technical one. The next Congress should reject gridlock and embrace compromise. That would indeed be a new start. Mr Obama should demand no less.
Voters will rebuke Washington itself
By Clive Crook
Copyright The Financial Times Limited 2010
Published: October 3 2010 19:46 | Last updated: October 3 2010 19:46
http://www.ft.com/cms/s/0/07bc7e04-cf1d-11df-9be2-00144feab49a.html
Opinion polls continue to say that Democrats will do badly in next month’s midterm elections. Most analysts expect the Republicans to gain control of the House of Representatives. Many give them a chance of winning control of the Senate, too – which ought to be impossible in a year when the seats up for grabs put the Grand Old Party at a disadvantage.
If the Republicans do well they will call it a repudiation of President Barack Obama and a historic victory for their side. They will be right on the first point but wrong on the second. More than a rejection of Mr Obama’s agenda, this election will be a rejection of Washington and all its works. Angry and even despairing, the US is about to vote for paralysis. Its system of government has rarely looked so broken.
It is true that centrist voters have turned against the Democrats’ ambitious agenda to transform the country. The policy outcomes to date are not in fact that radical (which is why the Democratic left also feels let down), but the professed aims of Mr Obama and his allies in Congress make few concessions to the country’s conservative instincts. Anxiety over this mixes with disappointment over the slow recovery, for which the Democrats are increasingly (though mostly unfairly) blamed. In any event, disenchantment with the Democrats is real.
Yet voters are not choosing the Republican alternative. On this, the polls could hardly be clearer. Mr Obama, despite his slide in popularity of the past two years, is better liked than either party in Congress. According to Gallup, the president’s job approval rating in September was 44 per cent; the scores for Democrats and Republicans in Congress were 33 per cent and 32 per cent.
Asked whether Congress as a whole is doing a good job, just 18 per cent said yes. Asked, “Do most members of Congress deserve re-election?” two-thirds of voters said no, the highest since the polling firm began asking the question nearly 20 years ago. The proportion of voters saying they have a “great deal” or “a fair amount” of trust in Congress stands at 36 per cent, the lowest for nearly 40 years – lower than Gallup has ever recorded for any of the three branches of government.
Next month the country can rebuke Mr Obama and his party, and check their ambitions for the rest of the president’s first term. Do not mistake this for an expression of confidence in Republicans. The electorate knows that the president and his veto pen will still be in the White House. The Republicans will have much stronger blocking powers, but will not be in charge. That would seem to suit the country just fine.
This is why the midterms say so little about 2012, and Mr Obama’s hopes for a second term. In two years, voters will be able to vote for undivided Republican rule. Whether they will, notwithstanding the victory the GOP expects next month, is very much in doubt.
One could argue that voting when the opportunity arises to divide and disempower the government is in the best traditions of American democracy. The checks and balances of the constitution were written with that purpose in mind. On a long view, the system’s resistance to political innovation might be the secret of the country’s success, preventing lurches from one ideological extreme to the other, creating a high degree of institutional conservatism. Compare domestic and foreign policy, where the executive’s powers are less checked and abrupt changes of direction, not always to the good, have been more common.
In normal times, perhaps, there is much to be said for the default mode of US domestic policy: don’t just do something, stand there. But these are not normal times. The US may be about to vote for paralysis in Washington just as circumstances really do demand forthright and urgent action.
Enormously consequential choices on infrastructure are pending: industry needs clarity on energy policy, so that long-lived investments can go forward without capital going to waste. The immigration system is squeezing the supply of skilled workers, choking the economy’s most promising and dynamic sectors. The US education system is failing and needs to be fixed. These are portents of decline. Action cannot wait. Business as usual will not do.
Most pressing of all, the US needs to repair its fiscal policy. The long-term budget projections are awful. To contain the risk of a public debt crisis, Congress must plan for a combination of gradual tax increases and spending cuts. Mr Obama has appointed a fiscal commission to come up with proposals. Parts of what it will say are easy to predict: a higher retirement age to stem entitlement spending, and a broadening of the tax base, so more revenue can be collected without raising marginal income-tax rates.
Simple enough, yet it is hard to imagine Democrats and Republicans coming to terms on this or anything else. The fiscal outlook is so bad that it might be better to let Democrats confront it their way (higher taxes on business and the better off) or Republicans their way (whatever this might be: they still have not said). The worst outcome – and, unfortunately, the likeliest – is bitter division, a paralysed government, and no action until another economic crisis intervenes.
You think disapproval of Congress is high right now? Just wait.
clive.crook@gmail.com
More columns at www.ft.com/clivecrook
How an unloved bail-out saved America
By Steven Rattner
Copyright The Financial Times Limited 2010
Published: October 3 2010 19:57 | Last updated: October 3 2010 19:57
http://www.ft.com/cms/s/0/333426c2-cf1d-11df-9be2-00144feab49a.html
America’s troubled asset relief programme – better known as Tarp – died on Sunday, at the age of two. The causes of death were bitter politics and financial illiteracy. Hatched in the post-Lehman bankruptcy panic, Tarp allowed Barack Obama, US president, and his predecessor, George W. Bush, to bypass laborious Congressional approval and deploy $700bn to rescue a collapsing financial system. In its short life Tarp soon became the programme that everyone loved to hate.
To conservatives it epitomised the meddling nature of a bail-out nation. To liberals it rewarded the same Wall Street financiers who took the economy down. And Congress quickly recognised that flexible Tarp capital was precisely the opposite of what the legislative body likes to do, which is to micromanage funding requests, not issue blank cheques. But instead of euthanising Tarp we should be eulogising it as, without exaggeration, this legislation did more to keep America’s financial system – and therefore its economy – functioning than any passed since the 1930s.
No one can doubt that without Tarp financing sources would have fled in terror from the banking system. Almost immediately institutions that dwarfed Lehman in size – potentially, AIG, Citigroup and Bank of America – would certainly have collapsed. Runs on other banks would have followed, causing credit to evaporate in the economy. A depression-era landscape of shuttered banks is easily imagined.
Without Tarp, General Motors and Chrysler would also have been at the mercy of Congress, whose dithering ways would have resulted in at least one of them running out of money, shutting down and liquidating. If Congress then failed to act quickly the other carmaker would have immediately followed suit. That would have brought down the vast majority of the sector’s many suppliers, already teetering on the edge of bankruptcy.
That loss of suppliers would have forced Ford, and all of the foreign-owned carmakers with assembly facilities in the US, to close. Between a collapsing auto sector and other businesses unable to finance themselves, what was already a painful recession would surely have spiralled downward, deeply and darkly. And in the interconnected world of the 21st century, a collapse of the American financial system and economy would have had global repercussions.
Government interventions on the scale of Tarp are certainly to be avoided. But when markets are frozen, as they were after Lehman’s demise, and private capital has retreated to the mattresses, it is the responsibility of government to step into the breach. Even a conservative president like George W. Bush recognised this and pushed Congress to approve Tarp two years ago.
Of the two political poles, the left has the better justification for being grumpy. In retrospect money was injected into financial enterprises on too generous terms: a 5 per cent dividend and a modest slug of warrants to buy common stock. As the investor of last resort the government had the ability – indeed, the obligation – to insist on tougher terms. A vivid demonstration involved Goldman Sachs, which raised $5bn of expensive capital from Warren Buffett just three weeks before it received $10bn of far cheaper Tarp money.
Thus, when financial markets recovered, the share prices of most Tarp recipients were able to recover quickly, enraging a public that (somewhat correctly) felt that taxpayer money ended up preserving value for private shareholders. That said, the other grievance of liberals – that Tarp did little for small businesses and homeowners – falls further from the mark. Tarp’s job was to save the financial system. More traditional forms of economic relief were properly reserved for the stimulus plan and other initiatives.
Opposition from Republicans has been even more visceral, resting on an aversion to government and dark warnings of a slippery slope towards socialism. But let’s be clear: When conservatives say we should have “let the market work”, what could possibly have resulted other than a complete meltdown? Amazingly, all this vitriol is being directed at a programme that may well cost taxpayers little. Only $470bn of the $700bn was ever committed, and estimates of potential losses have been steadily ratcheting down. Last Thursday, Tim Geithner, Treasury secretary, said the cost would be less than $50bn. Hardly a high price for saving the world’s most important financial system.
As the US lurches towards its mid-term elections nary a positive word is heard on the campaign trail about Tarp, while by one reckoning, more than $80m has been spent by politicians of both parties decrying “bail-outs”. One recent poll found that 58 per cent of Americans thought Tarp was an “unneeded bail-out” while only 28 per cent termed it “necessary”.
Among the few courageous defenders of Tarp has been Mr Geithner, who recently pronounced it to be “one of the most effective emergency programmes in financial history” and praised the Bush team for having developed it. In the fullness of time, Secretary Geithner will be judged to have been speaking the truth.
The writer served as counsellor and lead auto adviser to the US Treasury secretary. His book, Overhaul, has just been published
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