Here's a thought: If we are going to spend two trillion dollars (and most likely more) trying to deal with the economic crisis, shouldn't we do it right?
The price of getting it wrong is, after all, extremely high. Think of a patient suffering from a grave viral infection who is treated with antibiotics. Not only will the treatment be unsuccessful, it will delay the proper care dangerously long.
So the ways the Obama administration handles the next phase of the bank bailout and the debate over the stimulus package are crucial.
So far, the debate over the stimulus package is, for starters, getting tied up in -- and dragged down by -- the public's widespread disgust at almost every aspect of the bank bailout, from the lack of transparency to the ongoing cluelessness of the Wall Street Marie Antoinettes to the lack of any recovery bang for our billions of bailout bucks.
Even worse than all that is wrong with the original bailout, is the prospect of the new administration repeating the mistakes of the old when Timothy Geithner announces his plans for the remaining $350 billion.
Early indications are that the next bailout tranche will be handed out from an equally Wall Street-centric perspective -- animated by the belief that all that ails us can be cured by pumping a few trillion into our financial institutions. This despite the mounting evidence that the best interests of the banks and the best interests of America are no longer aligned.
As Niall Ferguson told me in Davos, "It is time to start new banks; the old banks need to be completely restructured." And this includes an end to paying dividends to shareholders -- not to mention an end to bonuses, redecorating, new jets, Super Bowl parties, and stadium naming deals.
President Obama needs to make it clear that the next phase of the bailout is going to be handled radically differently than the first go round. As Bloomberg has reported, Henry Paulson invested twice as much taxpayer money in Goldman Sachs as Warren Buffett, yet gained warrants that were worth one-fourth as much. And the Goldman terms were repeated in most of the other bank bailouts. "If Paulson were still an employee of Goldman Sachs and he'd done this deal," said Joseph Stiglitz, "he would have been fired."
This is a mad-as-hell moment (see Sen. Claire McCaskill), and Obama needs to make it clear to the bankers that the American people are not going to take it anymore. And this requires more than finger-wagging -- it requires disgorging.
The administration also needs to use the debate over the stimulus package to rethink its too-timid approach -- otherwise we are going to miss a huge opportunity to both arrest our economic free-fall and create a 21st century economy.
"I support the stimulus package," Van Jones, author of The Green Economy, told me. "But when I look at it in its entirety, I fear that we may soon look back and say that we missed a huge chance to go bigger and bolder. After all, there were three flaws with the old economy that has crashed: it favored consumption over production; debt over smart savings; and environmental damage over environmental renewal. Some parts of the stimulus package seem to be more of the same -- trying to prop up the old, failed economy. That strategy simply won't work -- but we could waste a lot of money and time trying. Instead, we need a new direction for our economy. You can't jump halfway across a chasm -- you just end up falling into the abyss."
Rick Levin, president of Yale and an economics professor, echoed Van Jones' call for "bigger and bolder": "First of all, there's a question of magnitude. The overall stimulus is about 6 percent of GDP. We did not exit the Great Depression without a stimulus that amounted to about 25 percent of GDP -- we called that World War II... The second problem is with the mix... Only $335 billion worth goes to job creation -- that's about 3.5 million jobs, about $100,000 a job. Three-and-a-half million jobs is only two percentage points on the unemployment rate. That's not enough. I would get rid of the tax cuts and use the entire package for job creation... There are lots of great public works projects that would be well worth supporting. And, in the near term, what about CCC-type activities that put people to work right away, cleaning up public parks, weather-stripping homes, offices, schools, government buildings?"
Many experts in the key areas the stimulus package involves -- including healthcare and education -- are equally critical but reluctant to go on the record since, after all, there is something rather than nothing for them in the current bill. One high-ranking expert on education told me off-the-record: "We are really wasting an enormous opportunity. They are going to spend something like $100 billion on education and not get much reform. At this point, they would have so much leverage to get the unions to really think differently. Unions are worried about teacher layoffs. So Obama could say we'll give you money in exchange for tenure reform and teacher accountability. The president has a lot more leverage than he's using to rebuild a system that's not working."
As Michael Lynton, Chairman and CEO of Sony Pictures, told me: "I'm often asked, given Hollywood's struggles, if I were building a movie studio system from scratch, is the current model what I would build?"
The answer was, of course, no. Likewise, given the chance to rebuild America's economy, is the current system, with a few hundred billion dollars worth of patches, the one we want to build?
Obama has added or talked about adding several new cabinet-level positions, such as chief technology officer, climate czar, and car czar. How about an advisory cabinet of economic thinkers who can offer the president big ideas for a 21st century economy?
A good place to start would be among those who sounded the alarm about our current financial crisis -- all of whom are critical of the short-sighted, ad-hoc nature of the stimulus bill. People like Nouriel Roubini, the New York University economist who was so prescient about the collapse. Lawmakers, he says, are "injecting populist politics into economics decisions. Companies and sectors that should be left to drown are being floated lifeboats."
Jeffrey Sachs, the Columbia University economist who was instrumental in transitioning the economic system of the former Soviet Union, is also no fan of the stimulus bill, calling it a "a fiscal piñata," an "astounding mish-mash of tax cuts, public investments, transfer payments and special treats for insiders," and "a grab bag of hasty short-run spending." He warns that "without a sound medium-term fiscal framework, the stimulus package can easily do more harm than good." This is especially true, he says, "if we allow further tax cuts during a time of fiscal hemorrhage, or give into 'bipartisan' demands to make the Bush tax cuts permanent."
Joseph Stiglitz is equally leery of the tax cuts that have been included in the stimulus package. "We are in uncharted territory in this crisis," he says. "But household tax cuts, except for possibly the poorest, should have no place in the stimulus. Nor should business tax breaks, except when closely linked with additional investment... Increased investments in infrastructure, education and technology, relief to states, and help to the unemployed need pride of place."
In October, Alan Greenspan, one of the poster children of the old system, conceded that there was a "flaw in the model." I'd say that events since then have exuberantly proven that to be an understatement. There's not a flaw in the model -- the model itself is flawed.
And instead of bailing water out of the sinking ship, we should construct a replacement appropriate for navigating the economic seas of the 21st century -- and steer it in the right direction.
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