Wednesday, November 5, 2008

The New President’s Dilemma


The Lehmann Letter ©

President-elect Barack Obama faces a dilemma.

A severe recession is unfolding. Demand, production, employment, income – all are falling and falling hard. The new president has two traditional remedies at his disposal: Reduce taxes so that consumers can purchase more, thereby stimulating production and employment, or increase public-works spending to directly boost employment. These remedies will, of course, raise the federal deficit.

Therein lies the dilemma: The president can not effectively deal with the recession and shrink the deficit. Which horn of the dilemma should the president choose? Fight the recession or deal with the deficit?

In the spring of 1933 the same dilemma confronted President Roosevelt. FDR had campaigned on a balanced-budget platform. But when he took office, current events left him no choice. FDR’S administration enacted sweeping measures that lifted federal spending and the federal deficit. The Works Progress Administration and the Civilian Conservation Corps spent billions on public works and employed millions. The deficit grew.

Barack Obama now confronts the most serious economic crisis and dilemma since the Great Depression. Like FDR he must choose between promoting economic recovery and containing the deficit. He can’t do both.

The new president can use the $700 billion bank bailout as a template. In that instance Congress moved decisively to meet the financial crisis. President Obama should present Congress with an equally large, bold and urgent program of tax cuts and spending increases to deal immediately with the recession. Households living from hand to mouth will spend any increase in after-tax income or extension of unemployment benefits. Now is the time to invest in the nation’s crumbling infrastructure and the energy-independence and green-technology programs that Mr. Obama advocated.

The deficit will grow dramatically and the new administration should deal with it as soon as economic recovery is assured. Meanwhile, interest rates have fallen and the dollar has strengthened, proving that foreign investors remain willing to purchase Treasury securities. Recession confronts us immediately; national bankruptcy does not.

Now is not the time to think small.

© 2008 Michael B. Lehmann

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