I've been a little skeptical of Obama's economic team's belief that there are no real consequences to running up the deficit. This seems to be generated by a sort of "crass Keynesianism" that assumes that deficits, no matter how they are spent, will help the economy. Obama's willingness to renege on his campaign promise of more progressive taxation indicates a potentially disturbing budgetary bipartisanship that is based on the assumption that deficit spending can be used to support both parties' agendas (tax cuts and gov't spending) at the same time.
Obama's stance towards the bailout has also been worrisome. I think it is fair to say that aside from Paulsen and Bernanke, Obama might be the person most responsible for the management of TARP so far. The bailout has been criticized for lacking any oversight (of the treasury or of banks) and also increased the deficit dramatically right before Obama took office. Why did Obama vocally support the bailout despite these flaws?
One potential reason is that Obama seriously believed that the bailout was necessary to slow the rate at which the economy collapsed. But even if this was the case, he could still have pushed for changes in how the money was spent. Three problems with the bailout are particularly glaring: a) banks have continued distributing hefty bonuses despite receiving TARP funds, b) there was little oversight and transparency to how the money was given out and spent, and c) there were no efforts to institute substantive changes at banks receiving funds. The fact that Obama did little to address these problems (until yesterday--more on that later) begs a motive. Here are four options:
- He thought TARP was necessary, and thought any dissent would seriously weaken it
- He thought that passing TARP would make Americans more receptive to future stimulus spending
- He was influenced by lobbying from bankers and other involved constituencies
- He was, and remains, reliant on his economic team, whose close ties to the banking industry gave them a pro-banking perspective
The recently-introduced bill capping executive compensation is a step in the right direction, but it reads more like a PR move than a substantive measure. Illicit bonuses have been an open secret for the past few months, and most of last year's bonuses have already been distributed. This bill is too little, too late, and does not do anything about bonuses that have already been given out.
So although I am optimistic about Obama's administration in general, there is a lot of ground for skepticism about its economic policy. It is likely to run up the deficit further while not necessarily repealing the Bush tax cuts. It is also likely to adhere to a dubious watered down economics that emphasizes deficit spending. Ironically, it has also suddenly transformed the Republicans into the sensible check on democratic excesses, a shift that would have hardly seemed possible a few months ago. It also risks alienating Obama from more fiscally responsible voters and democrats. However, it's only a few weeks into his term, and hopefully things will improve--centrist democrats seem to be helping him figure things out.