Obama Economics

Barack Obama will start his first day as President facing one of if not the deepest recessions in U.S. economic history. Obama's first action as President-elect on this issue was to appoint Timothy Geithner as Treasury Secretary. The move was slammed by liberals because Geithner is seen as being too close to Wall Street (currently the President of the New York Fed) and to conservative in his economic philosophy.

Obama also appointed Geithner's mentor and Clinton's Treasury Secretary Lawrence Summers as his national economic advisor. Criticism of this pick from the left was muted because of his connection to Clinton while many conservatives were relieved to see an economic moderate be appointed to this crucial post.

Obama's economic address on Thursday revealed view specifics but reflected the moderate economic philosophy of his top economic advisers. While mentioning the importance of the government sector in economic recoveries, Obama state, "the overwhelming majority of the jobs will be created in the private sector." In addition, Obama has increased the size of the tax cut he is offering to "middle class" Americans and has apparently dropped plans to increase taxes on the wealthy.

Response to the speech was mixed.and on the left, NYTs columnist Paul Krugman wrote that Obama's proposed stimulus is not enough. Krugman claims that the domestic output shortfall is $2 trillion and Obama's roughly $850 billion proposal comes up short. Krugman's irresponsible response should come as no surprise considering what he has been writing for decades. He represents the now completely neglected far left side of the economic spectrum.

David Brooks responded to Obama's speech with economic research that shows fiscal (tax cuts, government spending) do not have a major roll in economic recoveries. The obvious problem with this study is that it can only measure what happened and cannot draw conclusions about what would have happened without fiscal stimulation. Brooks concludes that monetary policy (lower interest rates, quantitative easing (printing money)) is the best way to stimulate the economy.

No one would disagree that monetary policy is an important part of pulling an economy out of a recovery. However, with interest rates at close to zero and trillions in new money supply, there is much left to do. And, stimulating economic output by increasing the supply of money only works if the velocity of money is either constant of rising. (Velocity refers to how fast people spend money) Fiscal policy that gives consumers and businesses more money to spend will certainly do that.

Obama's plans for the economy are important, however, as Obama said in his speech, the most important source of economic growth will come from the private sector and the best way to help the private sector is to lower marginal tax rates across the board and improve education. Obama's advisers believe this and I hope Obama chooses to listen.