What to do Next?

The economic news is now a stream of bad, followed by worse, then followed by terrible happenings. There have been precious few, if any, bright signs, and I doubt that we’ll get anything positive until well into the first quarter of 2009. The employment outlook is getting worse by the day. Retail sales are collapsing: Best Buy calls the drop in sales a ‘seismic shift’. Circuit City is in bankruptcy. GM and Chrysler look set to follow. The situation when Obama takes over in late January will no doubt be worse. So what to do next?

Well, the options for traditional economics are limited. The Federal Reserve Board would typically reduce interest rates to stimulate the economy. Lower rates encourages borrowing, which stimulates sales and thence investment and employment. The problem right now is that due to the ineptitude of the Bush regime, and the extreme problems we’ve had in the credit markets, interest rates are already very low. In fact after inflation they are negative! So traditional policy is severely restricted on the monetary side.

That leaves old fashioned fiscal policy. This is where Bush’s ineptitude really comes into play. Because of the reckless tax cuts a few years ago we have been running large Federal deficits for a while. Tax cuts are all well and good if they are accompanied by spending cuts. But Bush never cut spending. On the contrary, he increased it. So even when the economy was doing relatively well we had a deficit problem. Now that we need to boost the economy, which implies letting the government pump money into the economy over and above the amount it takes in, we find ourselves already doing that! We need to stimulate something that is already dangerously out of balance.

This conundrum will no doubt be used by some more conservative politicians as an argument against bold action. All of a sudden our Republican friends will shed their Bush ideology and try to present themselves as fiscal conservatives once more – they were anything but during Bush’s tenure – which means only modest stimulus. The danger with this position, apart from the hypocrisy, is that modest won’t do. We would run the risk of repeating Hoover’s errors.

No. My inclination is to invoke the famous words of Marshal Foch, the French military commander who repelled the German attack in World War One. When he was appointed the French were in full retreat and the German army was within a few miles of Paris. His reaction: “Hard pressed on my right. My center is yielding. Impossible to maneuver. Situation excellent. I attack.”. Bold. Foolhardy. And remarkably successful. His legacy is that he saved France by ignoring caution, by setting aside the wise advice of his subordinates, and facing a dire situation full square on. That’s what Obama must do.

No half measures. We need a massive stimulus package in the order of half a trillion dollars. Damn the deficit. Extend unemployment aid; launch energy initiatives; put a massive public works program in place; cut low income taxes to put money into peoples pockets; and get health care legislation launched to lower costs. All at once. No piece meal attack. This is not a war of attrition. It is blitzkrieg.

Obama gets power late January. We need this stimulus within weeks.

Go for it.