Recently, I had the chance to return to my alma mater, Ohio Wesleyan University, to participate in a conference on the economy. Before hand, I spoke with a group of economic management students and took questions on the state of the economy. While the upperclassmen had considerable angst over the state of the job market, the majority of the questions were centered on the housing market and the banking system.
The best question was from a student who asked this question, "It seems that the economy goes up and down over time a lot. Can't we do something about it?"
To me, this encapsulates exactly what most Americans feel right now. With massive job losses occurring over an extremely short time frame, the mood of the country is dark and demanding action. The country elected a new president and increased the majority of his party for exactly this purpose.
The initial product has been the stimulus plan that President Obama is set to sign today amidst darkening economic clouds. The hope is that the $787 billion stimulus bill will attack the nation's economic free fall on multiple fronts. The reality is that the spending will help, but it could be reduced significantly if US interest rates are pushed up due to the massive increase in the fiscal deficit.
More importantly, the biggest oomph that the President Obama may have missed comes from how the package was sold. Saying this is a catastrophe and waving sigs saying the "END IS NEAR" does not, repeat, does not engender confidence. This is what is so maddening about the first weeks of the Obama administration. They were incredibly adept at messaging during the campaign, we all assumed they would be continuing that skill into office. The Geithner press conference was a wake up call for everyone.
Circling back to the OWU student's question, this is the ultimate challenge for government when it inserts itself into the economic mix. We should mandate that government officials take the Hippocratic economic oath, "I will prescribe policies for the good of my voters according to my ability and my judgment and never do harm to anyone." While the US government has acted quickly to increase spending, they have clearly addressed a symptom without prescribing a cure.
There is great consensus on where the problems lie: housing and banking. And yet, this is where we haven't seen the same speed for attacking these key areas. Why do the more difficult work when you can spend money?
As Columbia Professor Amar Bhide puts in in the WSJ today, even the common sense approaches are lacking. "If the current crisis is indeed; unprecedented, why not increase the funding and resources to the battle tested methods? When earthquakes or tsunamis strike, we rush in more doctors and supplies. We don't use untested medical procedures or set up new relief agencies on the fly......Increasing unemployment insurance, bankruptcy judges, and the FDIC's capital and staff would certainly cost money, but these targeted expenditures would be much smaller than grandiose measures to revive overall confidence."
Today's signing of the stimulus plan signals that grandiose has won the day versus common sense experience. Let's hope in the days and weeks to come that a solid, common sense plan to address housing and banking is unfurled with pain for all involved.
This way we will have confidence that the cure will work.