(This piece appeared on Forbes.com on 11/20/08)
President-elect Obama announced the other day that the government would do “whatever it takes” to revive the economy.
I suppose that made some people feel good. After all, who wouldn’t want tireless effort in the face of a crucial problem?
Unfortunately, the problem with the economy isn’t insufficient effort or focus. The problem is that no one knows what to do next. Hank Paulson already looks like a man who’s not sleeping enough. His problem isn’t insufficient effort. It’s too much effort.
If reviving the economy were like reviving a patient whose heart has stopped, then relentless effort would be the key. Get out those paddles and keep stimulating the guy until he comes back to life. Never give up. Whatever it takes.
But reviving an economy is more like parenting. There’s no manual. If there were a parenting manual, every hospital would hand one out with every newborn. But there isn’t a manual because each kid is different. And parents come to learn that they aren’t really in charge. There’s too much of the process they can’t control. So great parenting isn’t about doing whatever it takes. It’s an art. It’s about a set of principles and knowing which principle to apply in which situation. When to be tough. When to be soft. When to give a kid a do-over.
Even the most skilled parents make mistakes. Not because they don’t understand what it takes to be a good parent. Not because they aren’t committed to doing the job as well as it can humanly be done. But simply because there’s no way of knowing what to do next.
Often what’s called for in parenting is the exact opposite of whatever it takes–what’s called for is doing nothing.
Welcome to the world of macroeconomics. Even the wisest president and most skilled secretary of the Treasury doing whatever it takes isn’t enough if you don’t know what it takes. And there’s no way of knowing.
Look at poor Henry Paulson. He can’t figure out what to do. But you think it’s easy? To revive financial markets, he just has to create confidence and a desire to invest. Piece of cake. Alas, no one knows how to do it. And it isn’t from lack of trying. Or desire. Paulson’s successor will have one advantage Paulson doesn’t have. He’ll know something about what not to do. But unfortunately, that isn’t enough.
After all the changes in policy and the uses of the TARP that have been announced in the last six weeks, I suspect that confidence and a desire to invest are no longer under the control of the Treasury secretary or the president. If anything, many of Paulson’s relentless efforts to move markets forward have made the situation worse.
Obama may promise whatever it takes, but the unfortunate reality is that he faces the same situation that Bush and Paulson have been facing. We need confidence and optimism, but there’s no way of knowing how to get there from here.
Obama’s only practical suggestion has been to support the idea floating around Congress for a stimulus package of $100 billion or more.
That doesn’t exactly meet expectations of doing whatever it takes. That’s doing what we’ve already done.
We tried a $160 billion stimulus package last spring. That accomplished very little. What’s the argument for spending $100 billion to revive a $14 trillion economy? A $14 trillion economy where the government has just spent a few hundred billion and counting on financial bailouts and capital injections. To no avail. Does anyone really think that we haven’t spent enough?
Somehow, I don’t think an extra $100 billion or even $300 billion is going to get the job done, even if it goes toward infrastructure as some are suggesting.
What if markets are spooked by the specter of government spending without any constraints? What if doing whatever it takes means doing less, rather than more?
That is the conundrum for Obama and the successor to Paulson. The more options there are, the harder it is to know which one is the right one. The more options you try, the more uncertainty is injected into the economy, and the more cautious are investors and employers and consumers.
Nobody knows what it takes to move the economy forward right now.
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