President-elect Barack Obama is giving hints about what is in store for the next two years: tons of spending and government activity. There is a real question whether an approach ripped from the New Deal playbook will be any more successful in reviving the economy than the New Deal itself (which wasn’t at all). The answer depends, to a large degree, on what he does on tax policy and trade policy. (Let’s leave aside for the moment whether an ever-expanding budget deficit, very likely in excess of a trillion dollars, is sustainable.)
First, what is plainly missing from the Obama economic agenda? Anything to spur private sector economic growth. Oh, that. I am not hearing that 95% of Americans are going to be getting tax cuts anytime soon. But you already knew that. Lacking any tax relief in the form of a reduction in corporate taxes or immediate expensing of equipment investment, it will be tough sledding to get businesses to invest and grow. In short, Obama is putting his eggs entirely in the Keynesian basket, which doesn’t have a great track record of success.
Second, what about trade? This weekend Mexican President Felipe Calderon warned the President-elect about tearing up NAFTA. Bloomberg reports:
Calderon’s comments reflect unease among U.S. trading partners over the likely economic policies of President-elect Obama, who has expressed reservations about Nafta and pending agreements with Colombia and South Korea. Leaders from the Asia- Pacific region also said they are concerned protectionism would exacerbate the global economic crisis.
Let’s hope candidate Obama’s protectionist rhetoric and refusal to back the Colombia and South Korea free trade deals were simply some of the many cons he employed to lure an unwary Democratic base.
So it seems certain that spending, lots and lots of it, will be in. The government will continue, one imagines, its unprecedented role in supporting and directing financial institutions and perhaps to many other sectors of the economy. What we don’t know is whether this will be any more successful than it has been in the last couple of months. Moreover, we don’t yet know whether it will be supplemented by tax and trade policies which help revive the private sector or instead which prolong and deepen the recession. When we know what those policies will be, we will know far more about the prospects for economic recovery.