There was a time when I thought being stimulated was a good thing

The rumblings of discontent with the Obama economic team over the stimulus package have already begun. What I’m picking up from within the economic and domestic policy transition teams is a sense that their ideas for the stimulus have not been heard, that key areas where major investments that can produce short-term jobs and long-term returns can be made are being ignored. I have heard this comment with regard to a variety of potentially high-impact, high-value technology and green stimulus elements. (And naturally, I have set the filters on my rumbling sensors to adjust for the usual sour grapes in a search for ideas when not all ideas can or should be implemented.)

According to insiders I’ve talked to, there are several reasons this is happening. One, the people at the top (Rahm Emanuel and Larry Summers were cited) are rushing to put together something BIG and FAST. And for political reasons as well as reasons of expediency when it comes to implementing such programs, there seems to be a willingness to pass along wherever possible big wads of cash to states, localities and other intermediaries and let them figure out where it should go. This may sound like a fine plan for those distrustful of the ability of the federal government to set investment priorities but in the end it will be like inviting the Christmas tree to decorate itself. The result will be diffuse, uncoordinated and messy.

Personally, I couldn’t think more highly of Larry, Tim Geithner and many other members of the economic team. A smarter, more dedicated group of men and women won’t be found elsewhere in this or any other Administration.

My worries about the stimulus and our overall approach to the economic crisis lie elsewhere. They include:

• An overall concern about the groupthink that has gripped Washington on this. Go anywhere in town, ask anyone at any table at any restaurant and they will tell you two things they know to be true. One, that the only way out of this is a really big stimulus package and two, that it is perfectly okay for the United States to incur trillion-dollar-plus deficits for several years as a "way out" of our problems. These sound roughly as well thought out as the ideas produced with DC’s last bout of panicked groupthink, post-9/11, when we all agreed that terrorism should be the new central focus of all our national security policy and that wherever the president saw a threat, we should go quash it, no questions asked.

• As for the need for the really big stimulus package, there are a few problems. First, it has already been promised to the markets, they have accounted for it in their pricing, and things still don’t look so great. Ok, maybe we stopped the free-fall, but we don’t want to get the markets thinking that the United States will drop a T-note on the economy every time they get a little wobbly. That kind of policy can produce a downward cycle of mutually self-destructive co-dependency between panicked traders and panicked politicians.

Which leads directly to the next question which is: what do we do if and when there is another downward spike, say, later this year when Chinese growth looks like it’s 6 percent a year and falling global commodity prices start triggering a domino effect of market failures and political crises throughout the emerging world? At a certain point, Congress will have bailout fatigue or the Chinese and other creditors will stop lending the U.S. money to write these big checks (either because they are worried about the Americans or because they have to spend the money on their own problems.) So then the economy is once again in free-fall but without a rope, a parachute, or a good plan B. This is a particularly worrisome scenario because whereas a friendly downturn, like a friendly Can Can dancer, shows its bottom early, this has been a very unfriendly downturn. No one can honestly say they know where the bottom is. The problem is made worse by the fact that in one key respect, an unfriendly downturn is also like a Can Can show, because before it is over it may show a lot of bottoms. We’ve already seen a couple, one around the Bear Stearns crisis in the spring, another around the deal to reach some kind of bailout package this fall. But it is clear there are more to come.

• As for being able to afford the big deficits, since when is the right response to a financial crisis rampant fiscal irresponsibility? We may be able to avoid the consequences of our big spending for a while, but sooner or later those chickens will come home to roost in very painful ways. One might be the nightmare scenario described above in which the countries that lend us our money decide they can’t or won’t any longer. That could lead to an obligation to increase interest rates right at the worst moments of a downturn, which is not conducive to encouraging growth. In any event, then or later, it will produce a weakening of the dollar. No matter what, these big deficits will produce a weakening of the dollar because historically inflation is the only way that countries can reduce the big debts they can’t pay. Beyond that, of course, sooner or later, say in a year or two or three, the United States will have to, as Obama recently implied, get fiscally more responsible. Even under better growth scenarios than currently exist, by the end of his term, our falling tax revenues from an aging population minus our fixed entitlement costs and pre-Iraq defense spending levels leave us with no money left over for discretionary spending. So this is not going to be about saving money on funny earmarks for toilet bowl museums in East Bumfuck, Oklahoma. This is going to be about this administration embarking on the biggest defense budget cuts in post-World War II American history. Count on that. There is no other place to make big cuts. And it is going to be about creating new revenues. I promise you this, when Jeb Bush or Sarah Palin or a cloned, laboratory-grown version of Ronald Reagan run for the presidency in 2016, they will be calling Obama the biggest tax-and-spend Democrat in history, no matter how earnestly he tries to avoid the designation. (This won’t be fair, as usual…since first of all, Dems are better about cutting spending and balancing budgets than Republicans historically, and secondly, Obama the demographic die was cast re: the new fiscal reality long before Obama was in office.)

• It should also be noted that there is no U.S. policy solution for this crisis. We live in a global economy. If the Chinese or the Europeans or the Japanese get their response to the crisis wrong, if their stimuli don’t work, we will continue to struggle. This needs to be coordinated by a new successor organization to the G8 that includes the big emerging powers on an ongoing basis and with real seriousness of purpose.

• Finally, something just smells wrong about the stimulus as we are now hearing about it. It does have a bit of that Christmas tree feel to it, little bits and pieces of glitter everywhere and precious little strategic vision about how to build a new America, how to make strategic investments so that the money spent produces a longer term return and is not just a fast-dispersing feel-good drug. The whole idea of sending anyone a $500 check is absurd. It didn’t work a year ago and it is not going to work now. And finally, if we are going to go whole hog into investing in job creation and growth in the U.S. economy, we are going to need a part of the government to oversee it. Just what would that be? Treasury will be overwhelmed with fixing financial markets. It can’t be done out of the White House. Commerce? Really? I’ve been a senior Commerce official and frankly, there are many parts of that agency that you could shut down and it would be six months before you got a letter of complaint from anywhere in the United States. You may not like industrial policy but we are already waist deep into it and we are missing the institutional capability to get into it…which should be, the institutional capability to get us out of it.

Which brings me to my final point. We need a Powell Doctrine for this bailout and stimulus process. Right now, there is broad agreement on only one component of the Powell Doctrine (which was a set of national security principles regarding overseas use of military power formulated to avoid future Vietnams) which is that everyone seems committed to the use of overwhelming force. But the Powell Doctrine doesn’t stop there. It also calls for clear goals and an exit strategy. At the moment, we have neither here except some vague aspiration to create 3 million jobs and to stop the pain. While those are a start, we need a vision for what the post-crisis U.S. economy is going to look like, to identify the areas where federal investment is likely to produce the greatest returns (including the greatest leveraging by private investment), and a means of turning that vision into a reality.  And as soon as we can, we need to recognize that we are going to have to live on limited means and that necessarily, this means the government the Obama Administration leaves is going to have to be much smaller and more efficient than the one it inherited (even if it provides new and better services in some areas.) Hard choices are coming.