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What Should Obama Do?

Stiglitz’s advice for the new administration
December 22, 2008

Globe-trotting economist Joseph Stiglitz, PhD ‘67, is an old hand at prescribing policy cures for ailing economies abroad. This time, he offers words of advice to his own president-elect.

“Even if President Obama manages to put the best policies in place early in his administration, we will not recover overnight,” he warns. “In the best of circumstances, it takes 12 to 18 months for measures to take full effect.” Caveat noted, here’s what the Nobel laureate prescribes for Obama’s first 100 days in office.

Stimulate

“We will need a strong and comprehensive stimulus package before Obama takes office. But he may find it necessary to increase or expand it soon after he’s sworn in. There has been enormous damage done, and we will need a stimulus of significant magnitude to jump-start recovery. It will have to include doing something about foreclosures, and it will have to address rising unemployment and the shortfall in state and local government budgets.”

Invest

“President Obama should increase spending on infrastructure, technology, and alternative-energy development, even if it means larger deficits in the short run. At least investment spending will look good on the balance sheet.”

Restructure the bailout

“It is essential that the new administration restore confidence in the financial markets, particularly the credit markets. The way ­Secretary Henry Paulson organized the bailout last fall, banks are not properly incented or required to lend the government money they receive. Because there are no restrictions, many banks continue to pay dividends to shareholders, which is really very counter­productive. They should not be permitted to use bailout payments as a private treasure chest for acquiring other banks. That actually decapitalizes the institutions and hampers lending.”

Reform regulation

“Because our regulatory structure is flawed, it is imperative that the new president and the new Congress enact regulatory reform right away. We need it in the short run to restore confidence and to ensure that banks use government money wisely. Better regulation would ensure they don’t embark on any more gambling episodes.”

Control the deficit with care

“President Obama will be under pressure to combat the deficit, which is likely to climb at first. But that should not curtail an ambitious stimulus plan. Deficit reduction can be done even as the government spends more if it restructures expenditures and the tax program the right way. It is possible to stimulate the economy and reduce the deficit at the same time. If we cut back on our expenditures in Iraq, for instance, and spend more on municipalities, we could actually stimulate economic growth and cut the deficit simultaneously. But it must be done carefully.” –Anne Murphy

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