And for my next TARP...

Call it quantitative easing with a vengeance. The Fed's new programs--$200 billion  in credit to support private purchases of securitized auto, credit-card and student loans; and $600 billion to buy mortgage-backed securities issued or guaranteed by Fannie and Freddie--constitute another dramatic widening of the Fed's remit. The new facilities are not brand new concepts, however: they add to existing schemes to support the commercial paper market (involving commitments that approach $2 trillion in their own right). The new facilities will further engorge the Fed's balance sheet: rather than adding to public borrowing, like the TARP, this is money creation by another name, targeted on specific sections of the credit system.

As time goes on, the paralysis over the passage of the original TARP--with Congress attempting to impose a precise design of its own on the Treasury and Fed--seems increasingly absurd. So much for accountability. Yet what the Fed is doing seems right to me. Try everything; do more of what seems to be working, and less of the rest. What was daft at the outset was the idea that a single detailed blueprint could be drawn up ex ante, given a political stamp of approval, and then executed to the letter. I am relieved--and surprised--that the system is allowing this much learning by doing, and that the experiments are being conducted on so vast a scale. In this respect, maybe the presidential transition and the semi-attentive Congress that goes with it are a blessing in disguise.

Will it work? Who knows? The new scheme instantly suppressed long-term mortgage rates by about half a percentage point, which is not nothing. But with house prices still falling, will that be enough to persuade home-buyers to return to the market? It helps, but only a little--and housing is still at the centre of all this. We need action on  foreclosures, which still threaten to make house prices undershoot, with even further collateral damage in credit markets. And I hope somebody in this Treasury or the next is taking a hard look at Allan Meltzer's proposal for temporary tax-relief for house buyers.

Treasury Secretary Hank Paulson's plan helps banks and lenders. It does not address the problem - an excess supply of housing. Eliminating excess supply will end the housing problem and help the mortgage market because mortgage value depends on house value. Buying or adjusting mortgages will not do much for house prices. And any programme to rewrite mortgages in default encourages more defaults.

To address the housing problem, Congress and the administration should take actions that increase the current demand for housing. For a limited time, say up to the end of 2009, allow buyers to use the value of their down-payment (or some part of it) as a tax deduction. Or, reduce the tax rate for qualified buyers who purchase a house between now and January 2010. Or do both. Give the benefit to all home buyers, including those buying a second or third house.

Some may be speculators. Not a problem. The goal should be to remove the excess supply of houses and condos, not to reward or punish particular groups. Increased housing demand will work to stabilise prices, not immediately but sooner than would otherwise occur. Reducing the excess housing stock reduces defaults by slowing price decline. And it brings nearer the time when homebuilding increases.

Some proposals urge the government to buy mortgages. This does little to remove the excess supply of houses, although it may reduce the number of defaults. But reducing defaults does not stimulate the demand for housing. It helps some who are hurt and may keep the problem from growing, but it does not relieve the problem of existing excess supply.

A bigger stimulus is right

I find it encouraging that the Obama team is working on a much bigger fiscal stimulus than previously contemplated. I agree with Larry Summers on this: the dangers of being too timid are far greater than the risks of doing too much. A plan of at least $500 billion is warranted, as I argued here and here [subscription required]. But the composition of the stimulus is important, obviously. Boldness in mobilising the resources needs to be matched with restraint in two respects: avoid an industrial policy that draws the government into micro-managing the recovery; and avoid structural commitments that jeopardise long-term fiscal control. A focus on unemployment assistance and infrastructure spending (the first is cyclical, the second is by its nature temporary) seems to make best sense in both respects.

The Citibank rescue is much less encouraging--though I am willing to believe it was necessary. The trouble is that it raises as many questions as it answers. Comprehensive as it may be, the deal does not in fact ring-fence all of Citi's possible future losses, only some of them. Roughly $300 billion of mainly housing-related assets are covered, but those are not the only assets in jeopardy. So that is one question: will Citi need to come back to the Treasury a third time? Another is whether this plan scales--since other big banks may shortly be asking for similar treatment. Citi has been granted pretty generous terms, after all. Can the Treasury roll this deal out to every systemically significant firm? It is hoping, no doubt, that it won't have to, but this would not be the first time its hopes have been dashed. The US government's fiscal capacity is enormous--but not unlimited.

As for Obama's main economic appointments, I think Tim Geithner and Larry Summers are both outstanding--though I do wonder whether they will be able to work well together in the roles they have been given.

President-elect Barack Obama, in choosing Timothy Geithner and Lawrence Summers to lead his economic team, is betting on a student-and-mentor pair who forged a partnership while battling the world's last serious financial crisis.

That is how the Wall Street Journal put it. I very much hope that this is not what Obama has in mind. The Treasury secretary as "student"?

Is Geithner going to be in charge of economic policy or not? To have credibility as Treasury secretary he will have to be, and the markets ought to be left in no doubt about it. (Students of British economic policy might think back to the resignation of Nigel Lawson as chancellor of the exchequer in protest at being second-guessed by Alan Walters, Margaret Thatcher's personal economic adviser. You could plausibly argue that this falling out marked the beginning of the end for Thatcherism.)

The prospect of this inverted, or at any rate ambiguous, economic partnership has also given rise to speculation about Ben Bernanke's future as Fed chairman. Is that job being lined up for Summers, people are wondering? Not helpful. All in all, I think it would have been better to give Summers the Treasury job, even if that would have ruffled some feathers. Aside from the presumption of seniority, he is the outstanding economic-policy brain in the new administration--and in the country, for that matter. It's not as though Geithner's talents were going to waste at the New York Fed. His role there has been critical.

An apology to Deval Patrick

As many correspondents have pointed out (some with an air of triumph that makes me question their loyalty), my column today accused Deval Patrick of being a Republican.

A case in point: the Republicans should have gone into this election with a national plan for universal market-based healthcare (something that Republican governors in Massachusetts and California are trying to implement). If the Obama administration makes progress on this, it will be all the more necessary next time, but how stupid to have yielded the advantage.

Of course in the case of Massachusetts I was thinking of Mitt Romney's plan, and got my tenses muddled up. Sorry about that.

The claim that a plan with a mandate can be called market-based has also come under fire. I stand by that, while acknowledging that "market-based" might mean a lot of different things. For the purpose of this column I only meant to contrast these Republican designs--which leave a dominant role for private insurance schemes--with single-payer models. I'm not a huge fan of the Massachusetts plan, in fact, because I think it important to get away from employer-provided coverage. If you're curious to read about a plan I like very much, here is another article.

Some tentative advice to Republicans

My Monday column for the FT has some suggestions.

In my view, the challenge for the party is not, as many argue, to decide whether it is a movement of social conservatives, of fiscal conservatives, or of soft libertarians. To win elections, the Republican party has to gather support from all of those groups. If any one faction comes to dominate the party - as social conservatives have lately threatened to - its prospects are diminished. To get along with each other, never mind with the independents and uncommitted liberals whose votes the party needs, Republicans first need to develop their capacity for tolerance.

You can read the rest of the article here.

Does Obama still want stronger unions?

In a new column [link expires in a fortnight] for National Journal, I give some ground to the case for more aid for the Detroit Three. (I'll give Jonathan Cohn the credit, by the way: this is a great piece.) The point is that the bankruptcy process is impaired. Still, I think, the dire consequences of allowing GM to go bust are being exaggerated.

Now, bailout advocates say, consider the consequences. A note on this by the Center for Automotive Research (which you could say has a vested interest, but let that pass) has been widely cited in the past few days. It says that 3 million jobs could be lost. How does the center get to this number, when all three companies employ about 240,000 people, or less than one-tenth of that figure? It adds about 1 million more jobs at firms that supply the car manufacturers. Then it tacks on 1.7 million in "spin-off employment," which means jobs lost across the economy as a whole because of reduced spending by workers with Detroit's Big Three and their suppliers.

It would surely take more than the bankruptcy of GM to shut down all three companies and wipe out the industry's supplier network (which, remember, serves foreign-owned companies as well). The failure of one firm would help the survivors. The most-valuable assets of the failed company would most likely be acquired by its competitors. The technology for the forthcoming Chevy Volt -- the plug-in electric vehicle that some enthralled commentators seem to think justifies a $50 billion bailout all by itself -- would be snapped up by another company if it is as promising as its supporters say. Fiscal stimulus could reduce any spin-off unemployment. The collapse of GM would be a heavy blow all right, but not the end of life as we know it. Even if all three firms collapsed, the claim that this would destroy 3 million jobs is far-fetched.

Nonetheless, the view that the normal Chapter 11 process is likely to fail in this case has some weight. At a time when the economy is weak and the bankruptcy system impaired, when a good independent case can be made for a second fiscal stimulus of $500 billion or more to sustain demand and preserve jobs, it is difficult to argue with conviction that employers the size of the Big Three should be denied all help. But in coming to the rescue, if it does, the government should demand both a bankruptcy-like restructuring of the companies and a share in the upside.

Beyond the question of the bailout, what does the plight of the US car makers imply for the new administration's policy on unions?

The Democratic Party is allied with the unions, a marriage of head and heart. Obama has promised to support the "card-check" legislation that the unions see as vital for expanding their membership and bargaining power. The state of American auto manufacturing -- an example of union power in action -- ought to give him pause.

No doubt there is plenty of blame to go around for the mess that the industry is in. Epic management incompetence has played its part. So has shortsighted economic policy, which kept the price of gasoline in the U.S. at a fraction of what it was in other industrial countries. (If fuel is dirt cheap, you cannot fault consumers for wanting to drive SUVs, or car manufacturers for selling the vehicles that buyers want.) But on top of that, the unions raised wages and benefits to insupportable levels, and for years blocked efforts to cut costs and increase efficiency. Worst of all, by anointing themselves co-managers, they reduced the domestic industry's ability to react promptly to shifts in demand. Is this how the Democratic Party intends to strengthen the economy?

Avoiding foreclosures

Avoiding mortgage foreclosures ought to be a win-win proposition for the lenders and borrowers directly involved. It would also be good for the rest of us--for anybody with a stake in the housing market, or an interest in a faster economic recovery. When you recall that it was identified very early on as a key aspect of managing this crisis, it is disappointing that so little progress has been made, and the reasons for this are not altogether clear. Securitization has complicated the loan-modification process, of course, but even so.

Sheila Bair's plan seems to be making some headway. Will it work? It was tried when the FDIC took over IndyMac, and with some success. Still, the numbers are not exactly shattering.

IndyMac, which services 653,503 loans, has offered about 23,000 modifications since launching the programme on August 20. Only 5,108 have been completed with first payments made but this is double the figure a month ago and will grow rapidly as modifications in the pipeline are finalised.

Given the lack of effective alternatives, it seems worth trying on a larger scale. True, it creates an incentive to default (only delinquent loans are eligible for help), but this is true of any loan-modification scheme. A bigger problem is that it does not seem to provide for principal write-downs as opposed to interest-rate relief. For why that might matter, here is Ben Bernanke (from a speech last March) on the subject.

To date, permanent modifications that have occurred have typically involved a reduction in the interest rate, while reductions of principal balance have been quite rare.  The preference by servicers for interest rate reductions could reflect familiarity with that technique, based on past episodes when most borrowers' problems could be solved that way.  But the current housing difficulties differ from those in the past, largely because of the pervasiveness of negative equity positions.  With low or negative equity, as I have mentioned, a stressed borrower has less ability (because there is no home equity to tap) and less financial incentive to try to remain in the home.  In this environment, principal reductions that restore some equity for the homeowner may be a relatively more effective means of avoiding delinquency and foreclosure.

Lenders tell us that they are reluctant to write down principal.  They say that if they were to write down the principal and house prices were to fall further, they could feel pressured to write down principal again.  Moreover, were house prices instead to rise subsequently, the lender would not share in the gains.  In an environment of falling house prices, however, whether a reduction in the interest rate is preferable to a principal writedown is not immediately clear.  Both types of modification involve a concession of payments, are susceptible to additional pressures to write down again, and result in the same payments to the lender if the mortgage pays to maturity.  The fact that most mortgages terminate before maturity either by prepayment or default may favor an interest rate reduction.  However, as I have noted, when the mortgage is "under water," a reduction in principal may increase the expected payoff by reducing the risk of default and foreclosure.

Another day on Wall Street

What's another 5 percent here or there--well, 7 percent if you want to look at the S&P 500? I, for one, don't want to look.

The stock market is now at its lowest since 1997. The flight from risk in credit markets continues unabated, with safe short-term interest rates now at zero. The end of the road for monetary policy? Not quite. What remains is "quantitative easing", which Fed vice-chairman Don Kohn referred to yesterday--and which the Fed is now conducting. A good time to re-read Ben Bernanke on the subject. In a speech from five years ago, when the subject seemed of mainly academic interest so far as the US was concerned, he explains how it works. (Thanks to Calculated Risk for the reminder.)

A quite different argument for engaging in alternative monetary policies before lowering the overnight rate all the way to zero is that the public might interpret a zero instrument rate as evidence that the central bank has "run out of ammunition." That is, low rates risk fostering the misimpression that monetary policy is ineffective. As we have stressed, that would indeed be a misimpression, as the central bank has means of providing monetary stimulus other than the conventional measure of lowering the overnight nominal interest rate. However, it is also true that the considerable uncertainty that surrounds the use of these alternative measures does make the calibration of policy actions more difficult. Moreover, given the important role for expectations in making many of these policies work, the communications challenges would be considerable. Given these risks, policymakers are well advised to act preemptively and aggressively to avoid facing the complications raised by the zero lower bound.

That was then, this is now.

A center-left country?

Apparently not.

The Inn Between's waitress is busy delivering the lunch special of breaded chicken, mashed potatoes and green beans to a stream of customers who work at different places but all seem to know one another.

The banter is raucous and sustained, and when the conversation turns to a proposed federal bailout for U.S. automakers, there is little support for the idea.

"I don't think they should bail them out because ... obviously something's not right in the way they're running their business, and why should the American people have to bail them out if they can't figure out how to do it right?" September Quinn, the busy waitress, said after the lunch rush at the Inn Between.

The threat of deflation

I attended the Cato Institute's annual monetary conference. The Fed's vice-chairman, Don Kohn, gave the keynote address, and used it to emphasize that the central bank would not let the economy fall into a deflationary spiral (speech; Krishna Guha's report). The BLS released inflation figures for October, showing a seasonally adjusted drop in the CPI of 1 percent, the biggest since 1947. Even core inflation was negative last month. Stockmarkets crashed again. I suppose Cato should be congratulated on its timing.

Hillary Clinton as secretary of state

I think choosing Hillary would be a mistake. Not because of Bill. The new administration can choose to use him or not, regardless. The "two for the price of one" stuff is ridiculous: they are not exactly chained together. Equally, if Hillary were the best candidate for secretary of state, it would be absurd to deny her the offer because of Bill's post-presidential connections. Scrutiny in future is really all that is required there.

No, the problem is that she is not a well-qualified candidate. She is not by any stretch of the imagination a foreign-policy expert. I don't think I would call her a born diplomat. And her loyalties, to put it mildly, might be divided. Her first priority would be to advance her own presidential ambitions, not to help make the Obama presidency such a success that those hopes die. The "team of rivals" idea is wonderful so long as the rivals are fully invested in the success of the enterprise. In this case, it seems doubtful. Could Hillary defer to Obama, and carry out his instructions to the best of her ability? I doubt it. And it would not help that everyone would be watching for the first sign of friction or insubordination. The soap-opera dimension would be highly counter-productive.

I find Tom Friedman persuasive on this:

Foreign leaders can spot daylight between a president and a secretary of state from 1,000 miles away. They know when they're talking to the secretary of state alone and when they are talking through the secretary of state to the president. And when they think they are talking to the president, they sit up straight; and when they think they are talking only to the secretary of state, they slouch in their chairs. When they think they are talking to the president's "special envoy," they doze off in midconversation.

What is Obama thinking, I wonder? That the party would be delighted? Yes it would, but so what: the election is already won. Or is it something to do with keeping your friends close and your enemies closer? (LBJ put it less delicately of course, but the metaphor does not really work in this instance.)

Military intervention to promote development

Paul Collier's well-received book, "The Bottom Billion", advocated military intervention alongside economic aid to improve security and economic growth in some of the world's poorest countries. Iraq notwithstanding, the idea has caught on in official development circles--rhetorically, at any rate. In this review essay, Bill Easterly is unimpressed. By the time his tanks have rolled through, not much of Collier's thesis is left standing. Bill's article is recommended reading not just as an attack on Collier but as a warning about the social-science method as applied to development more generally.

In fairness to Collier, it is very difficult to demonstrate causal effects with the kind of data we have available to us on civil wars and failing states. As Collier writes, "our model cannot be used for prediction." In the research papers on which his book is based, Collier does give abundant caveats that show he understands the limits of correlations for inferring that actions cause outcomes. But the caveats are not as apparent in the book, and Collier does not explain to the reader just why he recommends precise actions so confidently on the basis of mere correlations.

Of course, governments take many actions even when social scientists are unable to establish that such actions will cause certain desirable outcomes. Presumably they use some kind of political judgment that is not based on statistical analysis. What is unusual about Collier's book is that he seems to offer statistical analysis as a replacement for political judgment, or perhaps unintentionally gives scholarly cover for actions that governments want to take anyway. The press shows a certain reverence for social science work with statistics that can make this cover quite effective. The paradox is that many social scientists familiar with this kind of analysis do not share the press's reverence.

An English lesson for Republicans

A good piece by Jonathan Freedland about the years of Tory misery that followed Blair's landslide election victory in 1997, and what the Republicans might learn from them. Three different leaders; two more election defeats...

Only then, staring oblivion in the face, did the slow stirrings of recovery begin. A senior Conservative official, Theresa May, had already warned that the Tories had to shed their image as "the nasty party" with few women or members of ethnic minorities in Parliament. Now, at last, that message began to be heard. A younger, fresher face emerged and overtook more established rivals for the leadership: David Cameron.

Mr. Cameron's candidacy was built on a simple premise: modernize or die. He told the Tories they had to look as if they actually liked the country they sought to govern, rather than wishing they could turn back time. They could not hope to form a winning coalition without appealing to the Britons whom Mr. Blair had made his own: women, suburbanites, the highly educated. Relying on angry old white men was never going to get the Conservatives much beyond 33 percent.

To that end, Mr. Cameron set about decontaminating the Tory brand. Central to that mission were forays into two areas of political terrain previously deemed forbidden zones. First, he signaled comfort with gay rights, ditching the party's previous support for laws restricting sexual equality. Second, he championed environmentalism. He may have endured news media mockery when he took a dogsled ride to inspect a Norwegian glacier in 2006, but it did the trick, confirming that the Tories were changing.

Mr. Cameron's efforts have paid off: recent polls suggest a Conservative victory at the next election. Of course, the lessons of one society can never fully apply to another. But the Tory experience suggests that a defeated party of the right has to move toward the center, abandon divisive social issues and elect a leader who looks as if he or she actually belongs in the 21st century. With Arnold Schwarzenegger ineligible for the presidency and no other accommodating figure on the horizon, the Republicans might have a bumpy decade ahead.

The Tory revival surely owes more to exhaustion with "New Labour" than to Cameron's rebranding, but Freedland is right that the Tories had to embrace moderation and centrism to become electable again. (The same was true of Labour, of course. After Margaret Thatcher's victory in 1979, they were out of power for 18 years, choosing leaders true to the soul of the party, with far too little appeal to the center. Then came Blair.)

Shame about Schwarzenegger.

China to US: New president? Big deal

The timing of China's fiscal announcement this weekend is notable. It comes just ahead of the White House economic summit of G20 countries. As that meeting approaches, an outgoing US president, a not-yet-US-president, and a lame-duck US Congress are discussing a second stimulus plan costing maybe $100 billion to $200 billion--which might happen before the inauguration, or possibly not. Meanwhile China's government stuns global markets by promising to inject nearly $600 billion of spending on infrastructure and social welfare this year and next. Supposing the US plan ends up providing $200 billion, that would be roughly 1.5 per cent of US GDP; $600 billion is roughly 15 per cent of China's GDP. Remind me, which country is taking the lead in managing the global economy?

True, doubts surround the details of China's proposal. It's unclear how much of what they are proposing is really additional to existing plans. And of course the timing was not determined entirely by the approaching summit. Figures about to be released are expected to show a sharp deceleration in Chinese growth; announcing a big stimulus in anticipation of this makes sense domestically. Nonetheless, the new initiative--described by Chinese officials as "massive"--sure gives President Hu Jintao something talk about when he meets George Bush later this week. Up to now, the US and the West have been urging China to do more to help stabilize the world economy. Suddenly, China is setting the pace and it is the US and Europe that are dragging their feet. A sign of things to come?

While giving that some thought, here is some useful prep on the summit. Morris Goldstein at the Peterson Institute for International Economics reiterates his "ten-plus-ten" plan with characteristic force and clarity. And in a remarkable feat of timeliness, VoxEU publishes a collection of short and (putting China's announcement to one side) bang up-to-date essays in an electronic volume edited by Barry Eichengreen and Richard Baldwin, "What G20 leaders must do to stabilise the economy and fix the financial system". It includes fast accessible pieces by many of the best international-economics and finance scholars in the world, including Willem Buiter, Raghuram Rajan, Dani Rodrik, Michael Spence and others. By the way, my spirits lifted to see Dani, who is usually inclined to pick holes in the orthodox case for open markets on the grounds that it is all so complicated, propose these refreshingly simple-minded phrases for inclusion in the final communique:

The weeks and months ahead will be trying times for economic policymakers everywhere, as they try to contain the fallout for output and employment. Raising trade barriers against imports will be a temptation, especially when currencies fluctuate so much. But the experience with the Great Depression teaches us that this is the surest way to magnify the costs of the crisis, and to spread it to other countries. Hence the most serious challenge for the global trading regime at the present is to ensure that the financial and economic crisis does not lead to a vicious cycle of protectionism, greatly exacerbating the economic downturn.

So we jointly commit ourselves in public to not raising protectionist barriers in response to perceived threats to employment from imports. We further ask the secretariat of the World Trade Organization to monitor and report unilateral changes in trade policy, with the purpose of "naming and shaming" G20 members that depart from this commitment.

Column: The choices that confront America

[From Monday's FT]

During the US presidential campaigning, neither candidate was about to let the financial crisis dictate a wholesale remake of his economic platform. As the markets crashed and the recession rolled in, every promise stood, however ancient its provenance, as though nothing had changed and dealing with the crisis was a separate issue. It took Barack Obama three days - from the election result to his first press conference - to think again.

At said conference, the president-elect declined to confirm that he would raise top tax rates soon. Is he wondering if John McCain, his Republican opponent, was right, and this is no time to be raising anybody's taxes? Mr Obama also said that his promised tax cuts for "95 per cent of working families" should be seen as part of a new fiscal stimulus. Previously, he had not mentioned this as a reason for cutting taxes. On the contrary, he had emphasised that his plan was roughly revenue neutral, implying that any stimulus would be second order.

A question too complicated for campaign speeches, and which neither side even wanted to think about, now needs an answer. How can the next administration reconcile its longer-term goals for the economy with the imperatives of the economic crisis? Getting this right will not be easy, but is the key to success or failure in Mr Obama's presidency.

One danger lies in failing to think clearly about short term and long term. In the short term, a further big fiscal stimulus is needed. In the long term, the budget deficit will have to be cut not merely from where it will be after this new boost has been delivered, but from where it stands already. If these goals get blurred together, as they are likely to, the country will get the worst of both worlds: the short-term stimulus will be too small and the long-term consolidation will be too slow.

Discussions about the next fiscal stimulus have started, and figures as low as $100bn (€78bn, £64bn) - smaller than the first stimulus, enacted last spring - are being talked about. That is much less than 1 per cent of gross domestic product. Current data on the state of the economy are much too alarming for this kind of timidity. A stimulus in the order of $500bn is required. This rightly arouses concerns about the long-term fiscal outlook. The answer is not to scale back the stimulus but to make it, so far as possible, self-correcting over the course of the cycle.

One-shot tax rebates fit the bill. The first stimulus took this form, and it worked fairly well. The problem is that under present circumstances too much of a rebate gets saved rather than spent.

Lower tax rates, as opposed to rebates, are worse in this regard because they are not self-correcting. Ask President George W. Bush. His tax cuts were scheduled to expire in 2010 - not because he wanted this to happen, but because it disguised a deteriorating fiscal outlook. One thing Mr Obama and Mr McCain agreed on was that the Bush tax cuts should be maintained (for 95 per cent of working households, at any rate).

Mr Obama will most likely keep his promise to cut most households' taxes (relative to what current law provides, plus some extra relief for the working poor). This is helpful for the economy in the short term and he will regard it as a political necessity in any case. Yet the fact remains that this will undermine the long-term fiscal position. Care must be taken not to let the rest of any stimulus compound the problem.

With this in mind, the next fiscal plan should lean heavily on temporary spending. More generous unemployment assistance scores highest. This mostly feeds through to consumption, and automatically does so at the right time. It helps the people who most need help. Later, when unemployment falls, the demands on the public purse fall with it.

Assuming this recession may be prolonged, infrastructure spending also scores well. It directly supports low-wage employment in the hard-hit construction industry. So long as the projects are desirable on their merits, they are valuable as public investments. And once you have built a bridge (preferably to somewhere), you do not have to keep building it. Turning off the tap is relatively easy.

On the spending side, expanded entitlements are a long-term hazard unless the revenues needed to pay for them are enacted at the same time. A red flag should go up if Mr Obama proposes to regard new subsidies for healthcare as part of his stimulus. However desirable they might be on their merits, they would be an ongoing fiscal burden, regardless of the state of the economy. The means to pay for them need to be designed alongside.

The greatest danger of all is that the valid case for a strong stimulus takes under its wing spending proposals that create an ongoing obligation, have no true investment rationale, and represent a waste of public money now and in the future.

The bail-out currently being sought by the big US carmakers falls squarely into this category. Managers and unions have conspired for years to drive US-owned, US-based car manufacturing into the ground. Now they seek public subsidy to pay for investments they should have undertaken in any case, and to sustain wages and benefits that comparably qualified workers in other industries cannot hope to enjoy.

Why a worker in a US-owned car factory deserves more generous treatment than any other kind of US worker escapes me. Asking those other workers to pay for these privileges seems to add insult to injury. Perhaps President Obama will be able to explain.

Column: What FDR can teach Obama

[From Saturday's FT]

In the US presidential election of 1932 Franklin Roosevelt's campaign song was: "Happy Days Are Here Again". He won. Four years later, happy days had not returned: unemployment was down but still exceeded 15 per cent. That year, FDR was re-elected in a landslide that makes Barack Obama's victory look small. He carried every state but Vermont and Maine and more than 60 per cent of the popular vote. He led the Democrats to majorities of 334 to 88 in the House of Representatives and 76 to 17 in the Senate.

The economy promptly tanked. In the end it was revived not by the New Deal but by the war FDR had promised to stay out of. He won two more presidential elections.

The similarities between 1932 and 2008 make the temptation to draw parallels impossible to resist. One lesson that might give the president-elect comfort is that voters can overlook a lot of failure if they are sure that a president is on their side. Persuading them of this was FDR's surpassing talent. Mr Obama may have the same knack.

The history of the Great Depression is obscured by partisan mythology. One must steer a middle course between regarding FDR as a kind of saint who delivered the US from economic collapse and global conflict, and a malicious bungler who trashed the constitution and prolonged the Depression. Perhaps it is a moot point whether Mr Obama should even wish to be another FDR. If the thought should cross his mind, though, here are some things to consider.

After a prolonged and deliberately stalled transition - he and Herbert Hoover could not work together - FDR started with a bang. He dealt decisively with the financial aspect of the economic crisis. He closed the banks and used the Reconstruction Finance Corporation to recapitalise those sound enough to reopen. Most promptly did reopen and confidence in banks revived. He also took the dollar off the gold standard and let it depreciate. These were abrupt departures from Hoover's policies and they worked.

Then it was mostly a case of one step forward, two steps back. In his first 100 days FDR passed a blizzard of new laws - a standard other presidents seem expected to meet, though why is unclear. Banking and finance aside, the first months of the New Deal were a muddle.

Public works created new employment. But the Agricultural Adjustment Act aimed to support farm incomes through price and production controls; its fingerprints are on today's wasteful farm policies. Then came the National Recovery Administration to oversee a complex web of industrial regulation. This was based on the idea that too much production (not too little demand) was prolonging the slump. The NRA slowed the recovery. When the Supreme Court shut it down in 1935, growth picked up.

FDR persisted with taxes and other measures aimed at "economic royalists" - big business and the rich. Most likely, these also did more harm than good. Of greatest lasting significance, however, he laid the foundations of the welfare state in the Social Security Act of 1935. This did less than it might have to hasten recovery. New social security taxes began to be collected in 1936; benefits were not to be paid until a fund had been built up. (FDR was no Keynesian.) Nonetheless, the act created a programme that Americans today regard as inviolable.

FDR changed the country by changing what citizens demand of government. Economic hardship was no longer a private problem. It was the government's responsibility to provide some measure of economic security. Deploying a modern mastery of public relations, Roosevelt embraced this responsibility; and though the results were not always good, he did his best to discharge it. The country loved him for this.

Is Mr Obama an FDR for the new century? A president has many ways of ruining his reputation, and this is a different world, yet the idea looks plausible. Like Roosevelt, Mr Obama inherits a crisis not of his making. Like Roosevelt, he is brimming with energy to get things done. Like Roosevelt - happy days are here again - he has given the country a jolt of optimism just by turning up. FDR understood that his greatest strength was not being Hoover; he emphasised (and exaggerated) the differences. Mr Obama gets it and does not have to try so hard. Could he be more different from George W. Bush?

Some of Roosevelt's paths to reverence are closed. The transition is likely to be co-operative. The outgoing administration has already acted boldly to stabilise the financial system. Mr Obama will build on that - much as FDR's jobs programmes expanded and rebranded some of Hoover's. In managing the immediate crisis, he will find it difficult to make a decisive break. As for attitudes to government, a change as great as the one FDR made can happen only once.

Like FDR, on the other hand, Mr Obama accepts the duty to provide economic security more eagerly than his predecessor did, at a time when that promise, however difficult it may be to keep, has great new appeal. He has a signature policy as well - healthcare reform - that gives that obligation concrete form and could do for his place in history what social security did for Roosevelt's.

Above all, like FDR, Mr Obama is a great persuader. When it comes to making voters believe he is on their side, he is to Mr Bush as Roosevelt was to Hoover. An early economic recovery would be good, but FDR showed that some things matter more.

Campaigning and governing

From tomorrow's FT:

Barack Obama's campaign for the presidency will be seen as one of the most brilliantly planned and executed in the country's history. The challenges that will confront him as president do not rise to quite that level - the US does not face Nazi Germany or the Soviet Union, and it is not literally at war with itself - but they will suffice to be getting on with.

What happens when an irresistible politician meets an immovable political or economic reality? Is a superb campaigner equipped to be a good president in testing circumstances?

Or is it rather as Bob Dylan put it: "The louder they come, the harder they crack?"

Mr Obama's stunning political talents are indeed great assets, more so in the US system than they would be elsewhere. His mastery of the campaigning art has two aspects - and both should be as valuable in office as they were in winning it.

One is his personal magnetism. He is an instantly likeable man; a fine orator yet no demagogue; an intellectual but not inclined to show off about it; a calm and calming presence. The other is that, on the evidence of this campaign, he is an exceptionally cool and competent manager. No Drama Obama, they call him.

Compare the discipline and single-mindedness of Mr Obama's campaign with the shambles of John McCain's. Compare its steady consistency of tone and message with the squabbling, indecisive, misdirected efforts of Hillary Clinton and her team.

If you ask why George W. Bush was such a bad president, it is partly because he scores so poorly as a leader and as a manager. Most Americans found him a likeable man, to be sure, but none would accuse him of being an inspiring speaker, or even always an intelligible one.

At times a country needs its spirits lifted, or its nerves steadied. Mr Bush spoke well for the nation after the terror attacks of 9/11, but subsequently failed to rise to this challenge. His faltering, glassy-eyed pep-talks of recent weeks, with the financial system breaking down and the economy falling into recession, alarmed more people than they reassured.

As for Mr Bush's management skills, one need only think of the war in Iraq or the administration's lamentable handling of Hurricane Katrina.

An indispensable talent in a president is the ability to delegate well - to appoint good people (a president can choose from the best) and get the soundest advice.

To a pathological degree, Mr Bush has valued political loyalty over competence. Whatever one thinks of his goals, the results speak for themselves. Mr Obama's choice of advisers is impeccable, and not drawn from a narrow circle of friends and allies. He demands to be exposed to counter-arguments; he is not always looking to have his own prejudices shored up.

Admirable as these traits may be, Mr Obama is untested in high office. Governing is not campaigning. An audience can be charmed by a well-turned phrase and a winning manner. Facts on the ground are less susceptible, and starting with the economy Mr Obama has to deal with some especially bloody-minded instances.

He promised in his victory speech: "I will always be honest with you about the challenges we face." Maybe in future he will be, but his economic platform - promising lower taxes for almost everyone and greatly expanded public programmes too - was hardly forthright.

He may in the end be a victim of his own talent. He set out to raise expectations and he did: they are impossibly high.

His ability to manage disappointment is so far untested. That is about to change.

Three readings on the election

The best, most thorough, and most straightforward account of how Obama did it appears, aptly enough, on the website of Reader's Digest, written by my friend and former colleague Carl Cannon.

For a supplementary reading on how my profession disgraced itself this year see Harold Evans (no knee-jerk conservative) in The Guardian.

If the administration would like a blueprint for screwing up the next four years, John Judis has written it for them at the New Republic. The Republican party is destroyed, the Democratic party now owns the country outright, the post-industrial United States is a center-left country. (Can membership of the European Union be far behind?) To remain in power for decades, all liberals need is the nerve to be bold. Judis makes some excellent points. He is right that the Republicans are in even worse trouble than you might think--but I suspect that the surest way to help them out of their hole would be to follow his advice.

The next president

A remarkable moment, and a truly amazing achievement. The result was not a surprise; even so, it will take a while to sink in. The country has crossed a threshold.

A convincing and comfortable victory (in electoral-college terms, though far from a landslide in the popular vote). So much for the Bradley effect: an idea, let us hope, whose time has passed. Independents broke heavily in his favour, and he won support right across the country, from all demographic categories. Barack Obama will be president because of this great breadth of appeal and because of his extraordinary magnetism. By themselves, especially when you remember the challenges that confront him, these won't make him a great president, but they suggest that he has it in him to be a great president. At the mere thought of this possibility, one's spirits lift.

From John McCain's gracious concession speech: "A century ago, President Theodore Roosevelt's invitation of Booker T. Washington to dine at the White House was taken as an outrage in many quarters. America today is a world away from the cruel and prideful bigotry of that time. There is no better evidence of this than the election of an African-American to the presidency of the United States."

Quantifying the Bradley effect

Will the result be closer than the polls suggest? Up to now I haven't given much credence to the "Bradley effect" theory of latent racism, perhaps out of wishful thinking, but also because recent studies have tended to say the evidence does not support it. This article on VoxEU has given me pause.

Should Barack Obama worry about the Bradley effect? The much-discussed effect refers to observed discrepancies between voter opinion polls and election outcomes, in which African-American candidates receive a smaller vote share than would be predicted using opinion polls. In this column, I study US congressional and gubernatorial contests from 1998 to 2006 - black candidates on average receive a 2-3% lower share of the two-party vote than non-black candidates with similar numbers in the polls. If an effect of a similar size would appear in the current presidential race, then it would lower Obama's probability of winning from 85% to 53%.

In other words, it says the effect is small but real--real enough, in a race that is close to begin with, to alter the outcome. The study seems to be a careful piece of work, and it has an explanation for the fact that other studies have come up with a different answer. This election is very different from the ones in the study's historical sample, of course, so maybe the finding is barely relevant in any case. A disturbing read, nonetheless.

Obama and the weight of expectations

As a British citizen living in the US, I don't have a vote in today's election. (So much for "no taxation without representation".) If I did I would cast it for Barack Obama, with reservations.

I'll paste the rest of this article for the FT after the jump.

Continue reading "Obama and the weight of expectations" »