10.24.10

Economic Deathmatch

The stimulators outnumbered the slashers at The Daily Beast Innovators Summit’s remarkably civilized economic panel, though it was clear that what the country is lacking most is strong, clear-eyed leadership. Tunku Varadarajan reports.

The political debate over the way in which we should vanquish the economic recession that besets us has taken on some of the flavor of "pankration," the ancient Greek Olympic sport in which wrestlers fought each other, no holds barred—often to the death. Or, put another way: One has only to read Paul Krugman in The New York Times, or a raft of writers on The Wall Street Journal’s op-ed page, to find oneself in the midst of a full-blown ideological haka, the Maori dance in which open disdain is expressed for the opponent.

The economics panel at The Daily Beast’s recent Reboot America summit in New Orleans over the weekend was, by comparison, a remarkably civilized affair, in large part because "stimulators" vastly outnumbered "slashers," making a proper debate a little difficult. Nonetheless, Niall Ferguson, the Harvard professor of economic history who supports aspects of Paul Ryan’s Republican "Road Map," did find a way to lock horns with the hyper-liberal Joseph Stiglitz, an economics Nobel laureate, as well as with Sir Harold Evans, who has become an irrepressible popular advocate for stimulus spending (as he is for his fellow Englishman John Maynard Keynes).

The bitter truth hanging over a summit on innovation is that, in the economics sphere at least, we were, in part, laid low by innovation "M"—that of the myriad financial instruments, newfangled and arcane, that eluded proper oversight until it was too late.

Now, mired in recession, we need innovation much less than we need strong, clear-eyed leadership. And that, alas, we’re not getting, at least not in America. David Cameron in Britain and Angela Merkel in Germany offer a salutary contrast, and deserve great praise for their refusal to capitulate to President Obama’s insistent call to stimulate their respective economies. (This pressing of American policy on to sovereign states is, in some ways, comparable to the Bush administration’s insistence that our allies fall in line with us on Iraq. Of course, intrusions upon sovereign economic policy are more easily resisted than arm-twisting on foreign policy.)

The weakness in American economic leadership comes from the very top, of course. But the most glaring derelict is Tim Geithner, the Treasury secretary.

Geithner has surrounded himself with Clinton cronies and chin-scratching academics. Almost no one from finance works with him, so there’s little diversity of views. Geithner also has not articulated why all those banks needed to be bailed out. And as many Americans now know, he has failed to get an effective mortgage-modification program going, not to mention his Ahab-like—and, frankly, idiotic—pursuit of the Chinese currency white whale. (I am tempted to say Geithner must be a huge believer in capitalism, because he thinks it can withstand everything he’s throwing at it.)

Finally, and most unforgivably, he has not proposed any long-term deficit solutions on entitlements, or anything else. Instead his focus has been squarely, and myopically, on pulling off a short-term stimulus.

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Should there be another stimulus—the third, after the Bush and first Obama stimuli? As Pete Peterson told me at The Daily Beast Summit, "I can understand a relatively small stimulus, focused on infrastructure. But we shouldn’t use our preoccupation with the short term to lose our focus on the long term. The problems with the future debts and deficits are enormous." Is Geithner listening?

The Treasury secretary is fundamentally a wonk who is in a position for which he lacks the forensic depth and political maturity. People I speak to in D.C. say he might have made a great secretary 20 years from now. The position requires not so much smarts, of which he has plenty, but a kind of seasoned stature that comes from spending 30-plus years on Wall Street, and from having seen more than one bull and bear market. Also, he has had a difficult relationship with both Larry Summers and Obama. He owes his job to Summers, and has been reluctant to challenge him.

One also has the sense that Geithner and Obama are still essentially strangers who have never really clicked. Perhaps it would have been better to have put Summers back at Treasury in the first place and made Geithner head of the National Economic Council.

I spoke to the economist Bruce Bartlett, a Reagan-era supply-sider now turned apostate in the eyes of his former confreres, and he had an explanation for the rudderlessness of our economic leadership. Traditionally, the Treasury secretary has been the administration’s primary economic spokesman. But, says Bartlett, "that really hasn’t been the case in this administration. It has really had a troika of spokesmen—Summers, Geithner, and [former Council of Economic Advisers chairwoman Christina] Romer, not to mention Orszag at OMB. All are competent but have different mandates, responsibilities, and institutional constraints."

It would be better, Bartlett adds, "if the departure of Summers caused Obama to make Geithner his principal spokesman and let him take the lead. Austan Goolsbee is a nice guy but not a leader on policy. And whoever replaces Summers will probably be one of his deputies and therefore a wonk. That puts Geithner at the top of the pack, for good or bad. Obama might as well tell him he’s the guy and hope for the best."

What about that other pillar of our economic leadership, the chairman of the Federal Reserve?

There is no doubt that Ben Bernanke is brilliant. So it is too bad that he has his ego in check, seeking consensus from a too-wide variety of views, not all of them impressive. He also is too steeped in the Depression, so it is hard for him, perhaps, to see that the current situation is different. He is running out of actions to take and should press more for long-term deficit reduction rather than take the risks of another quantitative easing.

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All that said, Bernanke’s weaknesses are primarily institutional. The Fed has been forced to deal with problems unprecedented in its history, and it has taken actions equally unprecedented. As a deeply conservative institution, fearful of change, this has been very unsettling for it. Add to that the departure of some key board members, such as Don Kohn, and some vacancies on the board that took much too long to fill, and it’s likely that Bernanke has felt he was not in a strong enough position to do some things he would, perhaps, have liked to have done.

“I can understand a relatively small stimulus, focused on infrastructure,” says Pete Peterson. “But we shouldn’t use our preoccupation with the short term to lose our focus on the long term.”

Ultimately, however, Bernanke’s fear of deflation could be our undoing: It could prove to be as unfounded as Alan Greenspan’s fear of deflation, a fear that inflated the Great Big Bubble in the first place. Bernanke has run out of weapons—he can’t lower interest rates further—but worse, at least in this writer’s opinion, was that he didn’t stand up to the stimulus-helps-jobs brigade, whose reasoning he could not possibly have bought without many sleepless nights. So he succumbed to politics and hopped aboard the stimulus bus for a ride.

The question is, will he help the drivers find the brakes? Make sure your seatbelt is on...

Tunku Varadarajan is a national affairs correspondent and writer at large for The Daily Beast. He is also the Virginia Hobbs Carpenter Fellow in Journalism at Stanford's Hoover Institution and a professor at NYU's Stern Business School. He is a former assistant managing editor at The Wall Street Journal. (Follow him on Twitter here.)