Paul Krugman's long-running criticism of the administration's response to the financial crisis has attracted plenty of attention, but I recently heard a different way to look at the debate between the Obama team and its economic critics. It comes from David Frum, whom I recently interviewed for a forthcoming feature in our print magazine (emphasis mine):
It's really a debate between economists and politicians. The politicians in the Obama administration, the politically-minded people, have a whole wish list of liberal programs. The bank crisis in a way has created the opportunity for those liberal programs, but if people ever took on board just how expensive it's going to be, it would also destroy the appetite for those programs. The political imperative has been to find ways to make the costs of the bank problem look smaller so as not to frighten moderate Democrats away from the other things the administration wants to do.
The nationalization approach…national receivership is what we should call it…if the Obama administration were to do that, it's very hard to see how they could bring along people like Byron Dorgan or others for any ambitious domestic program in the first term. In a way…Paul Krugman is the General Shinseki of the Obama administration. The Axelrods and others are like those who fired Shinseki. They don't want to know, because it would be too inconvenient.
I don't buy what Frum is saying regarding the expense of the "liberal programs" that Obama wants to enact; those programs can be deficit neutral in the long-term and are more necessary than ever. Delaying investments in health care, energy, and education would be disastrous for the country's long-term future. But the "moderate" members of Senate who proclaim fiscal responsibility while trying to reduce the estate tax and subsidize agribusiness aren't usually interested in the nuts and bolts of "policy making," so the political imperatives are divorced from the realities of cost and benefit.
Given that, I agree with Frum that the biggest factor preventing the national receivership of the big banks is not the political influence of bankers but simply getting congressional approval for the huge cost -- not because of worries about the impact on other programs, but because there's not a lot of political will to spend a ton of money on banks right now. In that sense, Krugman, who is arguing in favor of a policy that is perhaps the most likely to be effective but is also the most expensive, is like Shineski, who was arguing in favor of a policy -- 500,000 troops in Iraq -- that was the most expensive, but also most likely to be effective.
The gaps in the analogy are obvious, of course -- Iraq was a war of choice and the financial crisis is a challenge we can't choose to avoid; the Bush administration was intent on rushing into Iraq over the objections of its critics while Obama's team is determined to take a deliberative approach contra those urging speed. But the comparison does raise some interesting questions. If the government starts seizing banks but is overwhelmed by the task or faces distressing unintended consequences, will the vocal proponents of temporary nationalization be allowed to get away with an "incompetence dodge" argument? Will Krugman receive a Cabinet-level position in a future Republican administration if his views are vindicated? Only time will tell.
-- Tim Fernholz
