Congressional Democrats have decided not to offer a major stimulus package during the lame duck session, instead waiting for the forthcoming Obama administration and larger majorities in both houses. They're concerned about obstruction from Senate Republicans and a presidential veto, but also about troubles in their own caucus around the idea of supporting another expensive economic measure, especially one linked to the somewhat controversial plan to bail out the auto industry, which, along with unemployment insurance extensions, now makes up the entire 'early' stimulus bill. This morning I spoke with Rob Shapiro, an economist and former Clinton administration treasury official, about the stimulus bill and the proposed bailout.
The idea that the Democrats and the administration are willing to put off serious stimulus until after the election is a very troubling mistake. ... Delaying the stimulus makes no economic sense. Why the Bush administration and the Republicans want to go out this year with a last measure that will damage the economy is beyond me. There's a big difference between getting it out in the middle of November and having to wait two and a half more months in an economy that's declining fast and is subject to additional shocks.
And on the Detroit bailout:
[T]he problems in the auto industry, the auto industry brought upon itself. The crisis in the auto industry is created by the financial crisis. If we let the auto industry go down, it will return the favor and make the financial crisis worse, and make the overall economic crisis worse. We have no more choice with the auto industry than with the financial institutions. That doesn't mean that you suspend thought about how to go about it … Detroit has a couple problems. One is, an absence of consumer demand. Well, there's an absence in consumer demand for everything. Consumer demand is falling at a faster rate than any time in 75 years. Jeff Sachs got half of it right. He said Detroit doesn't need a shake-up, it needs a technological breakthroughs. No, it needs both. The assistance should in part be tied to a greater commitment to move toward a super-high mileage car.
I consider this kind of a bridge loan, obviously tax payers should get equity, obviously they should get board seats. To help deal with the debt, we should do what we should have done with financial institutions which is to jawbone, get equity swaps between the auto companies and their lenders. They need to give up some of their equity to their lenders in turn for debt relief. And that will make them more attractive for outside investors, white knights, or grey knights.
You don't bail out the industry for the industry's sake. You bail out the industry for the country's sake. If this had happened three years ago, I would have opposed it. But you cannot ignore the conditions.
It's possible that public opinion could help sway Bush and Senate Republicans toward stimulus -- is it too early to try to engage the coalition of Obama supporters in contacting Congress and the president? Probably, especially given the one president at a time problem. But waiting on stimulus is a recipe for letting the recession lengthen.
--Tim Fernholz
