New President, New Crisis

Article excerpt

WHETHER THE NEXT PRESIDENT IS NAMED CLINTON, Obama, or McCain, the new chief executive will face an economic challenge unlike any since 1933. The new president will need to reject an entire failed paradigm of how the economy works and of government's role in it.

Since last summer, our private credit system has been unmasked as a series of interconnected Ponzi schemes. The reigning theory was that if government stepped aside, financial innovations would produce reliable, self-regulating prosperity. Instead, we got toxic financial bubbles, whose popping is now infecting our entire economy as credit contracts, while an administration still devoted to free markets watches helplessly.

Many senior people inside banking, business, and government regulatory agencies are more alarmed than they will say publicly. However, no official of the Bush administration will acknowledge how serious this financial crisis really is. Nor do most Democrats want to sound like Chicken Little--for the financial economy is a confidence game and nobody wants to be the Cassandra who triggers the crash. So for now, policy elites are publicly treating all this as just a modest bump in the road.

WHAT WOULD CLINTON OR OBAMA DO? Paul Krugman has relentlessly criticized Obama as too conservative. Seconding Krugman from the opposite quarter, Columbia University professor Jagdish Bhagwati, dean of academic free-market scolds, recently wrote in the Financial Times that Clinton has dangerous protectionist leanings, while Obama is the better free trader. Bhagwati lauded Obama's chief economic adviser, Austan Goolsbee, as "a valuable source of free-trade advice over almost a decade." But "Mrs. Clinton's campaign boasts of no professional economist of high repute. Instead, her trade advisers are reputed to be largely from the pro-union, anti-globalization Economic Policy Institute and the AFL-CIO union federation."

This surely came as news to EPI and the AFL-CIO, which have gotten courtesy meetings and modest policy gestures but nothing more. And it doubtless brought smiles to the faces of Gene Sperling, Robert Rubin, and Roger Altman, the actual Clinton economic team. None is an academic, but two are leading Wall Street grandees.

What a choice! With one candidate, we get advisers who arrive at conventional economic wisdom via failed academic models. …