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.