Obama Back to the Drawing Board on Stimulus

The Post reports that the Obama team is changing course on its stimulus plan in response to criticism from Capitol Hill.

Confronted with intense skepticism on Capitol Hill over the $700 billion financial rescue program, Treasury Secretary nominee Timothy F. Geithner and President-elect Barack Obama’s economic team are urgently overhauling the embattled initiative and broadening its scope well beyond Wall Street, sources familiar with the discussions said.

Geithner has been working night and day on the eighth floor of the transition team office in downtown Washington with Lawrence H. Summers and other senior economic advisers to hash out a new approach that would expand the program’s aid to municipalities, small businesses, homeowners and other consumers. With lawmakers stewing over how Bush administration officials spent the first $350 billion, Geithner has little chance of winning congressional approval for the second half without retooling the program, the sources added…

Obama’s top officials have begun discussions with key lawmakers on the TARP changes, but no decision has been made on when they will ask Congress for the balance of the rescue funds. It is possible that the request could occur before Obama’s inauguration. In which case, Paulson, not Geithner, would ask for the money. Paulson in an interview this week said he would fully cooperate with Obama’s team.

In building a case for the additional $350 billion, however, Geithner must also allay concerns about his past responses to the financial crisis. Geithner, as president of the Federal Reserve Bank of New York, was a leading architect of the bailouts of Bear Stearns, American International Group and Citigroup.

Some lawmakers plan to press him during his confirmation hearing to justify his role at those critical moments of the crisis and on what he plans to do to improve the financial system bailout. Others added that Geithner will have to explain how he would track how recipients of TARP money are spending taxpayer dollars.

This is bad news for the nascent Obama administration. While there were clearly flaws in Obama’s stimulus plan — fatal flaws — it will not be improved by taking advice from Capitol Hill. If the ‘stimulus package’ is going to have any effect to get the economy moving again, it has to focus on pro-growth tax cuts — not on pork-barrel projects and aid to municipalities. Even rate reductions and rebates for taxpayers are unlikely to stimulate the economy, both because consumers generally save one-time rebates anyway, and they are clearly more disposed to save (as opposed to consume) than at any time in recent memory.

Further, the American people ought to worry about an incoming president who’s vigorously re-working the central initiative of his presidency even before he’s sworn in. Yesterday Barack Obama told us it was essential to pass his plan immediately in order to avoid a new Great Depression. Today he’s ditching that plan in favor of a new one. Everyone who feels confident in Obama’s fiscal stewardship, take a big step forward.

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