In early 2008, economist Larry Summers argued in favor of a modest stimulus plan that ideally could be "timely, targeted and temporary." A few weeks after the presidential election, he was the Obama team's economic czar and called for a massive new stimulus plan that is "speedy, substantial and sustained." As the plan evolved in the back-and-forth between President Obama and the eager Congress, it became increasingly clear that the United States was assuming fiscal responsibilities of unprecedented size, for an unknown period of time, and with a newly unfettered government role in the economy.
Without some clearer limits on the extent and duration of the impact of the "sustained" stimulus, we could be seeing the birth of a new, mixed economy in which the United States government is a major shareholder and dominant member of its Board of Directors. And there are many reasons to doubt if such a new economy could compete as successfully in the global marketplace as the model which prevailed from about 1982 to 2007.
The first problem is simply the size of government that is being erected. Even without the Obama stimulus program, the Congressional Budget Office projects federal deficits of $1.2 trillion in 2009 and $700 billion in 2010. So with the stimulus added, we are facing deficits of around 10% of GDP, with scant hope for major reduction as new spending is locked in and entitlement spending continues its inexorable rise. Such huge deficits will not be financed indefinitely by foreign buyers, and Americans can only do so by massively cutting consumption, which would contribute to sluggish growth or worse, as far as the eye can see.
Anyone who believes that the massive new spending is temporary has not had the pleasure of observing the U.S. Congress in action. The Obama stimulus plan (as it was taking shape in late January) contains huge increases in spending for Medicare, education, energy subsidies and government employment, along with tax cuts for a broadly defined "middle class" and massive outlays for infrastructure. Experience shows that, once in place, such spending programs are hard to dislodge.
Federal support for distressed industries in the financial, housing and automotive sectors now includes a substantial ownership position for the taxpayers. Congressman Barney Frank (D-Mass.), Senator Chuck Schumer (D-N.Y.) and the Obama Administration have made it clear that they intend to take active roles in guiding the businesses where they -- in effect -- sit on the Board. This is especially the case for the financial sector, but also the automotive sector whose products will be expected to conform to the prevailing taste in Washington.
In January Summers further stated that: "Those receiving exceptional assistance will be subject to tough but sensible conditions that limit executive compensation... ban dividend payments beyond de minimus amounts, and put limits on stock buy-backs and the acquisition of already financially strong companies." Coupled with new labor legislation and environmental regulation proposed by President Obama, the role of government in business operations is likely to grow even further.
Because of the unprecedented economic stress we are witnessing, it is clear that we need a strong stimulus program to revive a deeply ailing economy. But it is not too early to begin the dialogue on an exit strategy from the intrusive new federal role in our economy. We will need to return to fiscal sanity and to private sector control of business strategy and operations if our firms are to maintain the flexibility and willingness to invest and innovate that made them so competitive in the last quarter century.
Dr. Duesterberg is president and CEO of the Manufacturers Alliance/MAPI, an executive education and business research organization in Arlington, Va.