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Economists offer up advice to Obama


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Solow, Mankiw see promising future, short-term problems

Two renowned economists agreed Thursday that America is facing several major challenges with economic implications -- including health care costs, climate change and the credit crunch -- but differed on how President-elect Barack Obama should handle those crises efficiently.

MIT Institute Professor emeritus Robert Solow and Harvard economist N. Gregory Mankiw spoke in front of a packed Wang Auditorium on the topic of “Economic policies for the next U.S. president,” a forum co-sponsored by the Department of Economics and the Undergraduate Economics Association.

Solow expressed excitement for the new administration (“I voted for Obama and I didn’t hesitate for a second”) while also noting the troubles that may lie ahead (“I don’t expect miracles of economic policy from the Obama administration”). But, he noted, policymaking is about more than one person.

“The two-party system goes against economic miracles,” Solow said.

Despite a freezing of “plain-vanilla lending” -- commercial and generally safe lending -- there is no reason to be completely doom-and-gloom, he said. “The productive capacity of the economy is still there.”

“The first order of business ought to be to do something about fending off the recession,” he said. “Anything that is done along that line will have to be done through fiscal policy.”

Solow also credited the steps already made by Federal Reserve Chairman Ben Bernanke PhD ’79, comparing him to Captain Kirk from Star Trek. “He has loaned where no man has loaned before.”

Mankiw said he had “a lot of respect for what is going on in the Obama administration,” especially since the president-elect has surrounded himself with several advisors who have “Cambridge connections” -- either with MIT or Harvard.

But he also said “the long-term budget looks pretty dire,” and that seeing Obama put together a long-term budget “is going to be very interesting.”

Mankiw agreed with some policies that Obama has expressed support for in the past, including fully auctioned cap-and-trade carbon programs. He was “most skeptical,” however, on certain international trade proposals, including one to renegotiate the North American Free Trade Agreement (NAFTA) and on limiting the import of sugar-based ethanol from Brazil.

“My view is that all those views are wrong, and my thought is that the economists advising him think they are wrong. The question is, in what direction will he head?” Mankiw said.

The U.S. also needs to move away from an economy where many top earners come from the financial sector, as it is leading to more inequality, Mankiw said.

“A lot of these high incomes come in the financial services industry, and I think that needs to stop,” he said. “Economic growth that is primarily finance based is unsatisfactory.”

While taking steps in the short-term may pay off now, Solow said it would be unwise to think that results would be immediate.

“Whatever happens now, the federal deficit is going to be close to a trillion dollars.”

A brief question and answer session following the forum brought forth the question of General Motors and whether the government should bail it out as it did for Wall Street’s financial firms.

“When do you stop? Once you get through the auto industry there will be other industries [asking for money] as well,” Solow said, pointing out a bigger problem that is “not about GM, but about fixing a nonsensical system that fixes health care to employment.”

Mankiw suggested offering money, but only if there was private investment to back it up.

“There’s no point putting public money into a company that no private investor deems viable,” he said.



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