Playing House in the White House

Let's Stimulate Private Risk Taking

Tax cuts are the way to nudge capital toward productive uses.

ALBERTO ALESINA and LUIGI ZINGALES

In virtually all economics classes, including those taught by the many excellent economists on the Obama team, the idea of government spending as an engine for growth is not a popular topic. Yet despite their skepticism of Keynesianism in the classroom, when it comes to public policy, these economists happily endorse a large stimulus package that could bring our deficit to 10% of GDP. Why?

One explanation is that these economists think this recession is an extraordinary one. In normal recessions -- the argument goes -- an increase in discretionary government spending is unnecessary and even counterproductive. But in the event that a recession becomes a depression, a Keynesian stimulus package might work.

There are certainly economic models that show how government spending can shift the economy from a bad equilibrium (where people do not search for jobs because they do not expect to find them, and firms do not invest because they do not expect to sell), to a good equilibrium (where people search for jobs, and firms invest and generate demand for their goods).

But this particular recession is unique not in its dimensions, but in its sources. First, it is the result of a financial crisis that severely affected stock-market valuations. The bad equilibrium did not originate in the labor market, but in the credit market, where investors are reluctant to lend to risky firms. This reluctance is making it difficult for these firms to refinance their debt, forcing them to default on their credit, further validating investors' fear. Thus, the problem is how to increase investors' willingness to take risk. It's unclear how the proposed stimulus package would help inspire investors to do so.

The second reason this recession is unusual is that it was caused in large part by a significant current-account imbalance due to the low savings rate of Americans (families and government). Even assuming that more public spending would increase private consumption -- a big if -- such a measure would cause even more imbalance.

So how do we stimulate the economy without increasing the already large current-account deficit? It's not easy, but here is an idea: Create the incentive for people to take more risk and move their savings from government bonds to risky assets. There is no better way to encourage this than a temporary elimination of the capital-gains tax for all the investments begun during 2009 and held for at least two years.

If we fear this is not enough, we can temporarily increase the size of the capital loss that is deductible against ordinary income. This will reduce the downside of new investments and increase the upside.

More savings need to be invested, and firms need an incentive to invest in order to help aggregate demand in the short term and promote long-term growth. The best way to do this is to make all capital expenditures and research and development investments done in 2009 fully tax deductible in the current fiscal year.

A large temporary tax incentive may be just enough to jolt investors from their current paralysis to take action. Such a switch will also be fueled by the temporary capital-gains tax cut mentioned above, which will motivate people to move their savings from money-market funds to stocks, increasing valuations, investments and confidence.

Many are concerned about what we can do to help the poor weather this crisis. Unlike during the Great Depression, we have an unemployment subsidy that protects the poor from the most severe consequences of this recession. If we want to further protect them, it is better to extend this unemployment subsidy than to invest in hasty public projects. Furthermore, tax cuts have a much better effect on job creation than highway rehabilitation.

No doubt, it is much easier to sell the public and Congress a plan for more public works than tax cuts, particularly while Main Street despises Wall Street -- with some good reason. But the role of a good economic team is to courageously propose the right economic policy, even when it is unpopular. The role of a president is to sell it politically, as real change we can believe in.

Mr. Alesina is a professor of economics at Harvard. Mr. Zingales is a professor of finance at the Chicago Booth School of Business.

Playing House in the White House

Playing House in the White House

JENNA BARBARA BUSH

Sasha and Malia, we were seven when our beloved grandfather was sworn in as the 41st President of the United States. We stood proudly on the platform, our tiny hands icicles, as we lived history. We listened intently to the words spoken on Inauguration Day service, duty, honor. But being seven, we didn't quite understand the gravity of the position our Grandfather was committing to. We watched as the bands marched by -- the red, white, and blue streamers welcoming us to a new role: the family members of a President.

We also first saw the White House through the innocent, optimistic eyes of children. We stood on the North Lawn gazing with wonder at her grand portico. The White House was alive with devoted and loving people, many of whom had worked in her halls for decades. Three of the White House ushers, Buddy, Ramsey, and "Smiley", greeted us when we stepped into her intimidating hallway. Their laughter and embraces made us feel welcome right away. Sasha and Malia, here is some advice to you from two sisters who have stood where you will stand and who have lived where you will live:

-- Surround yourself with loyal friends. They'll protect and calm you and join in on some of the fun, and appreciate the history.

-- If you're traveling with your parents over Halloween, don't let it stop you from doing what you would normally do. Dress up in some imaginative, elaborate costume (if you are like us a pack of Juicy Fruit and a Vampiress) and trick-or-treat down the plane aisle.

-- If you ever need a hug, go find Ramsey. If you want to talk football, look for Buddy. And, if you just need a smile, look for "Smiley."

-- And, a note on White House puppies--our sweet puppy Spot was nursed on the lawn of the White House. And then of course, there's Barney, who most recently bit a reporter. Cherish your animals because sometimes you'll need the quiet comfort that only animals can provide.

-- Slide down the banister of the solarium, go to T-ball games, have swimming parties, and play Sardines on the White House lawn. Have fun and enjoy your childhood in such a magical place to live and play.

-- When your dad throws out the first pitch for the Yankees, go to the game.

-- In fact, go to anything and everything you possibly can: the Kennedy Center for theater, State Dinners, Christmas parties (the White House staff party is our favorite!), museum openings, arrival ceremonies, and walks around the monuments. Just go. Four years goes by so fast, so absorb it all, enjoy it all!

For four years, we spent our childhood holidays and vacations in the historic house. We could almost feel the presence of all the great men and women who had lived here before us. When we played house, we sat behind the East sitting room's massive curtains as the light poured in illuminating her yellow walls. Our seven-year-old imaginations soared as we played in the enormous, beautiful rooms; our dreams, our games, as romantic as her surroundings. At night, the house sang us quiet songs through the chimneys as we fell asleep.

In late December, when snow blanketed the front lawn, all of our cousins overtook the White House. Thirteen children between the ages of two and 12 ran throughout her halls, energized by the crispness in the air and the spirit of the season. Every room smelled of pine; the entire house was adorned with thistle; garlands wound around every banister. We sat on her grand staircase and spied on the holiday dancing below. Hours were spent playing hide-and-go-seek. We used a stage in the grand ballroom to produce a play about Santa and his reindeer. We watched as the National Christmas Tree was lit and admired the chef as he put the final icing on the gingerbread house.

When it was time, we left the White House. We said our goodbyes to her and to Washington. We weren't sure if we would spend time among her historical walls again, or ever walk the National Mall, admiring the cherry blossoms that resembled puffs of cotton candy. But we did return. This time we were 18. The White House welcomed us back and there is no doubt that it is a magical place at any age.

As older girls, we were constantly inspired by the amazing people we met, politicians and great philosophers like Vaclav Havel. We dined with royalty, heads of states, authors, and activists. We even met the Queen of England and managed to see the Texas Longhorns after they won the National Championship. We traveled with our parents to foreign lands and were deeply moved by what we saw. Trips to Africa inspired and motivated us to begin working with HIV/AIDS and the rights of women and children all over the world.

Now, the White House ballrooms were filled with energy and music as we danced. The East sitting room became a peaceful place to read and study. We ran on the track in the front lawn, and squared off in sisterly bowling duels down in the basement alley.

This Christmas, with the enchanting smell of the holidays encompassing her halls, we will again be saying our good-byes to the White House. Sasha and Malia, it is your turn now to fill the White House with laughter.

And finally, although it's an honor and full of so many extraordinary opportunities, it isn't always easy being a member of the club you are about to join. Our dad, like yours, is a man of great integrity and love; a man who always put us first. We still see him now as we did when we were seven: as our loving daddy. Our Dad, who read to us nightly, taught us how to score tedious baseball games. He is our father, not the sketch in a paper or part of a skit on TV. Many people will think they know him, but they have no idea how he felt the day you were born, the pride he felt on your first day of school, or how much you both love being his daughters. So here is our most important piece of advice: remember who your dad really is.

Jenna Bush is a writer and educator, the author of the book 'Ana's Story' and the co-author, with her mother Laura Bush, of the picture book 'Read All About It.'

Barbara Bush works for a public health-focused non-profit, Global Health Corps, and previously worked for The Smithsonian's Cooper-Hewitt National Design Museum.

(clockwise from top left) Corbis Outline; Corbis (2)

Clockwise from top left, President George H.W. Bush reading to granddaughters Barbara and Jenna, 1989; the twins at an inaugural ball in 2001; with their father at an Ohio campaign stop, 2004.

Can Obama Make Government Solvent?

Can Obama Make Government Solvent?

Start by reforming Social Security and Medicare.

• By HOLMAN W. JENKINS, JR.

Barack Obama thus far has treated politics mainly as a business of mobilization, not persuasion. That will now have to change. He's had the audacity to inspire more hopes than he can deliver, especially with his new talk of entitlement reform. He might, if he were Pinochet, deliver a giant, non-porky stimulus package, financed by a trillion dollars in borrowing, followed by a monumental fix to Social Security and Medicare to steer the country back toward fiscal solvency.

Corbis

Pinochet, though, didn't have to deal with Congress.

Yet our new president's recent and welcome emphasis on "reform" should be more than an afterthought. His urgent goal is to re-energize the private sector, and that means restoring confidence -- when you boil it down, the aim of anything called "reform."

But this is not the 1930s. The banks have not vaporized. Then, arguably, we didn't have enough government, whereas today the situation is conspicuously different. Our long postwar prosperity has left an unsustainable accumulation of government-spawned Rube Goldbergism, Social Security and Medicare most of all.

But what kind of reform? Democrats seldom say exactly, hoping susceptible voters will assume their promised benefits will be funded unto eternity. And yet Mr. Obama's objectives are perfectly amenable to a genuinely reforming approach.

End the tax preference for employer-provided health care. Make it up to workers with an income or payroll tax cut. This one step would move the economy towards consuming health care efficiently and designing insurance policies that actually insure rather than channel the privileged class's health spending through a tax loophole.

The privileged class, exposed to meaningful price tags, would become a force for disciplining cost and quality rather than the opposite. Nothing else would so improve the country's long-term fiscal prospects or do more to lend practicality to Mr. Obama's goal of universal coverage.

Back in 1993, when minds were still fresh, economists left and right recognized that the enormous tax subsidy to third-party payership was the original sin of our health-care woes. The Senate Finance Committee devoted a full set of hearings to just this issue. But it was a fix that lacked the grandiosity of a flow chart showing how government would re-engineer health care from top to bottom. There's a lesson here: Real reform is often deceptively simple, leading naturally to changes in behavior that are more far-reaching than any detailed government prescription could hope to achieve.

Mr. Obama, in his campaign, already has adopted the Bush template for entitlement reform in all but name: Incentivize private savings funded by payroll tax givebacks. Leave it to future presidents to deliver the bad news (which workers already expect) that Social Security and Medicare will increasingly become means-tested supplements to private saving. In the meantime, collect the pro-growth free lunch that will come from replacing a disincentive to work (i.e., the payroll tax) with an incentive.

By the bye, those who think the recent halving of America's 401(k)s proves the unwisdom of such reforms should think again. Today's workers should be so lucky to get a realistic picture of what Social Security and Medicare might pay when they retire. In contrast, their mutual-fund statements are a model of transparent honesty about current expectations of future earnings of American business.

Mr. Obama has been handed an opportunity. He will put the welfare state on a path to solvency or he won't, and we're likely to find out soon. His stimulus spending plans will blow up in his face unless the bond markets (which will be called upon to finance them) are convinced the dollar will remain sound and spending under control.

Sadly, to those from whom much is expected, sometimes not enough is given. FDR can have been a great leader who sought the best for his country, and the '30s still have been a succession of political disasters. Both things can be true. Presidents ride the tiger. Without apparent cognitive dissonance, Mr. Obama already has taken to denouncing Washington's "anything goes" culture while simultaneously outlining plans to borrow perhaps $1 trillion to distribute to anybody and anything that happens to fit the wish list of some Democratic Party constituency group (and a few GOP ones too).

He certainly will meet with a gratifying success in the spending portion of his plan. The revelation will be whether he can deliver anything else.

Lincoln's Lessons for a New President

Lincoln's Lessons for a New President

Nothing comes easy in the White House.

JAY WINIK

Now that the grandeur of the inauguration is over, this morning is President Barack Obama's first in the Oval Office, and the hard work of governing finally begins. More than any president in memory, Mr. Obama has evoked Abraham Lincoln. He made his presidential announcement in Springfield, Ill., where Lincoln once served as a legislator. He copiously read Lincoln histories. He placed his hand yesterday on the Lincoln Bible. But what are the real lessons of Abraham Lincoln for his presidency?

Early on, Lincoln learned that tumult is inherent in governing. Mr. Obama has already declared that he doesn't want "drama" within his cabinet and staff, but Lincoln's experience suggests that he should expect precisely that. From the outset of his administration, Lincoln's secretary of state, William Seward, a former senator from New York, was assiduously scheming against his president. Where Lincoln saw civil war as inevitable, Seward was freelancing, calling for negotiations with the South and privately telling Confederates that their differences could be peacefully resolved.

Then there were Lincoln's problems with his generals. In 1862, despite Lincoln's pleading, Gen. George McClellan refused to attack the Confederates. When senators clamored for McClellan to be removed, Lincoln feebly replied, "Whom shall I put in command?" "Well anybody!" Sen. Benjamin Wade told Lincoln. "Well anybody will do for you," Lincoln said, "but not for me. I must have somebody!"

Only after much wasted time was McClellan finally dismissed. But from there, Lincoln had to contend with a procession of woefully unsatisfactory generals until he eventually found Ulysses S. Grant: He had to fire Ambrose Burnside, get rid of Joseph Hooker, and marginalize George Meade. Even at war's end, Lincoln was still struggling to forge consensus inside his administration. He outlined his vision for reincorporating the South into the Union, only to meet with fierce resistance from his own cabinet. In one revealing moment, the president sheepishly said, "You are all against me."

Another lesson from Lincoln is to blend clarity of purpose with steely pragmatism. It was Lincoln and Lincoln alone who had a mystical attachment to the Union, and he was willing to do almost anything to preserve it, even as the body count mounted and it became clear that the sacred struggle would be neither brief nor necessarily victorious. Checking out books from the Library of Congress, the president gave himself a crash course in military strategy, and day after day, year after year, dragged his tired body to the War Department to monitor the progress of Union armies in the field. He hectored his generals constantly to be on the offensive: "hold on with a bulldog grip and chew & choke," "stand firm," "hold . . . as with a chain of steel."

And despite his revulsion for slavery -- "if slavery is not wrong then nothing is wrong" -- he hesitated to do anything about emancipation lest he jeopardize a fragile Union coalition that included slave-owning states. He even flirted with fantastic schemes to resettle blacks in Liberia. But once an opportunity presented itself to strike a death-blow to slavery, he took it. After the stirring Union victory at Antietam on Sept. 17, 1862, Lincoln issued the Emancipation Proclamation. Though billed as a war measure based on "military necessity," in one masterful stroke Lincoln imbued the Northern war effort with a larger moral purpose, while becoming a personal emblem of freedom himself.

He was unfailingly pragmatic in his command of military strategy as well. Early in the war he made it a central tenet that the goal of Union generals should be the destruction of Confederate armies. But by 1864, when public support was waning, and it looked as though he might lose his bid for re-election, he allowed Gen. William Tecumseh Sherman to unleash total war on the South -- a form of war that Robert E. Lee had adamantly rejected when his armies moved north through Maryland and Pennsylvania. Sherman ravaged Atlanta beyond recognition, sending innocent civilians fleeing the city. He then laid waste to a vast corridor stretching some 400 miles, culminating in the burning of Columbia, S.C. Said one Southerner who witnessed this cloud of destruction and plunder, "We are going to be wiped off the face of the earth." Sherman was unrepentant, and so was Lincoln.

But Lincoln was never vengeful. Once the tide of the war finally changed, he made sure that the looting and burning ended, particularly when Union armies made their way into North Carolina and Virginia. As Lincoln fatefully told one general, "I would let 'em up easy."

Perhaps more than anything else, President Obama should learn from Lincoln the importance of perseverance. The fact is that as late as 1864 -- well after the battle of Gettysburg, which in hindsight is often seen as the great turning point of the war -- the Union was still suffering frightful losses. In six weeks alone during the Wilderness Campaign, Lee inflicted some 52,000 casualties upon Grant's men, nearly as many soldiers as America would lose in the entire Vietnam War. The single battle of Cold Harbor was an unmitigated bloodbath; 7,000 men slaughtered in under an hour, most of them in the first eight minutes, more than the Confederates lost during Gen. George Pickett's infamous Gettysburg charge.

A stunned Lincoln declared that the "heavens are hung in black," and most of the North agreed. By then, some 200,000 troops had deserted the federal Army, and everywhere Lincoln turned there were fervent antiwar rallies. The influential journalist Horace Greeley wrote that "our bleeding, bankrupt, almost dying country longs for peace." The Democratic Party, headed by former Gen. McClellan, ran on a peace plank.

How easy it would have been at this juncture for Lincoln to give in or compromise, and history might well have celebrated his refusal to subject the North to the continuing blood and wreckage. But a gloomy Lincoln resisted the calls for Grant's head. Instead, when Grant marched his army across the James River in pursuit of Lee, refusing to retreat as so many other Union generals had done, Lincoln, with tears in his eyes, telegraphed Grant: "I begin to see it: You will succeed. God bless you. A. Lincoln."

Related to perseverance is the importance of rhetoric -- the words that inspire and articulate national ideals and deeds -- but Mr. Obama shouldn't expect instant results. Lincoln's first inaugural was a masterpiece of conciliation, but it did little to soothe antagonistic passions in the South or keep the Confederacy from seceding. The importance of Lincoln's Gettysburg Address, another masterpiece, was almost wholly overlooked by much of the country. A mere 272 words, it was so short that only one fuzzy photograph of the occasion exists. And Lincoln's second inaugural, arguably the finest speech given in American history, was treated with contempt by most Southerners. In each case, only with the flow of time do we see how important these speeches are to the overall narrative of the American story. And only in retrospect did they more fully illuminate our path and stitch up our wounds.

Just as important as the elements of governing, Mr. Obama can also learn from Lincoln about the personal side of being president. If Lincoln was marked by one trait, it was humility -- and the fact that he was always himself. Resisting temptations to fit in with established Washington, Lincoln liked to say, "I presume you all know who I am, I am humble Abraham Lincoln." His self-derogation was real, and so was his simplicity: He referred to himself as "A," greeted visitors with "Howdy," and stuffed notes in his pockets and stuck bills in his drawers. Lincoln also knew the importance of diversions to help him weather the strains of war, frequently going to plays and comedies -- he often liked to say that he needed a "little laugh."

And finally, Lincoln knew that as president of the United States, he was the steward of the precious fabric of American democracy, and equally importantly that he was just one link, and a temporary one at that, in the chain of presidents elected to watch over it. As Carl Sandburg once remarked, there were 31 rooms in the White House, and Lincoln was not at home in any of them. He knew it was never really his house.

Mr. Obama, as improbable and eloquent a president as Lincoln, will almost surely come to feel the same.

Mr. Winik, a presidential historian, is the author, most recently, of "The Great Upheaval: America and the Birth of the Modern World" (Harper, 2007).