From Bailouts to Fundamental Change

Good morning, everyone. I hope that your day goes well.

I'm reading a New York Times column on the financial crisis by David Leonhardt, who argues that while bailouts such as Treasury Secretary Henry Paulson is arranging may reduce the immediate damage, they also may prevent us from accomplishing the bigger changes that will help us move into the future. Using the Chrysler bailout of the late 70's as an example, he says that it kept the auto maker in business, but prevented them from breaking out of the gas-guzzling mold that hurt them so much in the next 25 years. So what is needed?

At its core, the current crisis stems from two problems. Regulators, starting with Alan Greenspan, assumed that a real estate bubble couldn’t happen and that Wall Street could largely police itself. And households, struggling with incomes that haven’t kept up with inflation in recent years, said yes when those lightly regulated banks offered them wishful-thinking loans. No bailout can solve either problem.

Now should come the harder part: a much more serious attack on our economic problems. Earlier this week, I called Mr. [Gary] Hart, who has written some thoughtful things about the economy lately, for his take on all this. “We’ve been consuming more than we’ve been producing. We’ve been spending more than we’ve been earning,” he told me. “It’s been a big holiday.”

His list of solutions is a pretty good one. The tax code, he said, should be changed to reward savings far more than consumption. The resulting savings would help families prepare for retirement — and also become a pool of money that companies could invest in productive ways. The federal government should lend a hand, by investing in areas like basic science and technology, which could, in turn, help create more good-paying jobs than the economy has been able to create recently. The government also needs to bring down Medicare costs, which is the key to solving its long-term budget deficit.