Obama brings a taste of Chicago to Washington

Imagine you are the president of the United States, confronted with the worst economic and financial crisis since the Great Depression.

You inherited a $1.3 trillion fiscal deficit from the previous (Republican) administration. In just one month in office, you committed to spend another $1 trillion and made it clear that won't be the end of it.

You know your signature $787 billion fiscal stimulus plan will need to bear fruit in the next six to 12 months or the public will lose confidence and label you an idealist and big spender.

You know that Treasury yields will have to rise to attract foreign capital to finance the deficit, but you want to delay that inevitability.

What should you do?

1. Pay Americans $1,000 to buy $1,000 of Treasury securities. This would be in addition to the $1,000 "incentive" offered to formerly deadbeat homeowners for doing what they are contractually obligated to do (make timely payment of principal and interest) on their new, government-modified mortgages.

2. Supplement the "Making Work Pay" tax credit -- work already pays, which is why we do it -- with a "Making Sloth Cost More" tax increase in an effort to reduce the deficit.

3. Make an effort to fool enough of the people enough of the time until economic conditions improve. This can be achieved by a) traditional sleight-of-hand government accounting; or b) talking about fiscal responsibility.

The Answer Is...

The correct answer is 3b.

Barack Obama kicked off what's turning out to be a big week in the nation's capital -- every week is a big week now that the business of America, which used to be business, has become the government's business -- with a fiscal responsibility summit on Monday.

If it seems inconsistent to talk about fiscal responsibility when you're spending like a drunken sailor, consider that Obama hails from Chicago. He worked as a community organizer and, after earning a law degree from Harvard, returned to teach at the University of Chicago Law School.

Chicago is home to, among other things, rational expectations theory, the idea that outcomes depend to some extent on what people expect to happen. It would have been hard to spend that much time in Hyde Park without some of Chicago rubbing off on Obama.

What better way to manage expectations in the face of soaring government borrowing than to hold a fiscal responsibility summit!

I was ready to dismiss the summit as more theater than workshop until I spoke to David Walker, president and chief executive of the Peter G. Peterson Foundation, an organization committed to increasing the public's awareness about America's fiscal challenges. Walker attended the summit and participated in a break-out panel on Social Security, where there was a "substantive discussion" that "exceeded my expectations" for the 3 1/2 hours allotted, he said.

There was "bipartisan agreement about the measures for Social Security reform," including an increase in the retirement age and the wage-based tax cap, he said. "There's clearly a way forward if the president wants to do it."

Walker, who spent 10 years as comptroller of the Government Accountability Office, knows better than anyone that "the devil is in the details."

There weren't many of those in Obama's first address to both houses of Congress Tuesday night. The president clearly took the advice of the man from Hope and delivered a message of hope, acknowledging the current state of the union (lousy) while appealing to the innate strength and resourcefulness of the American people.

If we expect the future to be better, rational expectations dictate that it will be.

In terms of his agenda for a better future, Obama resorted to the age-old tactic of natural selection: Throw everything that needs fixing -- health care, Social Security, Medicare, regulation, education, the banks, the auto industry, the environment, the tax system -- against the wall and hope something sticks.

Obama's first budget, to be unveiled today, is expected to be short on details as well. It will be a blueprint, we're told, of his goal of cutting the deficit in half to $533 billion by the end of his first term, primarily through reduced defense spending for the wars in Iraq and Afghanistan and higher taxes on the wealthy.

It's admirable to see the president raise thorny issues like entitlement programs and health-care spending, which, if left unchecked, will bankrupt the country in the next half century. It's encouraging to hear him talk about cutting wasteful spending for things like Cold War weapons or agricultural price supports. And it's good to know he wants the government to be accountable for how and where taxpayer dollars are spent.

So what are we to make of news that the state of Washington mailed $1 checks to 250,000 food stamp recipients? It sounds as if some government bureaucrat was doing his job without questioning the efficiency of paying for postage, even at discounted bulk-mail rates, to deliver a $1 benefit.

This is the same government that aims to restructure a big chunk of the U.S. economy. Obama needs to make sure this type of behavior doesn't get embedded in the public's expectations.