The View From Here . . .

By Bob Morgan, Jr.

While America has made its choice of a new leader, President-elect Barack Obama will not take office until January 20. Nevertheless, there are numerous economic challenges in the immediate future.

It was debatable whether the United States was in a recession earlier in the year, or just in a period of slow growth, but there is no doubt now. Once Lehman Brothers collapsed in mid-September, the stock market dropped precipitously, there were major dislocations in financial markets, including a severe credit crisis, significant waves of layoffs and sharp drops in retail sales at many key chains. National home prices are down 9 percent year over year. The only relatively good news has been a significant decline in the price of oil and gasoline, but this decline has not been enough to prevent an economic contraction.

With the recession has come increasing demands for bailouts. Congress already approved a $700 billion bailout of the financial industry before the election. Rather strangely, the focus of the rescue effort has been changed precipitously by the Treasury Department in the last few days from purchase of distressed assets to the purchase of interests in financial institutions. A more understandable move was to reserve about $300 billion of the bailout money for use by the incoming Obama administration.

Not to be outdone by the financial industry, numerous other interests have attempted to be the recipients of bailout packages of their own. As described by Investor's Business Daily , numerous state and local governments, already saddled with huge public sector pension debt, have "caught bailout fever," arguing that the markets for government debt have dried up.

And, of course, Detroit's Big Three, facing a severe cash drain and sharply declining sales, are also seeking assistance. Congress has already appropriated $25 billion for a plan to develop fuel efficient vehicles but the automakers are attempting to win approval of an additional $25 billion. The Bush administration is opposing the additional outlay and some Congressional Republicans believe that a reorganization in bankruptcy would be a better solution to the industry's woes, since it will allow changes in labor contracts, which have saddled the manufacturers with huge wage, retirement and health benefit costs.

As a general rule, bailouts should be a last resort at best. Generally, capitalism works best when the market, rather than government intervention, is the cure for excesses. In the case of the local governments, they should be looking more carefully at cutting expenses and labor costs before approaching the Treasury. As for the automobile industry, the company and the United Auto Workers should step up with a plan to reduce labor and retiree expenses and executive compensation before asking for a rescue. Even then, it is not clear that a merger of the Big Three with lower cost foreign manufacturers might not be the best solution.

In the short term, President-elect Obama would do well to calm financial markets, which have declined steadily since his election, by announcing that he will not be increasing capital gains or marginal tax rates until the end of the recession, and in any event no earlier than 2010. When Mr. Obama takes office, there may well be room for traditional recession-fighting measures like accelerated public works projects and extension of unemployment benefits. But right now, further bailouts do not seem like the appropriate solution.