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The Government Needs to Do More to Stimulate the Economy

What Will Lew Do?

by DEAN BAKER

It has been more than five years since the onset of the financial crisis.

It will be at least several more years before the economy recovers fully. And the too-big-to-fail banks are bigger than ever. President Obama’s nominee for Treasury Secretary, Jack Lew, needs to address these two problems.

On the first, would he be open to increasing the deficit to stimulate the economy? If not, why not? What sort of person would he recommend to chair the Federal Reserve? Would he want a continuation or even expansion of Ben Bernanke’s policy of quantitative easing – having the Fed buy government securities to increase the monetary supply? Or would he prefer a retrenchment in monetary policy?

Does he favor trying to break up the huge banks, whose protection by the government gives them an implicit subsidy? If so, what measures would he propose? If not, how does he justify this taxpayer subsidy for many of the country’s richest people.

Also, the European Union is moving ahead with a financial transactions tax. Such a tax would make the financial sector more efficient by eliminating a huge amount of wasteful transactions. It could also raise a large amount of revenue. Congress’ Joint Tax Committee estimated that the Harkin-DeFazio bill’s modest transaction tax, with a 0.03 percent rate, could raise $40 billion a year. Other proposals could raise more. If Lew doesn’t support this efficiency enhancing tax, why not?

Finally, we just saw Standard & Poor’s sued by the government on accusations that it mis-rated securities in the run-up of the housing bubble. A provision of the Dodd-Frank bill would end the conflict of interest inherent when, as is now the case, bond issuers pay raters, by having the Securities and Exchange Commission select the rating agency. This provision sits in some bizarre regulatory limbo even after an SEC study determined that it is feasible. Will Lew push to have this provision put into law? If not, why not?

Dean Baker is the co-director of the Center for Economic and Policy Research (CEPR). He is the author of Plunder and Blunder: The Rise and Fall of the Bubble Economy and False Profits: Recoverying From the Bubble Economy.

This article originally appeared in Room for Debate.