I have spent the last few weeks talking to economists who are plugged into the policy establishments in both parties, to politicians, and to policy-makers in the think tank community. There is broad agreement on several important points.
The new administration is benefiting from President Bush’s decision to make the transition to an Obama administration seamless. Having suffered from the nasty, sullen treatment he and his team received from the outgoing Clintonites–they ripped the “W” off their computer keyboards–Bush is determined to have his outgoing team put the national interest above any personal pique. Bush is deferring to the president-elect in important matters, most notably the question of a bailout of the auto industry, which he is supporting because he doesn’t want Obama to face an immediate bankruptcy of GM and Chrysler, in addition to the other domestic and foreign crises that he will confront. Were he not concerned to make the new president’s life easier, Bush might well have joined Senate Republicans who want to let the bankruptcy courts rewrite the auto makers’ labor and dealership contracts.
Bush knows that Obama is inheriting a very difficult economic situation indeed. So does the president-elect. Economists with whom I have spoken–and these are the people listened to at the highest levels in both parties and at Ben Bernanke’s Federal Reserve Board–believe that the unemployment rate, now at 6.7 percent, will hit double digits sometime in 2009, and stay there well into 2010. They expect house prices to drop another 15 percent and share prices at least another 10 percent before finding a bottom. Worse still, they are predicting an extraordinarily sluggish recovery. Since unemployment is what economists call a lagging indicator–job creation doesn’t start until a recovery is well under way–the unemployment rate might remain high well into 2011.
This prospect isn’t depressing the Obama team, which freely admits to seeing the crisis as an opportunity to push through a reformist domestic agenda as comprehensive and radical as anything wrought by Franklin Roosevelt. As Charles Krauthammer pointed out in his Washington Post column, Obama has constructed an administration that will leave him free to concentrate on reconstructing the domestic economy.
Hillary Clinton at State and General Jim Jones (National Security Adviser) should be able to handle foreign policy, which will have the modest objective of preventing conflagrations. Forget about spreading democracy. The economist-superstars–Tim Geithner (Treasury), Larry Summers (Director of the National Economic Council, located in the White House), Paul Volcker (chairman of the Economic Recovery Advisory Board), and a bevy of distinguished academics–will manage the macro-economy, initially along with Fed chairman Ben Bernanke. Bernanke receives high marks for his ingenuity in crafting programs to contain the recession, including last week’s decision to lower short-term interest rates to zero, and to become the nation’s capital-supplier, buying up mortgage-backed and other securities. Nevertheless, when his term as chairman expires early in 2010 he will be replaced by Summers. As one wag puts it, by then everyone who has dealt with Summers at the White House will be glad to see him go, and no politician brought up in the Chicago Democratic regime, as was Obama, can leave a plum job in the hands of a non-crony.
That leaves Obama free to pursue his agenda. Bush’s obliteration of the line between the public and private sectors; the crisis atmosphere; the acceptance of multi-hundred-billion dollar programs as being, well, normal; the relative strength of the dollar in the face of budget deficits that will hit 10 percent of GDP; the demands of the profligate states for cash; the belief that government spending creates jobs–all of these things combine with Obama’s favorable approval ratings to give the president-elect a blank check.
Obama sees himself as a transformational figure. The government already has effective control of the banking and mortgage markets. Obama has appointed Tom Daschle to organize a step-by-step takeover of the health-care sector. Carol Browner, perhaps the greenest of America’s politician/regulators, is charged with transforming the energy sector by substituting wind, sun and batteries for coal-fired electricity generation and gasoline-powered vehicles, at whatever the cost. New York City housing commissioner Shaun Donovan’s claim to his new post as head of HUD is his record of attempting to increase the role of government in the housing sector. There will be more, but you get the idea: Obama will expand the federal government’s reach every bit as much as did during Franklin Roosevelt during his New Deal.
Obama will also expand and rebuild the nation’s infrastructure–and the term “infrastructure” is being very broadly construed. He plans to pour hundreds of billions–more likely, at least a trillion–into new roads, bridges, schools, and into repairing existing facilities; investments in human capital–read teachers’ salaries–will also come under the infrastructure umbrella. The incoming president has been told and professes to believe that the states have numerous projects “shovel-ready”, and has the enthusiastic support of his trade union allies, who know that when the federal government funds a project, union wage levels are protected, and most of the jobs go to members of the construction and other unions.
Finally, Obama intends to revise the free trade system that has more or less prevailed since the end of World War II. No, he will not repeal the North American Free Trade Agreement. But his new U.S. trade representative will be directed to renegotiate NAFTA to force Mexico and Canada to adopt American labor and environmental standards. And Obama will certainly not put pressure on a protectionist-minded Democratic Congress to approve any new trade-opening agreements. Free trade proponents will have reason to be pleased if they can hold on to most of their past gains.
Obama can count not only on the sense of crisis, and the eagerness of the public for economic stability, to get his program through. He will have a Congress that is, if anything, to his left. It is difficult to imagine an Obama tax or regulatory program that the House will not approve. The Senate might place a bit of a constraint on Obama–the Republicans were able to torpedo the plan agreed to by Bush and the Democrats to bail out the auto industry when the union refused to make any concessions. But with a few “moderate” Republicans likely to line up with the Democrats on key votes, Obama will pretty much have his way in the Senate as well as the House.
One aspect of the Obama program that I have been told has been put in the “hold” file is his plan to raise taxes on families earning more than $250,000 per year. Rather than face charges that he has defiled the memory of John Maynard Keynes by increasing taxes during a recession, Obama has decided to allow the Bush tax cuts to expire at the end of 2010, at which time the rate on long-term capital gains will go from 15 percent to 20 percent, the rate on dividends from 15 percent to 38.6 percent, and the top marginal income tax rate from 35 percent to 38.6 percent. But there will be immediate handouts to 150 million Americans–$1,000 for working families, tax relief for lower-earning retirees and mortgage-interest and tuition credits for lower-income families. Given the widespread belief that the “middle class” has not shared in the benefits of economic growth, the disrepute into which highly paid corporate executives have fallen, and with the electorate inured to numbers in the billions and deficits running at 10 percent of GDP, there will be little political resistance to whatever Obama proposes to alleviate what he sees as the plight of the middle class.
Which inevitably brings us to Bobbie Burns, and his famous observation, “The best-laid plans o’ mice an’ men gang oft a-gley, an’ lea’e us nought but grief an’ pain for promised joy.” Presidents elected to concentrate on the economy often end up diverted by the need to fight a war or cope with foreign attacks–Woodrow Wilson and World War I; Franklin Roosevelt and World War II; Lyndon Johnson and Vietnam; Jimmy Carter and Iranian hostage-taking; George W. Bush and 9/11 and Afghanistan and Iraq. Wilson and Roosevelt ended up physically broken men; Johnson could not face the electorate; Carter did and was tossed out; and Bush leaves office with a popularity rating so low that only Congress and O.J. Simpson rank lower. Obama has plenty of room for maneuver, but there are always Harold Macmillan’s much-feared “events” lurking. High on the list are a possible failure of his stimulus package, Iranian’s use of its nuclear capability to destabilize the Middle East, another attack on the United States, and inability to fulfill his promise to pacify Afghanistan.
But enough worries: Only a Grinch would steal from Barack Obama the joy he must feel in this run-up to his inauguration, and the self-satisfaction the nation feels in having elected a black president. All of the people with whom I have spoken, many of whom voted against him, sincerely wish Obama well. Like George Bush, they know it is in the national interest that their new president succeed.
Irwin M. Stelzer is a contributing editor to THE WEEKLY STANDARD, director of economic policy studies at the Hudson Institute, and a columnist for the Sunday Times (London).
