The Obama Presidency,Economic Team,Updated

November 28, 2008

a_wstimulusForget for now the way Inauguration Days have unfolded in the past. Jan. 20, 2009, could turn out to be a very different kind of swearing in.

Sometime around noon that day, Barack Obama will stand before millions of people on the west front of the Capitol, put his hand on the Bible and promise to “preserve, protect and defend the Constitution of the United States.” Then after delivering his Inaugural Address, the 44th President may step inside the Capitol and sign the lead elements of a two-year, $1 trillion economic-stimulus package, the largest ever fiscal booster shot in peacetime. Never mind all the familiar chatter about a new President’s first 100 days; Obama’s first 100 hours could break some records.

The Obama era, it is now clear, began on Election Day and will not wait. Like his presidential campaign, his transition is proving to be historic. Unwilling to bide his time until President Bush packs up his things and leaves town, Obama simply took control of economic policy on Nov. 23, when he unveiled an economic team noted for its brains and experience and asked it to come up with a massive economic-stimulus plan, in the hopes of rushing it through Congress and readying it for him to sign by the time he is sworn in. The next day, he launched a pre-emptive strike against the bloated federal budget, noting that some recipients of federal farm subsidies are millionaires who no longer need relief. Taken together, his bold moves heralded the fastest start by a President-elect in memory and one of the most dramatic takeovers ever. “I think it is very important for the American people to have clarity that we don’t intend to stumble into the next Administration,” Obama said Tuesday.

Obama no longer has the luxury of waiting. In the past two weeks alone, General Motors announced it has only three months of cash left before it will run out of money, and the Federal Government was forced to rush to halt a shareholder run on the giant banking conglomerate Citigroup. Unemployment has risen to 6.5% and is expected to hit 8% by next year, if not higher. Some economists predict that gross domestic product will shrink at a 5% annual pace in the fourth quarter and perhaps 3% or 4% in the first three months of next year as a result of a squelching of credit by banks and a crushing plunge in consumer spending. Those factors have convinced Obama that if he is going to have any sort of presidency worth its name, he must take decisive action now. “With our economy in distress,” Obama said, “we cannot hesitate, and we cannot delay.”

Even so, a recession is under way. The goal now, said economist and Obama aide Austan Goolsbee, is to prevent a depression. Obama also sees in the current mess a rare confluence of both crisis and opportunity that gives him the chance to remake the U.S. economy. After months in which members of his own party wondered how Obama could keep all his promises in a single term, he is now setting the stage to attempt far more in his first year in office than seemed likely just a month ago. “We’re coming in,” noted Goolsbee, “with a bang.”

THE JOB OF FINDING THE RIGHT combination of spark, fuse and black powder will fall to Lawrence Summers and Timothy Geithner, two friends Obama named to lead his economic team. Geithner, 47, will leave his job as chief of the New York Federal Reserve to become Treasury Secretary. His mentor Summers, 54, who was Treasury boss for a year and a half under Bill Clinton, will move into the West Wing in January to take over the National Economic Council (NEC), the clearinghouse for all economic policy inside the Administration.

The two men are an interesting protégé-and-mentor team: Summers is the deep, intellectual economist who can be brusque if not arrogant. Geithner is a smoother, harder-to-read operator who gets along well with everyone. Of the two, Summers is the one to watch. He is expected to do for the economy what strong-minded and ambitious National Security Advisers like Henry Kissinger have done for foreign policy: plan it, set it and control it.

Summers is a dyed-in-the-wool Democrat who believes in trying to keep the conflicting forces of the U.S. economy–free trade, worker protections, rising incomes and fair tax rates–in balance. And he believes in risking dramatic action in a crisis. “It’s a lot easier to correct the errors of overreaction than the errors of underreaction,” Summers said in a speech to a securities-industry group in October.

While Summers has worked for almost every Democratic President or nominee for the past 20 years, Geithner’s politics are more moderate. Once a registered Republican, he is now an independent, and his instincts are also more opaque. He tried and failed to arrange a private buyout for Lehman Brothers in September and led the $152.5 billion AIG bailout, which proved to be far more expensive than the current Treasury Secretary, Henry Paulson, had anticipated. But Geithner has withheld judgment in public on key issues, like an ambitious program to modify bad home loans that has run into opposition from White House conservatives. He owes his present job in part to his ability, while at Treasury in the Clinton Administration, to stand up to Summers, according to New York University president John Sexton, who led the committee that chose Geithner for the New York Fed. “Summers told us that Tim was one of the very few people who, when Larry got on a roll, would sometimes take him up short and say, ‘Stop. Rethink that position,'” says Sexton. “And do it in a way that caused even Larry to stop and think and even occasionally change his view.” And Geithner is no longer inclined to see himself as Summers’ aide. “Tim is not taking this job to be subordinate,” says a person familiar with the friendship.

Both men will arrive with baggage. Summers was under consideration for the Treasury job himself and may feel slighted by being passed over. He had a troubled tenure as president of Harvard, where his controversial comments about women’s aptitude for math and science were a reminder that he operates best when he is working behind the scenes. His job at NEC is designed to make him the captain of the team but avoid an unpleasant Senate confirmation hearing. Though smoother than Summers in style, Geithner will have to explain to the Senate Banking Committee just exactly what he was doing last year while all those Manhattan investment banks came unglued.

Plan of attack: Whatever its other challenges, the new economic team already has one huge advantage: economists from both right and left now agree that a massive stimulus measure is needed–and soon. The éminence grise of Republican economic advisers, Harvard’s Martin Feldstein, raised some eyebrows in October by saying the stimulus package might need to be as big as $300 billion. Already that seems timid. Jan Hatzius, chief economist for Goldman Sachs, is telling clients he expects Obama’s stimulus package to be $400 billion to $500 billion a year in order to compensate for a retrenchment in personal spending. Regardless of the final size, here are some of the likely elements of Obama’s plan.

Tax cuts: The middle class will get a tax cut quickly, say several Democrats familiar with the planning. There may also be a payroll tax break to speed some extra cash to all. Obama may even postpone his plans to roll back the Bush tax cuts for the wealthiest Americans and delay any tax hike on top-tier earners until 2011, when the cuts expire under current law.

Jobs: Obama has promised to create 2.5 million new jobs and plans to do so, at least in part, the old-fashioned way: by rebuilding sewer systems, bridges, schools and other ailing parts of the nation’s infrastructure. After the I-35W bridge in Minneapolis collapsed in 2007, killing 13, the National Transportation Safety Board identified some 740 bridges of similar age and design in the U.S. They’ll be targeted for repair. But Obama believes that the country could invest wisely in a new generation of green jobs as well, in fields such as alternative energy and advanced biofuels. He has long promised to make the economy more energy efficient, but his plans in this area have always been somewhat murky. What has become clear in recent weeks is that his plans for investing in energy will be merged with his need to stimulate the economy. This means upgrading the nationwide electrical grid to prevent power outages and shore up weak spots. Democratic officials say another key initiative will be a nationwide campaign to install so-called smart meters that monitor energy flows to limit waste. Some high-tech players in the field claim such devices could ease pressures on the grid and save consumers millions.

Health care: While Obama cannot insert a fully formed, carefully drafted plan for universal health coverage into a hurried-up economic-stimulus plan, transition aides say he will direct billions toward the health-care sector immediately. Some will go to a massive tech upgrade for an industry that in many ways is still paper-based. More urgent is the need to funnel cash directly from Washington to states so that local legislators don’t rush to cut spending on Medicaid as state tax receipts dry up in the recession. “Absent some relief there, you’ll get Medicaid budgets slashed,” says a senior Democratic aide familiar with the plans.

Depending on what Summers and Geithner propose, the size of the total package could easily top $500 billion in the first year, dwarfing the $150 billion stimulus Bush pushed through Congress in February. The inertia that typically keeps Congress from spending itself silly has gone on vacation: Republicans are in retreat, and even they agree that something dramatic is necessary. If anything, only the President-elect is talking about scrubbing the federal budget carefully for savings.

If the Obama presidency is not already in full swing, it will be before the year is out. Transition aides say a more detailed economic plan may come before Christmas; some elements could be drafted by the holidays and acted on by Congress in January. Other pieces, like health-care reform, can’t be rushed. But there is a real chance that at least some of the economic jolt that Obama wants will be ready for his signature the moment he takes the oath of office. That will make for an extraordinary Inauguration Day–and mark just the start of the new President’s efforts to meet the extraordinary challenges that await him.

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