The Blog

Obama's Blank Check

Economic upheaval will give the next president free rein over his domestic agenda.

11:00 PM, Dec 18, 2008 • By IRWIN M. STELZER
Widget tooltip
Single Page Print Larger Text Smaller Text Alerts

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.