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Obama’s Full In-Tray

12:00 PM, Nov 10, 2012 • By IRWIN M. STELZER
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When all is said and done, any compromise will almost certainly raise effective income tax rates on higher earners, either from an increase in marginal rates, or a curtailment of deductions. Whatever else happens, the Obamacare tax of 3.8 percent on investment income will add a bit more gloom to high earners as they contemplate their prospects for the next four years, and decide just how much they want to invest in small businesses and in extra effort. Whether tax reform that eliminates special treatment of the income from dividends, capital gains and hedge fund operations can be negotiated is difficult to predict, since the parties that would be affected have already lined up lobbying teams to protect their benefits, and congressmen are already scrounging for campaign funds for their 2014 election campaigns.

The battle between Democrats and Republicans over how to cut the deficit, and at what pace—with some opposed to any cuts just yet—is not the only one that has been joined. There are other battles, these the president is almost certain to win. Having “transformed” the health care sector, the descriptive Obama prefers to “reformed” when he lays hands on some sector the American economy, the president is aiming to complete his transformation of the energy sector as part of his promise to turn his attention in this final term to the perceived problem of global warming. Permits to drill for oil and gas on federal lands will be harder to come by; subsidies for wind and solar will be easier to get, despite the record of bankruptcies of firms that have benefitted from the infusion of taxpayer funds; the Yucca Mountain nuclear waste disposal site will remain closed, adding to the difficulty of building new nukes; taxes on oil companies will go up; approval of the Keystone Pipeline to bring crude oil down from Canada, although still possible, is less likely; and new regulations to slow the pace of development of shale gas and oil are likely.

Also, the election of consumer advocate Elizabeth Warren to represent Massachusetts in the senate will help Obama to force a quickening of the pace at which regulations to implement the Dodd-Frank banking reform law will be churned out. We might see sooner rather than later just how the Volcker rule, separating investment banking and risky trading from plain vanilla consumer lending, will be implemented.

Finally, having sorted out fiscal policy, and put in place a regulatory regime, the president will have to begin considering two important appointments, in addition to finding a new director of the CIA. With four Supreme Court justices well into their 70s, and one of them crowding 80, Obama will have at least one and possibly two vacancies to fill. Although such appointees do not always vote as the president who appointed them had hoped, Obama’s picks are more rather than less likely to tip the court in a liberal  direction, supporting the constitutionality of government actions that a more conservative court might find transgresses constitutional limitations.

Then there is the Federal Reserve Board. Ben Bernanke, appointed by George W. Bush and reappointed by Obama, has let it be known that he will not seek reappointment when his term as chairman expires at the end of January 2014. If he sticks to his plan to return to Princeton, Obama will want to replace him with someone at least as inclined as Bernanke has been to print money in order to shore up the economy so that if fiscal policy is tightening in order to cut the deficit, monetary policy will remain loose. After all, Obama would like to leave office with unemployment lower than it was when he was sworn in in 2009.

The leading candidate is economist Janet Yellen, currently vice chair of the Fed board, and formerly president of the San Francisco Fed and chair of Clinton’s Council of Economic Advisers. Yellen favors an even more aggressive monetary policy than Bernanke, risking higher inflation if that is what is necessary to bring down unemployment. Also in the running is Roger Ferguson, Jr., Fed vice chairman from 1999 to 2006, and now CEO of the massive teachers’ retirement fund. Ferguson is a well-regarded economist who, if appointed, would be the first black Fed chairman. Larry Summers has been mentioned as a possibility, but the high IQ that qualifies him for the job must be balanced against the fact that he is not famous as a consensus builder.

President-elect Obama surely has a full in-tray. But given the alternative, he is not complaining.

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