Sensible meets radical

The economic team that President-elect Barack Obama unveiled Monday, led by Lawrence Summers, Timothy F. Geithner and Christina D. Romer, comprises widely respected, centrist economists who until recently advocated cautious, sensible-shoe policies to do such things as boost savings, reduce deficits and allow markets maximum feasible rein.

But the assignment that Obama has given them is anything but cautious and sensible-shoe.

It is to make Washington the consumer of last resort in an economy in which consumption is plunging. It is to devise industrial-policy-like programs to salvage a collapsing auto industry and turn green an energy industry almost wholly focused on fossil fuels. It is to dip more deeply into the lives of ordinary Americans -- especially those with housing troubles -- than the government has done in generations.

But so much has gone so wrong during the last 15 months that what would have been beyond the political pale as recently as a few years ago is quickly becoming the consensus.

“These are not moderate, centrist times, so economists who in normal times are moderate and centrist aren’t going to act that way now,” said J. Bradford DeLong, a UC Berkeley economic historian and prolific economic blogger. “The wild-eyed radicals are looking pretty sensible.”

Summers will be Obama’s chief economic advisor, Romer will chair the White House Council of Economic Advisors and Geithner is Obama’s nominee for Treasury secretary.

Their underlying task is to reconcile the nation’s historic commitment to free markets with an ever-deepening government intervention in the financial system, in individual companies and in people’s lives.

“Larry and the rest have to re-strike the balance that FDR sought in the New Deal of harnessing the market’s potential while at the same time damping its destructive social impulses,” said Robert Z. Lawrence, a prominent Harvard economist.

That means the new administration must navigate uncharted and uncomfortable terrain. It must thread its way, for example, between calls for an expensive healthcare overhaul and pressure to boost the economy with more deficit spending. It must deal with union demands to rewrite labor laws while trying to coax businesses into expanding. And it must satisfy environmentalists who want “green” policies even at the cost of economic growth.

Summers, Geithner and Romer must do all of this, and they must do it much more quickly than almost anyone had imagined only a few months ago.

In announcing his economic picks, Obama, who had intended to lie low during the final months of the Bush administration, acknowledged that the flood of bad news had forced him to show his economic hand much earlier and more forcefully than he had intended.

No sooner had the president-elect thanked the three for accepting their new positions than he informed them that their work “starts today.”

“Right now,” Obama said, “our economy is trapped in a vicious cycle: The turmoil on Wall Street means a new round of belt-tightening for families and businesses on Main Street.

“And as folks produce less and consume less, that just deepens the problems in our financial markets. These extraordinary stresses,” he said, “require extraordinary policy responses.”

The idea of a big new fiscal stimulus -- gargantuan by historical standards -- is the first and least controversial step the new administration may take.

With President Bush’s $168-billion stimulus of earlier this year having worn off and the financial crisis having stalled both U.S. and world growth, there is essentially no other actor but Washington that can get the economy going again, many experts and lawmakers believe.

As a result, calls for an extra $500 billion to $1 trillion in government spending over the next few years are coming from across the political spectrum.

“I’m a fiscal conservative who dislikes increased government spending and increased deficits,” Harvard economist and former Reagan chief economic advisor Martin Feldstein said in an e-mail. “But this is a time when we need both, and they need to be really big.”

Economists of diverse political opinion also believe that bailouts of once-highflying financial firms must continue and that a much more aggressive rescue program must be mounted for millions of troubled homeowners. This is despite the fact that such efforts help many financiers dodge the consequences of their own bad decisions.

Letting companies collapse and homeowners go bust would cause too much damage to the economy, even if some of those saved are undeserving, economists agree.

It is the challenges beyond enacting a huge new stimulus package and continued bailouts that are really complicated, both for the country and for Obama’s new team.

For example, what to do about the collapsing U.S. auto industry. Politicians have been hard-pressed to agree on almost anything, and matters are unlikely to get any easier in the coming months.

The scope of the challenge facing policymakers was reflected in the weekend decision to shore up banking giant Citigroup Inc., which came days after Congress deadlocked over whether to bail out Detroit.

The Detroit decision is not final: Congressional leaders have promised to return to Washington and consider the issue again if General Motors Corp., Ford Motor Co. and Chrysler submit detailed plans for making the companies viable in the long term.

But huge as the consequences of a Big Three collapse would be, in the current environment of triage, Citigroup’s massive size and global reach meant its collapse posed a much greater risk.

“It’s a multitrillion-dollar exposure we’re talking about which just dwarfs the entire auto industry,” said David Stowell, a finance professor at Northwestern University’s Kellogg School of Management. “With limited resources to bail out industries, you have to focus on the financial industry.”

Citigroup now has received $45 billion in direct federal investment -- almost twice the $25 billion sought by Detroit. The government has also committed to cover 90% of the losses on most of the company’s $306-billion portfolio of debt-laden mortgages and related securities.

Beyond autos lie such policy questions as how Washington can reduce the nation’s energy use, recast its healthcare system and restore a kind of economic security and prosperity that Americans had come to take largely for granted.

As recently as the 1990s, none of Obama’s new economic picks had much to say about energy and healthcare. As for security and prosperity, Summers and, to some extent, Romer recommended what then seemed a prudent blend of low taxes, balanced budgets, free trade and financial deregulation.

Now the times have drastically changed.

“Prudence is now the most imprudent thing,” said UC Berkeley economic historian DeLong.

But prudence at warp speed, Obama suggested Monday:

“With our economy in distress, we cannot hesitate and we cannot delay,” he said as he introduced his team. “Our families can’t afford to keep on waiting and hoping for a solution.”

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peter.gosselin@latimes.com

Jim Puzzanghera in our Washington bureau contributed to this report.