Change, meet crisis
Barack Obama was elected with a mandate for economic change on a scale that hasn’t been seen in decades.
So what does he do with it?
During two years of campaigning, Obama set forth detailed proposals for tax relief and enhanced government benefits for the middle class, the poor, college-bound students and the elderly.
He called for new government investments in infrastructure and “green” technologies, as well as a dramatic expansion of health insurance largely by making a Medicare-style program available to all.
He now faces a challenge familiar to every other newly elected political leader: how to transform ideas tailored to win votes into something suitable for the real world.
And he will almost certainly have to adapt some of his proposals to accommodate the current financial and economic crisis.
The urgency for action was underscored by another sharp drop in stocks Wednesday, with the Dow Jones industrial average plunging 486 points, or 5%. That brings its decline on the year to more than 31%.
“Obviously the agenda’s been taken over by economic conditions,” said James K. Galbraith, a professor of finance at the University of Texas and an economic advisor to the president-elect. “There’s no reason to think these are going away in six months.”
But insiders say Obama may have to mediate between opposing camps on his own economic team. Moderates are cautioning against stimulus efforts that might sharply increase the budget deficit, while others are urging the kinds of aggressive measures associated with President Franklin Roosevelt. During the depths of the Depression, FDR implemented a wide-ranging public works program, aid for farmers and homeowners, and social welfare programs such as Social Security.
The recessionary economy, and the expense of the government’s financial rescue program, will undoubtedly complicate Obama’s efforts to implement his economic plan. But some advisors say he won’t be inclined to abandon his key goals.
“It would be very difficult to come in and say, ‘That agenda I’ve been pursuing for a year and a half? Never mind it,’ ” Jared Bernstein of the liberal Economic Policy Institute said during an interview with The Times last week.
But Bernstein, a key Obama economic advisor, acknowledged that some economic issues may have to be addressed with greater urgency to provide a foundation for others.
“We can’t tackle healthcare until we get the economy working,” he said. “If the economy is weak, how can you make good on the promises you made?”
Other proposals, by contrast, may move to the front burner. Obama proposed a national infrastructure reinvestment bank to be funded with $60 billion in federal money over 10 years. But congressional leaders have said they may incorporate as much as $150 billion of infrastructure spending in an economic stimulus package that may be enacted before the end of this year.
Such a program is known to be favored by former Treasury Secretary Robert E. Rubin, perhaps Obama’s most influential economic advisor, on the grounds that it would have a more lasting effect than simply handing out rebate checks to taxpayers.
That’s especially so if the program is designed to make grants to state and local governments that already have bridge repairs, highway improvements and other local projects on the drawing board.
On the stump and in campaign material, Obama laid out an economic program focused on government investment and on strengthening the financial safety net for the poor and middle class.
In addition to the infrastructure bank, Obama proposed investing $150 billion over 10 years in alternative energy by doubling federal research and development funding and providing job training and tax credits for that field.
He also proposed to provide college tuition assistance in the form of a tax credit of up to $4,000 and an expansion of Pell Grants, which aid low-income students.
Obama made the elimination of President Bush’s tax cuts for upper-income taxpayers a centerpiece of his campaign, proposing to restore the top marginal tax rate to the Clinton-era 39.6% from the current 35%. The tax cuts are scheduled to expire in 2010, but Republican presidential candidate Sen. John McCain proposed making them permanent.
Obama has also proposed a tax credit of as much as $1,000 aimed at low- and middle-income households, eliminating income taxes for taxpayers older than 65 earning less than $50,000 a year, and raising the federal minimum wage to $9.50 an hour by 2011 and indexing it to inflation (it is currently scheduled to rise to $7.25 by 2009).
He also plans to strengthen protection for union organizing by fighting state right-to-work laws and employer efforts to classify permanent employees as “independent contractors.” The latter is often a device to avoid paying health and pension benefits.
The gathering economic storm prompted Obama to add several emergency measures to his platform. These included rebates of up to $1,000 per family, to be funded from a windfall profits tax on oil companies and pitched as a “down payment on the middle-class tax cut” he had already promised -- although oil company profits are likely to fall if world petroleum prices continue to decline.
He also proposed a $25-billion jobs fund for highway and other infrastructure projects and another $25 billion in revenue sharing to help state and local governments keep essential services afloat in a time of declining tax revenue.
The Illinois senator also began to temper his promise that every spending initiative would be revenue-neutral -- that is, paid for either by a reduction in spending elsewhere or through higher tax receipts.
“It’s clear that as events have become more dire, he’s become bolder,” said Robert Kuttner, founding co-editor of the American Prospect, a liberal journal, and a sometime advisor to the Obama campaign. “This is a race between how bold he’s willing to be and how fast the economy is cratering.”
The economic slowdown is likely to bring more pleas for emergency spending to the new president’s desk, even outside the stimulus package being crafted now on Capitol Hill. As car sales sink, the automobile industry might seek loans or loan guarantees beyond the $25-billion package approved by Congress last month.
With falling home prices and rising foreclosures at the epicenter of the economic crisis, mortgage holders and home builders are likely to be the focus of a broad range of initiatives. Obama earlier proposed a mortgage tax credit for homeowners who don’t already receive an income tax deduction because they don’t itemize, but more aggressive relief may be sought.
Some advisors argue that a potentially severe recession only underscores the need for a far-reaching stimulus plan focused on infrastructure more than on rebates to spark a short-term bump in consumer spending.
“We don’t need more consumption,” Joseph Stiglitz, an economics professor at Columbia University and an advisor to the campaign, said recently on financial news channel CNBC. “Infrastructure is where we’ve starved the economy. This is an opportunity at the national level to say, ‘Here are all the things we should have been doing and now have to do to get our economy to grow.”
The extent to which the Obama administration should push deficit spending is the subject of a debate bubbling within his economic team, according to people close to the group who requested anonymity. Although most appear to accept the Keynesian axiom that economic stimulus in a time of crisis requires deficit spending, the extent of the budget-busting is at issue. After all, more than $1 trillion in financial bailouts and economic stimulus already has been enacted this year and financed by government borrowing.
At the more cautious end of the spectrum, these people say, are former Treasury Secretaries Rubin and Lawrence H. Summers. The latter is thought to be a leading candidate to return to that post.
The campaign, however, seemed to be attempting to quash talk of a split on the economic team when Rubin and Bernstein, who eagerly backs a stimulus plan, published a joint op-ed piece Monday in the New York Times in which they took note of their policy differences.
Rubin acknowledged viewing long-term deficits “as a serious threat . . . to our economic future,” while Bernstein minimized the relationship Rubin cited between the deficit and higher interest rates.
They also acknowledged disagreement on trade policy, specifically on whether trade agreements should include provisions protecting foreign workers as a way to preserve U.S. workplace standards, which Bernstein supports.
But they expressed agreement on most fundamental issues, including the need for public investment in education, healthcare and job training, as well as restoring the income tax rates of the Clinton years.
Another contentious issue, the scale of new regulations on the financial markets, was treated gingerly. The aggressive oversight favored by Bernstein is opposed by Rubin, who made his career on Wall Street before joining government.
“Significant reforms are needed,” they agreed, but those should be balanced between consumer protection and mitigating systemic risk on one side, and “preserving the benefits of a market-based system on the other.”
Ralph Vartabedian contributed to this report.