The first glimpse of Obamanomics
As the President-elect's new team gets to grips with the financial crisis, US economic policy looks set to be guided by pragmatism rather than political philosophy
Tuesday 25 November 2008
For now, the people and the policy – for later, the philosophy. Later, if at all. When the President-elect, Barack Obama, unveiled his economic team yesterday, including the return of the former Treasury Secretary Larry Summers to the heart of government, he did not set a toe outside the current economic consensus.
Yes, there will be a substantial government spending programme designed to stimulate the economy, with public works projects at its heart. Yes, there will be tax cuts for working families, another way to help pull the economy out of its funk, but other tax policy will be decided on the hoof. Yes, there will be more effective regulation of finance under a new Treasury Secretary. No, not for now will anyone be focusing on the budget deficit and the national debt, even though we can see it mounting out of the corner of our eye.
Obamanomics will be forged, not in the first crisis-busting phase of the new president's administration, but later. And even then, a glance at the people with whom Mr Obama is surrounding himself, and a listen to the chatter of the economists he favours, suggests that his economic philosophy is one of pragmatism rather than ideology.
"It's not going to be left, it's not going to be right, it is going to be pragmatic," says Ken Goldstein, economist at the Conference Board in New York. "As soon as they take office, they will move very quickly to use policy levers to try to limit the rise in unemployment, and that might make policy look more to the left than to the right, but that is incidental. If a policy doesn't work, you can expect them to drop it. I think the team will be a lot like George Steinbrenner – the New York Yankees owner who changed managers every six months. They will be accused of flip-flopping, but they won't be the least bit worried about that."
The markets, terrified of a power vacuum during the long transition between administrations, are already looking to Mr Obama to act as a president, and were duly disappointed that he had no firm number to announce for the size of the stimulus package he has promised to sign within days of taking office. What we got instead was a glimpse into the workings of this team – something that may prove instructive. Instead, its size was expressed in terms of jobs. It will create or save 2.5 million jobs, Mr Obama said, and the details of the plan will be worked backwards from that number.
There is an irony in all this non-ideological policymaking. The characters with whom the President-elect has peopled his team are all, to varying degrees, associated with a very explicit economic philosophy from the Democratic party's recent past, namely the philosophy that came to be known as Rubinomics.
That is named after Robert Rubin, President Bill Clinton's second Treasury Secretary, and forged in that administration's ideological battles. Mr Rubin worsted opponents who believed in more activist government and higher federal spending, pushing Mr Clinton towards deregulation, a balanced budget and free trade, and – it has to be said – ushering in a prolonged period of strong economic growth.
Mr Rubin himself has been an adviser to the Obama camp, and floats above it as a kind of unofficial guru of Democratic economics, and two of his protégés were named to powerful pos-itions yesterday. Mr Summers was Mr Rubin's deputy and successor at the Treasury, and both men championed the career of Timothy Geithner, who rose to become an under-secretary in charge of the response to the Asian financial crisis of the late Nineties, long before ending up in his current role as president of the New York Federal Reserve.
Mr Summers will run the National Economic Council, a Clinton-era body inside the White House designed to co-ordinate policy across various government departments. Although it has fallen into disrepair under George Bush, the council looks set to be the main policy powerhouse under President Obama, and it was symbolic that, when the new commander-in-chief unveiled his team for the cameras yesterday, it was Mr Summers who was in shot over his left shoulder. Mr Geithner is being described by Obama insiders as an operations man, more likely to be implementing policy than forging it, in the pragmatic spirit he has shown in his current role at the heart of the federal bailouts on Wall Street.
For all their continued closeness to their mentor, both Mr Summers and Mr Geithner have taken positions that deviate from Rubinomics – perhaps inevitably as the credit crisis has shredded not just economic prosperity but also many of the economic assumptions that underpinned an earlier era. Mr Summers has been an early and ardent advocate for a big government spending stimulus, to make up for the effect on the economy of the shrinking banking sector. Mr Geithner signalled plenty of warnings about the effects of unfettered derivatives trading, and toiled – vainly – to impose regulation on a market whose implosion is at the root of the current crisis.
Mr Rubin, too, is helping to forge a new pragmatic consensus, at least for the first phase of the Obama administration. Jointly writing a "bury-the-hatchet" column in The New York Times this month, Mr Rubin and the old tax-and-spender Jared Bernstein said: "The Bible got this right a long time ago. Paraphrasing slightly, there's a time to spend, a time to save; a time to build deficits up and a time to tear them down. Though one of us (Mr Rubin) is often invoked as an advocate of fiscal discipline, we both agree that there are times for fiscal discipline and times for fiscal largesse. With the current financial crisis, our joint view is that for the short term, our economy needs a large fiscal stimulus that generates substantial economic demand."
Of course, here also are the seeds of the interesting philosophical debates to come. With the US national debt now over $10 trillion and sure to be expanded by another trillion or more, there will be a time, when the current crisis is past, when reckoning will have to be made. That is when discussion will turn on how quickly to rebuild the public finances, and when the cost of establishing universal healthcare, for example, will have to be weighed against tax cuts, or against paying off debt.
This is when Obamanomics will emerge. Yesterday, the incoming president characterised it pretty honestly. When the economy is stable, he said, there will have to be a debate about reforming the budget process in Washington (for which, read spending) and establishing a "sustainable fiscal situation for the long-term".
That is when the new team's Rubin-sponsored backgrounds may come to the fore. It is also when Mr Obama will finally have to decide whether to implement campaign spending promises, cut back the free trade deals he attacked in front of union audiences.
As the Conference Board's Mr Goldstein puts it, "From day one, they will be accused of making short-run gains at a long-term cost. Once we are through the immediate crisis, we don't know how they will approach these issues – and I don't think they do either."
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