How President Obama Will Deal With the Economy in 2009

U.S. News & World Report
By James Pethokoukis

As America's 44th president, Barack Obama will have one of the most challenging "to do" lists of any new Oval Office occupant in at least a generation. But before Obama can begin implementing the key aspects of his campaign's domestic agenda—increasing healthcare insurance coverage, improving education, dealing with climate change—he must try to kick-start a struggling economy that's sinking into terrible recession.

And he must do it as quickly as possible, given the worsening job market. Some sort of fiscal stimulus package might get passed when Congress returns from its autumn recess. But that will probably be merely an appetizer before the huge Democratic majorities in Congress send up a full-course meal of government aid to the new president soon after Obama takes the oath of office on Jan. 20, 2009. "Although our recommendation is a $300 to $500 billion package, our current expectation is only about $200 billion," explains economist Jan Hatzius of Goldman Sachs in a recent analysis. Such a package would most likely include infrastructure spending, financial aid to state and local governments struggling with lower property tax revenue, and tax rebates to middle- and lower-income individuals. Would President Obama sign such a pricey bill, with Uncle Sam already facing a budget deficit of $1 trillion or more next year because of the $700 billion bank bailout? You bet. A rotting economy can be poison to any new administration, sapping it of public support.

But stimulus is only the first of many economic issues on Obama's presidential priority list. Others include:

Helping homeowners. Wall Street got its megabailout, but what about Main Street? Many economists say that the plunging housing market and the deluge of foreclosures remain at the core of America's economic troubles and the credit crisis. During the campaign, Obama favored a 10 percent universal mortgage credit, but Daniel Clifton, an analyst with the Strategas Group, expects Obama to consider a range of options to bolster falling prices, such as an expanded home purchase tax credit, a moratorium on foreclosures, and "and potentially a large scale refinancing housing proposal." Among the various refinancing possibilities using Fannie Mae and Freddie Mac to refinance the mortgages of all the "underwater" homeowners whose homes are now worth less than their mortgages. That could cost $50 billion or more. Others have suggested refinancing everyone into mortgages with a low, low rate. That could have a $300 billion tab. Expect Obama do something, though. Word has it that his advisers have been reading up on the New Deal. One of FDR's first moves during the Great Depression was helping homeowners avert foreclosure.

Cutting some taxes, raising others. Back in 1992, candidate Bill Clinton promised a big middle-class tax cut, but President Clinton never delivered. He instead focused on cutting the deficit. Don't expect such a switcheroo this time around. One of Obama's key criticisms of the Bush administration was that the middle class has seen a decline in its standard of living. With incomes flat or falling, the Democratic nominee explained, Americans were forced this decade to run up big credit card bills and borrow against their homes. Of course, who gets a tax cut—actually a refundable tax credit—is in dispute, with several different income ceilings being mentioned during the closing days of the campaign. One group that won't get a cut is households making $250,000 or more. Obama has promised to roll back the 2001 and 2003 investment- and income-tax cuts for those folks. Keep in mind, though, that a weak economy could provide reason to leave upper income-tax rates where they are until the Bush tax cuts expire at the end of 2010.

Creating jobs. With the unemployment rate currently at 6.1 percent and predicted to rise to 7 percent or higher, Obama will also move fast to implement his energy and infrastructure spending program, which is supposed create 5 million green jobs and ensure stronger economic growth into the future. He wants, for example, to invest $150 billion over 10 years to advance clean energy technology, as well as $10 billion per year for five years in a government-run, energy-themed venture capital fund. Then there is a $60 billion effort to shore up America's crumbling roads, bridges, and electricity grid. Obama advisers promise that despite the big budget shortfall, the jobs program will stay intact.

Fixing healthcare. Like the previous Democratic president, Obama has made healthcare reform a key part of his agenda. Though it may be one of the most complicated and politically dicey issues he has to tackle, look for Congress to quickly give him the opportunity to sign a renewal of an expanded version of the popular children's health insurance program. That would a first big step toward the full-scale revamp of the health insurance system that he has promised.

Picking an economic team. Who is going to help President Obama turn the economy around? Among his possible picks for Treasury secretary are former Clinton Treasury Secretary Lawrence Summers, former Federal Reserve Chairman Paul Volcker, New York Federal Reserve Bank President Timothy Geithner, and JPMorgan Chase CEO Jamie Dimon. Also expect his current top adviser on money matters, Jason Furman, to lead the White House economic team.