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Sensible meets radical

Obama's team of centrist economists is asked to shift its thinking -- and fast.

November 25, 2008|Peter G. Gosselin | Gosselin is a writer in our Washington bureau.

WASHINGTON — 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.

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