Obama’s Economic Agenda

Sen. Barack Obama (D-Ill.) (Campaign Photo)

Whether Americans choose Sen. Barack Obama or Sen. John McCain as the next president, the first term’s economic agenda is already largely determined. Whoever takes office five months from now will inherit a deep-frozen economy, comatose housing markets, rising unemployment, gasping banks, falling tax receipts and soaring debt. Today’s article will look at the economy through the lens of a President Obama, and next week’s will take a look from the perch of a President McCain.

Should it be Obama who sits down at the at the president’s desk in the Oval Office on Jan. 21, 2009, he will bring a substantial list of economic priorities – tax reform to ratchet back the yawning income gap between the richest Americans and everyone else; jobs-creating public infrastructure programs; a national health-care bill, and a new regulatory regime for the runaway financial services sector, among others.

Illustration by: Matt Mahurin

The mantra of “Obamanomics’ is that it blends Clintonian market-friendly attitudes with the Democratic tradition of using government to offset the winner-take-all tendencies of raw markets

A President Obama would enjoy an unusual luxury for a new leader, but also face a dangerous trap. The luxury is that the current economic crisis is clearly stamped with a Republican label and strongly tied to President George W. Bush.

The “Bush prosperity” has been exposed as a fake, built on heavy borrowing against bubble-priced assets. Republicans cheered as Wall Street buried the country under mountains of unpayable debt and extracted hundreds of billions in bonuses in the process. Characteristically, the administration’s reaction to the crisis has been to throw public money at Wall Street – some $2 trillion so far and still counting.

The trap is that if Obama hasn’t fixed the crisis by 2011, when his second-term campaign should begin kicking off, this will be labeled the “Obama recession.” When the crisis first surfaced last summer, the mantra among professional economists was that it was just a short-lived market correction. But that is rapidly giving way to the far grimmer view that it will stretch into 2010, and possibly beyond

Some recent history is on point. In 1980, Ronald Reagan endorsed Fed Chairman Paul Volcker’s grim crackdown on price inflation at the Federal Reserve. By 1982, after Volcker had plunged the country into one of the steepest recessions of modern times, Reagan was widely regarded as a failed president.

But when the economy decisively righted itself in 1983-84, it became clear that the crackdown had restored U.S. competitiveness and set the stage for a long period of solid growth. Reagan not only won his second term by a landslide, but “Reaganomics,” or the religion of free markets and minimum government, became the ruling paradigm for a generation.

A President Obama has a similar opportunity. His most critical economic decision will be whether to stay on the Bush-Henry Paulson-Ben Bernanke road, or to address the credit crisis head-on. Should the Democrats gain firm congressional majorities in November, Obama could use his regulatory powers to force writedowns of all bad assets in one brutal swoop — purging the infection. Some big institutions could go under, and the government will have to step in with new capital — which should be in the form of stock, so the public also gets the upside

Democrats can cushion the blow on working folks by enriching unemployment benefits and extending Medicaid to poorer working families. Yet a real cleanup will be neither pretty nor easy — and everybody will get hurt.

Congressional Democrats, meanwhile, have instinctively climbed on the Bush administration’s bandwagon of covering up bad credits with taxpayer money. That path, however, risks keeping the economic needle stuck on “empty” for years. This would kill Obama’s reform hopes in any case. But if the strong medicine works the way it did in the 1980s, Obama can ride the “Obama economy” to an even broader triumph in 2012.

What about the rest of the Obama program? Once again, there is an important lesson from Reagan: keep it simple. Cleaning up the banking sector will be an all-consuming process. Possibly the only other priority that demands the same level of attention is health care.

National health care has eluded the Democrats for 75 years. A President Obama, with solid congressional majorities, looks to have a rare chance to pass a reasonable bill. But this opportunity could fade away with the 2010 mid-term elections. So it’s crucial to pass a decent bill, to at least establish the principle of a national system that’s neither means-tested nor limited to sub-groups, like the elderly.

It won’t be perfect. But once it’s in place, it can be expanded and improved at leisure. In any case, getting such a huge undertaking right is sure to take a decade or more.

The other big priorities -– public works, tax reform, regulatory overhaul – are important. A President Obama will inevitably make important proposals in each area. But he shouldn’t spend his strength — and his chips with Congress — to push them through in his first two years. None is as important as fixing the credit mess and getting decent national health legislation on the books. (The tax code gets a major overhaul every three-five years in any case.)

Political time-tables are cruelly short. The mid-term election campaigns will start in the fall of 2009, and the next presidential campaign in mid-2011 — just three years from now

But the longer-wave American political cycles tend to run for 25-30 years. Reagan kicked off a new cycle in 1980. The year 2008 could mark a tidal shift in another direction – that was the implicit premise of the Obama campaign. There is indeed high ground for the taking, but he will have to be fast and focused to seize it.

Charles R. Morris, a lawyer and former banker, is the author of “The Trillion Dollar Meltdown: Easy Money, High Rollers and the Great Credit Crash.” His other books include “The Tycoons: How Andrew Carnegie, John D. Rockefeller, Jay Gould and J.P. Morgan Invented the American Supereconomy” and “Money, Greed, and Risk: Why Financial Crises and Crashes Happen.”