Friday marks 200 days in office for President Obama.   “How has he done?” asks Fortune.

The first thing to say is that Barack Obama took over the presidency at an extremely difficult time. A variety of analogies suggest themselves: He is Harry Houdini who has been thrown in the river, in a straitjacket, with chains wrapped around him. Or he has taken over as the captain of a ship with a rotting hull, while the ship is under attack in a hurricane. To capture the state of the economy, perhaps the best metaphor is that Obama took over as pilot of an airplane in the middle of a steep dive. For a president precedent, he is Lincoln, who takes office as the South secedes. Or he is Roosevelt, who takes office at the depth of the Great Depression.

In any case, in light of the difficult circumstances, I think Obama has done amazingly well.

The financial markets were in free-fall six months ago. Bank spreads were at historic highs (a good indicator of just how outside-the-box this financial crisis was). GDP contracted at an annual rate of about 6 % in the last quarter of 2008 and the first quarter of this year.

Since then, the airplane has begun to level off. Those bank spreads are down to more normal levels. GDP declined at an annual rate of “only” 1% according to last Friday’s advance estimate; if I had to guess, we will see a bottom in the second half of the year and could see some positive growth. I give a lot of credit to the fiscal stimulus, to the monetary stimulus, and to the financial repair measures, as messy as those inevitably were.

At the time our new president took office in January, there was a danger that this could be not only the worst of the post-war recessions, but as bad as Japan in the 1990s. I think we have now avoided that. We have learned from mistakes in the past, particularly the mistakes of the Depression – those made by the Federal Reserve, Hoover, and also Roosevelt. Obama has the advantage of the lessons of the 1930s to learn from.   But he has the disadvantage of having inherited an exploding path of debt (unnecessarily incurred by this predecessor).    The debt is the rotting hull of the ship of state.

Regarding February’s stimulus package, some commentators said it was too small, some said it was too large.  In truth, it was both.   It was too small by itself to return us to full employment, to knock out the recession.   In order to bring us back to full employment, we would  need a boost to spending several times as big.  And yet, at the same time, it was too large to guarantee that we avoid losing the confidence of our international creditors.   If they stop buying our bonds, US long-term interest rates could rise sharply.   (China — the largest holder of US Treasuiy securities — has already begun to ask questions about the value of US debt.)     But the Administration struck an appropriate balance between these two competing concerns. 

People are angry about the big bonuses that are still being paid to those in the financial sector who got us into this problem. Entirely understandable. But don’t forget that, from the beginning, the goal was to prevent a depression in the general economy. That has been accomplished. You don’t punish someone who has been smoking in bed by allowing the resultant fire to burn down the block. The Administration and the Fed always admitted freely that helping some undeserving financiers would be an undesirable but necessary side effect of the rescue plan. And do you remember all the pundits who warned that the rescue could not work unless the banks were temporarily nationalized? Or all the cynics who dismissed claims that the Treasury would recoup a share of the budget costs as firms like Goldman Sachs repaid their loans with interest?

In my view, overall, Obama has gotten far more things right than wrong. He has bravely proposed things that most sensible economists — whether Republican or Democrat — have long favored. Proposing is not always the same as enacting; there is the matter of Congress. But he has tried to get them passed, and has tried to do it in a bipartisan way.  (That bipartisanship constraint is one of the Houdini chains.)

Washington has always been stymied by the political constraints of what can pass Congress.  Often presidents figure that special interest groups will block sensible reforms, so why waste political capital trying? But an example, which I find extremely encouraging, including symbolically, is that (with the help of Defense Secretary Robert Gates), Obama proposed to end spending on the F22 fighter. The F22 is probably the most egregious example in the defense budget of spending on hugely expensive weapons systems that the Pentagon doesn’t want because they are not useful for today’s national security needs. To my surprise, Obama actually prevailed  on this.

I can also name two areas where he proposed very sensible legislation that a heavy majority of economists of both parties would support, and yet where he has lost in Congress (at least so far). One is cutting agricultural subsidies to agribusiness and rich farmers. Another is auctioning off most of the greenhouse gas emission permits in any plan like the Waxman-Markey Bill, rather than giving them away to industry.  (Obama’s proposal was to use the proceeds of the auctions to reduce the marginal tax rate on low-income workers, to “Make Work Pay,” which would have been an excellent use of the funds.)

But the fact that he is trying, and that he is winning some of the battles, is important.  He is willing to fight the fight, while yet compromising when politically necessary. It is tremendously important that the public take notice of these details. There are always particular interest groups that stand to lose from any given reform such as farm supports,  military procurement or emission permit auctions; if the general public pays no attention to the details and does not support the President on them, it means special interests will triumph over the general good as so often in the past.

If I had to find one mistake that the White House has made, the initial economic forecasts were too optimistic, at least with respect to the unemployment rate. It was an honest mistake, but a mistake nonetheless… not just with respect to the economics: politically, Obama would have been better to recognize the severity of the recession from day one.

Regarding the health plan, we as yet have no idea what the outcome will be. The big questions, of course, are how to reduce costs and how to pay for getting everybody insured. Instead of proposing an income surcharge on the wealthy, I would have preferred eliminating non-taxability of employer-provided health benefits— that’s what McCain was for in the campaign, and most economists as well. The non-taxability could have been retained for workers in lower income brackets if the White House felt this was essential.  At the least, Senator Kerry’s astute version, which is aimed at curbing the effective taxpayer subsidy in the cases of the most egregiously expensive health care insurers, should be politically saleable.   You can call Obama’s failure, so far, to move in this direction a second mistake. But, since Fortune asked my opinion of how much the President has done right versus wrong, I put the score at 98 to 2. 

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The current visit of Secretary Tim Geithner to Beijing once again shines the spotlight on the Renminbi (RMB) and on demands by US politicians that the People’s Bank of China (the country’s central bank) abandon the peg to the dollar.  

Throughout the period 2003-2008, I, as some others, have thought that demands from American politicians of both parties that China loosen the dollar link have been misguided in a number of particulars.    They were misguided in thinking that an appreciation of the RMB would, alone, do much to boost US output or employment.  The demands were especially misguided in putting such high priority on the entire exchange rate issue, given that we need China’s help on more important things, such as preventing a nuclear-armed North Korea.   But my arguments during this period might reasonably have been viewed by non-wonks as quibbles.   After all, I did agree, along with a majority of other economists, that an increase in the flexibility of China’s exchange rate would be a good thing.

Now, in 2009, the situation has changed in some important ways.   Continued demands from American congressmen that China should stop intervening in foreign exchange market to keep the RMB fixed against the dollar have become especially foolish.  This is because of two developments over the last year.   

The first development: in mid-2008, the top leaders in China decided to abandon the policy they had followed in 2007 – which had consisted of the long-desired evolution away from  the dollar peg and the placing of a substantial weight on the euro.  They changed horses in mid-stream:    After mid-2008 they returned to their old policy  of a fairly close peg to the dollar (similar to 2005-06).   Evidently the motivation for the return to the dollar was complaints from Chinese exporters who had lost competitiveness in 2007 as the euro and therefore the new basket appreciated against the dollar.  (Barry Naughton, 2008, gives a glimpse inside politburo politics.)  

Why, then, are American congressmen wrong to complain that the return of the dollar link has given American firms an additional price disadvantage in world markets?   The first reason on the list is that over the last year, the euro (surprisingly) depreciated against the dollar.  In other words, at precisely the moment when the RMB jumped back on the dollar horse, the dollar horse and the euro horse changed directions vis-à-vis each other.  If the Chinese authorities had kept the (loose) basket policy of 2007 instead of switching back to the dollar peg in 2008, the value of the RMB would be lower today, not higher, and dollar-based producers would be at a more of a competitive disadvantage, not less.

The second development is that, in early 2009, the stratospheric rate of rise of China’s foreign exchange reserves fell abruptly.  In some months, the PBoC actually lost reserves.   This means that an increase in exchange rate flexibility – in the extreme case, a move to floating – under current conditions might not result in an appreciation of the RMB, and might even result in a depreciation.  Again, that does not correspond to what the congressmen actually want, nor to the public opinion that they represent.

In the near future, we could see a return of substantial surpluses on China’s overall balance of payments and a return of the 38-year trend dollar depreciation.   In that case, intervention would once again imply suppressing RMB appreciation against the dollar.  But that leads us to the third point.

The third development, this spring, is the appearance in the dollar’s garden of the first “red shoots.”   Red as in deficits and red as in China.   For decades, the United States has been able to count on foreigner investors, and in a pinch foreign central banks more specifically, to buy dollars to finance US current account deficits.   In recent years, the PBoC has been the lead facilitator, piling up $2 trillion in reserves, most of it in dollars (the estimate is 70%).  Many argued that the United States could continue to enjoy this “exorbitant privilege” indefinitely.   But during the past two months we have seen the first signals that this might not continue forever.   The possibility that rating agencies might eventually downgrade US debt is in the air, and US longer-term interest rates have finally begun to rise. 

The most telling warning shots have come from Chinese officials.   Premier Wen in April expressed worry that US Treasury securities would lose value in the future;  that required an unprecedented public assurance from President Obama.   Then PBoC Governor Zhou in May proposed replacing the dollar as an international currency, with the SDR.   Another official told Americans that his countrymen “hate” having to hold a currency that they believe will lose value in the future as it has in the past.  Interpreted separately and literally, each of these statements raises interesting economic questions worthy of extended discussion.  Taken together, they constitute a simple wake-up call for oblivious Americans.   The message is that we are heavily and increasingly dependent on China to buy our treasury securities, at a time when big budget deficits lie in America’s recent past (the big debt that Obama inherited from George W. Bush), in America’s present (the record budget deficits caused by the current recession), and in America’s future (rising medical costs and the retirement of the baby boomers), .   If they and other Asian and commodity-exporting countries stop buying our treasuries, the result would almost certainly be a hard landing for the dollar.  I define a dollar hard landing as the combination of a big fall in its value together with a big increase in US interest rates.  The outcome might be stagflation.

As a general proposition, it is somewhat obtuse to make strident demands on one’s biggest creditor without taking any consideration of the change in the power relationship that debtor status entails.   It is astoundingly obtuse to make the demand that the Chinese stop buying dollars, at the same time as we depend on them continuing to buy dollars to finance our deficits.    But demanding that they stop buying dollars is precisely what we have been doing for six years, every time we respond to trade concerns by demanding that they stop intervening to prevent the RMB from rising.

Fortunately, Secretary Geithner’s April decision not to declare China guilty of unfair currency manipulation, in Treasury’s semi-annual report, suggests that he understands the subtleties of the situation.   Now if those congressmen would just learn some economics…

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Secretary Tim Geithner announced today the long-awaited details on the financial repair plan that he promised on February 10.   Some reactions have been negative, both from the left and the right.  Paul Krugman, for example, argues that the plan does not go far enough in forcing banks to recognize the fallen value of their assets.  

But the stock market was “dazzled“ by Geithner’s explanation of the PPIP proposal, with prices up strongly.    The  plan has no shortage of defenders.  Brad DeLong makes some good points, and responds to Krugman.   The Geithner Plan is an improvement over the Paulson plan in that when ”toxic assets,” now called “legacy assets,” are bought from the banks, their prices are set by private bidding (from hedge funds and private equity companies), rather than by an overworked Treasury official pulling a number out of the air and risking that the taxpayer grossly overpays for the assets.   On similar grounds, Nouriel Roubini has surprised the cynics by giving (qualified) support for the plan, and points out that its design appears to follow a recent proposal by my Harvard colleage Lucien Bebchuk.  

Joe Stiglitz, who attacks the Administration’s proposal, offhandedly mentions “It has allowed the administration to avoid going back to Congress” to ask for more money “and it provided a way to avoid nationalization,” as if these were not key advantages for those who have to work in the real political world.  It is true that we might end up with some form of temporary bank nationalization before we are done.  And it is also true that the lesson from Roosevelt’s strategy in 1933, from the slower response to the Saving and Loan problems in the late 1980s, and from Japan’s much more delayed response to its banking disaster of the 1990s, is that biting the bullet early saves even greater expense later.  But as Alan Blinder says, it matters which bullet you bite.  He points out some neglected counter-arguments to the nationalization strategy that is newly beloved of academic critics.  It would be hard to enforce a clear drawing of the line as to which banks would be taken over.   Furthermore — even with the necessary wiping out of bank shareholders — (i) the word “nationalization” would likely violate a political constraint, while (ii) making good on the banks’ outstanding obligations would likely violate the government’s budget constraint.

My feeling is: the Geithner plan deserves to be given a chance.  I discussed it on NPR’s On Point this morning.   Some of the callers evinced the anger that the American public understandably feels against the financial sector and the understandable pain of the recession.   I made an analogy with 9/11/01, when understandable anger and pain led the American public to support presidential policies that made things worse rather then better — the invasion of an irrelevant country, plus big tax cuts for the rich — consequences that we are still living with today.   In the current crisis,it is important that the anger be channeled in directions that will make things better rather than worse.

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          Now I am a believer.    

Few readers of my blog will be surprised to hear that I voted for Barack Obama in the election.   But I was always skeptical that he would be able to achieve fully his promises to bring candor, responsibility, and bipartisanship to Washington.    Experience had convinced me it wasn’t practical.   OK, I am still dubious whether it is possible to achieve bipartisanship – even for Obama.    The evidence was his failure a week ago to get a single Republican vote for his fiscal stimulus in the House (and only three votes in the Senate) despite his substantial election mandate, 63% approval rating, the severity of the current recession, and the concessions he made to the other side.    

When it comes to honesty and responsibility, however, what Obama did at his Fiscal Responsibility Summit today was breathtaking.    (more…)

          We often hear the question “isn’t this economic crisis becoming as bad as the Great Depression?” Economists can offer a variety of reassurances, but each of them is quite circumscribed:
(more…)

           Congress has finally agreed on a $790 billion stimulus package.   Is it too small, as many Democrats claim (such as Paul Krugman), or too big, as many Republicans claim (such as the minority party leadership in Congress)?     The answer is yes.     It is too big and too small.

(more…)

Some observations on the plan announced by Treasury Secretary Tim Geithner yesterday:

Clearly we need to hear more details.   I  sympathize with Geithner, who has only been in office a couple of weeks.    He has had to take over in the middle of the worst financial crisis in 77 years, at the same time that he must personally fill out the reams of forms that it takes to get confirmed by the Senate (like all such new appointees)  and to fill lots of positions throughout the upper levels of the Treasury.    But the American public will demand further elaboration  on his plan soon.

For now, one must guess what is going to be the precise shape of the new Private Public Investment Fund (PPIF).    (more…)

It is unfortunate that much of the congressional debate regarding the stimulus package is phrased in terms of a summary statistic: what fraction of the stimulus is to be increased spending and what fraction is to be tax cuts. It currently looks to be about 70-30, but the Republicans say they want more in tax cuts and the Democratic holdouts say they want more in spending.

To judge the merits, one has to go into greater detail. (more…)

Politicians are often tempted to think that a policy to help one goal, say air quality, must also help lots of other goals, say economic growth.  Economists are more likely to presume tradeoffs, and to use the principle of targets and instruments.  That principle says that you cannot expect to hit more than one bird with one stone, except by coincidence.

At the American Economic Association meetings in San Francisco, January 3, I was on a panel titled “Energy and the Environment: Policy Advice for the New Administration” (along with some real energy experts; I am a relative latecomer to the area).  Within the framework of targets and instruments, I proposed a matrix such as the one that appears below. (more…)

Over the last 24 hours, President-Elect Obama has announced five top members of his new economic team.   What do they have in common?   

• Retreads from the Clinton Administration?    Rubin protégés?   No, not all.                    

• Scholars from leading universities?     No, not all.                    

• Friends of mine?    Well, yes, though that is not my point.    As it happens, they have been friends, for 12-to-30 years.    (god forgive me.   There are few greater turnoffs than a columnist who thinks it’s “all about me.”    On the other hand, this isn’t a newspaper column.   It’s just my personal blog.  So what the hell.)    Here is the list:

• Yesterday, President-elect Obama formally introduced Larry Summers as his choice for Chair of the National Economic Council and Tim Geithner as his choice for Treasury Secretary.  Both of these excellent choices held positions in the Clinton Treasury.

• At the same time, to my delight, our new president introduced Prof. Christina Romer as his choice for Chair of the Council of Economic Advisers.    Christie was my colleague for 10 years in the Economics Department at the University of California, Berkeley (1988-1997).  She and her husband David Romer form a team who were my favorite daily lunch companions during that period.   (David would be a great pick for one of the open Governor slots on the Federal Reserve Board.)    They have also been my colleagues on the Business Cycle Dating Committee of the NBER.    The Harvard Economics Department voted to hire Christie last year (and the Harvard Kennnedy School voted to hire David), but unfortunately in the end it did not work out.   Although the CEA position is Christie’s first major government job, she is another excellent choice for the team.   She is smart, well-organized, and even-keeled.  Christie together with Fed Chairman Ben Bernanke have the added bonus of being among the world’s top experts in the monetary history of the Great Depression, an expertise that is of unexpected benefit at the current juncture.

• Today, Obama also announced Peter Orszag as his choice for Director of the Office of Management and Budget.   In 1996, when I arrived at the Council of Economic Advisers, Peter was a Senior Staff Economist at CEA, working on international economics.  Even then his extraordinary abilities had made him indispensable to top officials.   He was the sort of person who rises very quickly in a merit-oriented government:  not just extraordinarily smart, but able to get lots of things done very fast and very well.  When Peter returned from a quick spell at the London School of Economics (finishing his doctoral degree), he moved to a key position on the National Economic Council staff.    More recently, he has been director of the Congressional Budget Office.  This position at the Capitol Hill end of Pennsylvania Avenue is the counterpart to the OMB Director job at the White House;  thus Orszag will on January 20 truly “hit the ground running” with respect to the budget, in the same way that Geithner will with respect to the financial crisis.   

 Irrelevant gossip:    At the height of the East Asia crisis in 1998, I hosted a party in honor of Peter Orszag.    The party is mentioned in Paul Blustein’s The Chastening  (which remains the best blow-by-blow account of the East Asia crisis), because Joe Stiglitz took Stanley Fischer outside on the doorstep to voice in person the critiques of the IMF’s management of the crisis that he had been making in public.    The reason they went outside was so that Larry Summers, who had been managing the crisis from the Treasury, could not hear them inside.

• No, Obama did not choose this team because they are Clintonites or top scholars or my friends.   He did not choose them because economists (leaving aside, as always, the far left and the far right) consider this a dream team.   He chose them because they are The Best and Brightest and The Least Arrogant.     As the President-elect says, the American people want effective leaders, not primadonnas.

• The phrase “The Best and the Brightest” comes readily to mind because their IQs are so high.    After 8 years of the current President and his appointees, I hope that the American public, despite anti-elitist suspicions, understands that intelligence and ability do actually matter.  

• But IQ in an academic sense, by itself, is a very incomplete qualification for higher office.  Many university professors are famous for lacking social skills, managerial competence, personal organization, ability to communicate, unflappability, openness, and humility.  These other skills are just as important in policy making as is intelligence.   Indeed, the phrase “The Best and the Brightest” comes from the famous book by David Halberstam, where the title was meant ironically since the orignal Kennedy brain trust screwed up so badly in Vietnam.   The Bundys and McNamaras were arrogant in the same sense as the Cheneys and Rumsfelds:  when reality diverged from their pre-conceptions (whether in Asian wars or other policy areas), they were too sure of themselves to process the discrepancy mentally and too stubborn to adjust course.   But the Obama team is different.   It is The Best, the Brightest, and the Least Arrogant.    With one possible exception, these people have no ego, no sharp elbows, no rough edges.   They are not close-minded or stubborn.   They are not ideologues.  They will scoop up facts and arguments, on all sides of a policy question, before making a recommendation; and even after a decision has been made, they will monitor new information as the situation develops and adjust course when necessary.    These traits, more than anything, have been missing from government in recent years.
  • Many will object to this description of the team with the observation that Larry Summers is famous for being arrogant.   Summers’ arrogance is a little overdone, compared to some others I could name.  But it is true that Larry’s personality is not ideally suited for the traditional job description of the Chair of the National Economic Council, which is to be an “honest broker,” in the classic phrase of Roger Porter’s early description of the proto-position.   The NEC manages the decision-making process in the White House.  It must make sure that every agency feels that its views have been heard and fairly represented to the president.  (“Agencies” here means not just cabinet departments like Treasury, State, Commerce, Labor, Agriculture, HHS, etc., but also White House agencies such as CEA, OMB, NSC, etc.)  It is evident that Larry was given the title of NEC Director so that he could have the status of Principal, which means he gets a seat at the table in cabinet-level meetings, as opposed to having to sit in the row behind, where the principals’ top aides sit.   I am sure that Obama wanted direct access to Larry’s views because he is off-the-charts smart  (“one of the great economic minds of our time”).  I am also sure that Obama realizes that Larry is not perfectly suited to the honest broker role.   (The same was true of Larry Lindsay, who was fired from the NEC Director position by George W. Bush — not just, as often reported, because he correctly forecast that the cost of the Iraq war would be much higher than the official line.   He did not have a lot of interest in running the policy process, and was rather more interested in expressing his own views to the President, as compared to his more bureaucratically inclined successors.)  
  • Not to worry.    The Wall Street Journal has evidently reported that the NEC will have Jason Furman as Deputy Director.  Jason, who has been Obama’s Economic Policy Director during the national campaign, could not possibly be better suited to the job of running the policy process as an honest broker.   He is a young version of the others:   brilliant, tireless, non-ideological; no ego, no rough edges, a team player.   I know.  He worked for the CEA in 1996-97.

• There you have it.   The Best, The Brightest and the Least Arrogant.   Current conditions are so bad it would be foolish to make an optimistic prediction about economic performance over the coming years.  But I will make the prediction that this team will function like clock-work, and give the country the most capable economic policy making it has had in many a decade.