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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Personal saving rose again in the second quarter. “Does this mean the stimulus tax cut has failed, as the 2008 tax cut stimulus did?”, asks The National Journal.

My answer:

Martin Feldstein and others predicted that the tax-cut component of the 2009 fiscal stimulus package would have substantially less expansionary bang-for-the-buck than the spending component of the package, because much of the tax cut would be saved, as had been the case with the 2008 tax cut.  (“Bang for the buck” in this case could be defined as demand stimulus divided by budget cost.)   We knew this from Milton Friedman’s permanent income hypothesis, or even from good old Keynesian multiplier theory.

But in February President Obama had to get those last three (Republican) votes to pass the stimulus bill in the Senate, and those three Senators insisted on raising the tax cut component of the stimulus package a bit and lowering the spending component. Their motivation presumably was to mollify their fellow Republicans, many of whom still claim that ONLY tax cuts provide stimulus, and that spending does not (and perhaps even has a negative effect) — which is even more extreme than the claim that a tax cut creates stimulus equal to spending. After the failures of the Bush tax cuts (and Reagan’s before him), I don’t know if any economists still cling to such “supply sider” notions — or indeed if these congressmen would be able to state their logic. Regardless, I think the Feldstein prediction has been borne out since then.   Talk about irony!   The Reagan tax cuts of 1981-83 and the Bush tax cuts of 2001-03 were both explicitly designed to boost saving — hence their focus on capital income and higher income brackets — and yet in both cases private saving fell in their aftermath.   The tax cuts of January 2008 and February 2009 were both explicitly designed to boost consumption; yet private saving rose in their aftermath !   

Fortunately, the majority of the Obama stimulus package took the form of increased spending, much of which has yet to come.

None of this is to deny that efficiency is an important consideration, and cost-benefit calculations should always enter into the choice of both what kind of tax cuts to adopt and what kind of spending increases to adopt. But if it is short-term demand stimulus we are after, and we are, then government spending gives more bang for the buck than tax cuts.

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Most international summit meetings are long on photo-opportunities and short on substance.   There was a great danger that last Thursday’s G-20 meeting in London would be merit comparison to the failed World Economic Conference of 1933, which was also held in London.   This one, however, did have genuine substance.   

Nobody reads the communiques, or listens to the press conferences of leaders or finance ministers. But here is the substance:

Top of the list of accomplishments was expansion of IMF resources. The new SDR allocation was perhaps the most noteworthy and unexpected decision: those observers who have proposed such a step in the current international crisis, or in past international crises, have usually been dismissed as pipe-dreamers (John Williamson, Dani Rodrik, George Soros, Joe Stiglitz…). In addition, there seems to have been some forward movement on international regulation of the financial sector, as the Europeans wanted. Although President Obama acquitted himself well overall, the failure to achieve agreement for coordinated additional fiscal stimulus, as the Americans wanted, was probably the greatest shortcoming of the meeting.

I believe the G-20 meeting will be remembered historically, but not primarily for the above reasons. It will be remembered as the occasion on which primary emphasis shifted from the G-7, the global steering group that until now has had a monopoly on real economic decision-making power, to the G-20. Of the various substantive ways in which developing countries could and should have been given more representation in recent years, the shift to the G-20 is the first one to have actually taken place.

          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…)

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…)

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.

News services reported today that Tim Geithner, currently President of the Federal Reserve Bank of New York, was President-elect Obama’s choice to be Secretary of the Treasury. The fiancial markets reacted very positively to the news. This presumably captures both relief that some policy uncertainty has been resolved at this critical juncture and approval that Geithner is the man chosen.   I share the pleasure at this appointment.

Tim Geithner is refreshingly straightforward and personable, and doesn’t “stand on ceremony.”  At the same time, he is cool and unflappable. By coincidence, the Economic Advisory Panel to the NY Fed President, of which I am a member, met today. Unusually, Geithner excused himself at two points in the four-hour meeting to take short phone calls. Given the timing, it seems very likely that one of the phone calls was Senator Obama offering him the Treasury position. These Panel meetings are off the record, but I think I am not betraying any confidences to report that Geithner betrayed no sign to us of what had just happened. No change in demeanor, no change in the substantive flow of the discussion. This is a guy who does not lose his cool.  Just what the country needs.

Most sensationally, Summers is said to be tainted by his time as President of Harvard.    Too much has already been said about this.   But I will make just a couple of observations.    First, although Summers may not be Mr. Personality, and he will never be elected to high office nor chosen to head offices for women’s rights or the environment, he has all the most important qualities for the Treasury job.   Despite a tendency to say what he thinks, I don’t think he committed any true faux pas or became involved in any mini-scandals during 8 years in the government — no easy feat.   (The closest he came to a faux pas, or what counts for one in the media, was a statement that the argument that was then being made for abolition of the estate tax was based on greed alone rather than efficiency.   He quickly retracted the statement without bothering to try to explain what he had meant, having already by then become familiar with the rules of political brouhahas.)    In his time in Washington, he learned how to get along with politicians across the spectrum, from socialists to the far right.   It’s true that he wasn’t able subsequently to get along with the full range of faculty in the Harvard English Department, but that is a tougher task.  

Finally, I continue to be surprised at how the press describes Summers’ ill-fated and ill-considered (but “off the record”) remarks regarding explanations for the lack of women in academic science departments.  He is most often reported as having suggested that women generally have less aptitude for science than men.   Memories of these remarks in some quarters probably accounts for the recent decline of Summers in the betting odds, though he also has defenders among women with whom he has worked.   I link to the text of what he actually said here,  and urge readers to make up their minds for themselves.   But I don’t read his speculative remarks about the various hypotheses quite the way most people have assumed.   To me the most outrageous line in the remarks was, rather, the suggestion (made to illustrate the penalities for being out of the academic workforce for a couple of years) “that no economist who had gone to work at the President’s Council of Economic Advisers for two years had done highly important academic work after they returned” !