Introduction
Nobody is happy about the performance of the US economy and in particular, the lack of job creation. Obama is taking much of the blame, and there is no point in just “piling on”. However, it is worth highlighting the President’s most important mistakes in hopes that he will do something to remedy them. The mistakes are presented and discussed below.
Bad Personnel Choices and Delegation of Authority
A new President must make more than 3,000 political appointments when he comes into power, a tall order. In addition, he must rely on people in other branches of government. This is where Obama made a number of real blunders.
1. Tim Geithner is at the top of the list. Geithner cheated on his taxes, got caught, and paid fines. That in itself should have disqualified him for the Treasury Secretary position since the Internal Revenue Service is part of Treasury. What message does appointing him send to the American people? But there is more: Geithner was in charge at the Federal Reserve Bank of New York at the time of the AIG bailout (under the Bush presidency). You might remember that AIG staff thought they could get banks to agree to settle for 60 cents on the dollar. Geithner said no, pay the banks in full. That decision cost the American taxpayers $37 billion. Yet somehow, Geithner’s track record was not enough to deter Obama from appointing him. A bonehead decision!
2. Larry Summers is Director of the White House National Economic Council. Summers started as an academic followed by senior positions in the Clinton administration. Following a short stint the President of Harvard University, Summers started working in the financial industry. Glenn Greenwald reports that before being appointed, Summers:
…collected roughly $5.2 million in compensation from hedge fund D.E. Shaw …and was paid more than $2.7 million in speaking fees by several troubled Wall Street firms and other organizations. . . .Financial institutions including JP Morgan Chase, Citigroup, Goldman Sachs, Lehman Brothers and Merrill Lynch paid Summers for speaking appearances in 2008. Fees ranged from $45,000 for a Nov. 12 Merrill Lynch appearance to $135,000 for a one-day visit to Goldman Sachs.
Both Geithner and Summers came to the Obama administration from the financial community and will go back to it when they leave government. What was Obama thinking in appointing them? The two operate as a team. They kept Volcker away from Obama and made sure the Volcker Rule (banning proprietary trading by banks) was not included in the financial reform bill.
Geithner and Summers also made sure that Christina Romer, the now-resigned head of the Council of Economic Advisers, had little influence with Obama. Romer had estimated that a $1.2 billion stimulus package was needed. Jeff Spross reports that her resignation was:
driven largely by frustration over her lack of voice in Obama’s economic team, and her inability to get input past the firewall of Larry Summers and Tim Geithner.
I am at a loss over why Obama made these two appointments. There are plenty of good economists without ties to the financial community. Things would be very different if Obama relied on James Galbraith, Paul Krugman, Robert Reich, Laura Tyson and/or Paul Volcker for economic policy.
3. Nancy Pelosi is a strident liberal Democrat and the Speaker of the House. Obama gave her far too large a role in structuring the $787 billion stimulus package. Take a look at how the money is being spent – http://www.recovery.gov/Pages/home.aspx. A stimulus package? A stimulus package should get the money out in a hurry to create jobs.
There is one appointment Obama should have made that would have made a big difference. He should have appointed a Stimulus Czar that reported directly to him. The Czar should have focused on prodding the Federal agencies receiving the stimulus money to get it out in a hurry. Of course, the Federal competitive bidding process should have been used to allocate the monies, but a Czar could have speeded up this process.
Bad Policies
1. Romer was right: the $787 billion stimulus package was too small. Unfortunately, very little can be done about this mistake now. Congress is incorrectly focused on the size of the government deficit to appropriate more stimulus money.
2. The Financial Reform bill was written for lobbyists to shape as they want. Obama did not put his foot down and insist on the Volcker Rule. So banks will go back to trading, and we could have another banking collapse.
3. The Health Bill should have included a public option: people should have been able to choose an insurance plan negotiated by the government. Again, Obama did not put his foot down at a critical time.
4. Escalating the war in Afghanistan was Obama’s final big economic mistake: nothing to be gained – a lot of good money after bad.
One Ray of Hope
Obama got Bernanke reappointed as head of the Fed. I seem him as a good pick for this role. Bernanke has his detractors, and it is unsettling that in 2004, he claimed in a paper that we are in a new era where economic volatility has been permanently eliminated. Oh?
But unlike Geithner and Summers, I see Bernanke caring about his reputation as a professional economist. I might be wrong, but I do not believe he is beholden to the bankers. And he spent considerable time researching the Great Depression. He repeatedly says the Fed will do all it can to ensure a US recovery. The Fed can print a lot of money. I hope Bernanke keeps the printing presses running.
Comments
Frank Caine
Elliott
Couldn’t agree more with regard to your comments on Geithner, Summers and Pelosi. I believe that, taken together, they have done a disservice to the administration and the country.
We can debate Stimulus, Health Care legislation and Fin Reg. However, I do think it would be valuable to take a close look at what the Europeans have been doing and contrast the impact of their recent fiscal/monetary policies with that of our own. My sense, although I have not examined the data, is that fiscal and monetary restraint (termed “austerity” by some) have resulted in better currency performance and better capital market performance, perhaps owing to less uncertainty and less instability?
Richard Rust
Elliott:
I assume an abundance of admirable caution explains why you come to your criticism of Obama, Geither, Summers and Pelosi so late in the day.
Whenever I read comments like yours (and my own more tempered take downs) my first reaction is to say, if we are so smart why aren’t we in charge? My second, reaction is to acknowledge the way we see it from the comfort of our couches may bear little resemblance to how the targets of our criticisms saw it when they made their decisions. My third, reaction is to ask, if rather than making the decisions they did, they had made decisions we preferred would the current state of things be appreciably different?
The first observation is pretty irrelevant for those of us who are now out to pasture. The second is a given and probably deserves a little more credit that we are won’t to provide. The third is unanswerable, but if I were a betting man I might have balked at making the bet.
But in response to you critique, if the proof is in the pudding, the actions of the Obama team that were specifically designed to keep the international financial system from imploding worked – somewhat spectacularly.
As for the success or failure of the stimulus package I simply refer you James Surowiecki’s article “Second Helpings” in the recent issue of the New Yorker magazine. Surowiecki’s credentials are well-established and therefore, I give his take on things a careful hearing.
(Here is a link:http://www.newyorker.com/talk/financial/2010/09/20/100920ta_talk_surowiecki)
He is anything but critical of the Obama efforts. He takes on the criticisms with some interesting results. Most importantly, he separates the political from the substantive as he assesses how to measure Obama’s success versus failure.
He makes the following observations:
“By any reasonable measure, the $800-billion stimulus package that Congress passed in the winter of 2009 was a clear, if limited, success. The weight of the evidence suggests that fiscal policy softened the impact of the recession, boosting demand, creating jobs, and helping the economy start growing again. What’s more, it did so without any of the negative effects that deficit spending can entail: interest rates remain at remarkably low levels, and government borrowing didn’t crowd out private investment.”
“Paradoxically, the very things that made the stimulus more effective economically may have made it less popular politically.”
“Bizarre as it may seem, a less well-designed stimulus might have been more popular, and that would have made it easier for Obama to sell the electorate on his new stimulus proposals. But, given the scope and depth of the recession, it’s also likely that any stimulus would have become a political albatross.”
It is well worth reading the entire piece, as he makes a good case that the Obama teams efforts to right the economic ship of state are one more example of where “no good deed goes unpunished!”