When The Economist asked academic economists in September which presidential candidate would pick the better economic team, a huge majority said Barack Obama. He has not disappointed them. The team he unveiled this past week is studded with stars of the profession.
Mr. Obama’s policies may not be any more successful at combating the financial crisis and recession than those of George Bush. But it does seem safe to say that economics will play a bigger part in the formation of those policies. Three of the first four members of the team to be named are well-regarded PhD-holding economists and the fourth, Tim Geithner, the new treasury secretary, is a respected central banker (he heads the Federal Reserve Bank of New York). Only one of the four people they will replace shares a comparable background (see chart).
They are not just any economists but among the best. “Their IQs are off the chart,” gushes a former colleague of some of them. Henry Kissinger supposedly once said every president should give Larry Summers an office in the White House. On November 24th Mr. Obama did. As director of his National Economic Council (NEC), Mr. Summers “will be by my side, playing the critical role of co-ordinating my administration’s economic policy”.
It is a striking contrast with the outgoing administration, in which economists never had much clout. Consider the Office of Management and Budget director, who as overseer of $3 trillion in federal spending plays a pivotal role in setting economic priorities. Mr. Bush has had four: one was a pharmaceuticals executive, one did government relations for an investment bank, and two were congressmen. All four trained as lawyers. Mr Obama’s nominee, Peter Orszag, the outgoing director of the non-partisan Congressional Budget Office, is a professional economist known for such page-turners as “Saving Social Security”, a 300-page tome boasting 37 pages of footnotes and eight appendices. Whether Mr. Orszag will be tough enough with the red pencil, however, is something that his track-record does not tell us.
The team’s other striking feature is its centrism. Mr Summers is on the conservative wing of Democratic economists. As Mr. Clinton’s treasury secretary he backed the law that in 1999 tore down barriers between commercial and investment banks and still backs it despite recent criticism. Christina Romer, an economic historian from Berkeley, has just published a paper with her husband David showing how raising taxes retards growth. Jason Furman, likely to be named as an aide to Mr. Summers, outraged unions for his 2005 article, “Wal-Mart: A Progressive Success Story”. One hedge-fund manager who, before the election, was terrified Mr. Obama would usher in “confiscatory” tax policies breathed a sigh of relief. “No Robert Reichs,” he said, a reference to the leftish adviser who was Mr. Clinton’s labour secretary. “There’s no radicals in the whole cabinet that anyone can find.”
Mr. Obama’s backers, in fact, can with some justification feel betrayed by the presence of so many figures from the Clinton regime: Mr. Summers and Mr. Geithner served at the Treasury then, and Mr, Orszag was on the NEC. Moreover, many of them are protégés of Mr, Clinton’s second treasury secretary, Robert Rubin, whose star has dimmed considerably as Citigroup, where he has been a senior executive since 1999, has lurched from crisis to catastrophe.
Still, if Mr. Obama is going to emulate the economic record of any predecessors, Mr. Clinton is not a bad one to pick. Hiring Mr. Clinton’s team won’t bring back that era’s steady growth and low unemployment, but it does bring valuable experience of fighting financial crises. Mr. Summers and Mr. Geithner were deeply involved in dealing with the disasters that befell Mexico, East Asia, Russia and Latin America during that time. Mr. Geithner has spent the past 15 months battling the current crisis, though so far with little success.
Their influence helps explain why Mr. Obama wants a hefty fiscal stimulus to keep the economy from “falling into a deflationary spiral”. Mr. Summers had prominently called for “significant, speedy and sustained” fiscal stimulus. Mr. Obama says he has asked his team to come up with a two-year plan to raise employment by 2.5 million more than would otherwise be the case. Reports suggest a price tag of $500 billion-$700 billion over two years. The stimulus could include both aid to states, funding for public infrastructure and early implementation of Mr Obama’s promised $1,000-per-family tax-credit. It may also include health-care aid for the poor and uninsured—a down payment on one of Mr. Obama’s more costly promises.
Mr Obama’s people will also be more willing to deploy the $700 billion Troubled Asset Relief Programme to prop up the financial system; they may even seek to enlarge it, and pursue some formal powers for taking over failing financial institutions. Other issues they will have to tackle quickly include whether formally to guarantee the debts of the mortgage agencies, Fannie Mae and Freddie Mac; a moratorium on mortgage foreclosures; reform of bankruptcy law to permit judges to rewrite mortgage contracts; and reforming the financial regulatory system.
Though impressive enough on paper, it’s less clear how well Mr. Obama’s picks will function as a team. The NEC director is traditionally the honest broker of the economic team’s ideas. Given his reputation as an intellectual bully, many wonder whether Mr. Summers can play that role. “Larry clearly can’t do that, and it’s a waste of his talents, quite frankly,” says a former colleague. But that may sell Mr. Summers short. More than anything else, he relishes a spirited debate with worthy adversaries. One of those is Mr. Geithner, who first came to Mr. Rubin’s attention by contradicting Mr. Summers in a staff meeting. Mr. Geithner once described the Rubin Treasury as “an open competition of ideas.” And Mr. Summers will have no trouble standing up to Mr Obama’s skull-cracking chief of staff, Rahm Emanuel.
That said, too much competition of ideas can breed chaos, and Mr. Obama may have increased the risk by creating yet another body. On November 26th he said Paul Volcker, a former Federal Reserve chairman, would head his new Economic Recovery Advisory Board and Austan Goolsbee, his longest-serving economic adviser, would be its staff director. The board seems to overlap with the three-member Council of Economic Advisers, which vets policy proposals for economic idiocy: Mr. Goolsbee will also serve on that council. Might too many economists spoil the recovery?