President Obama Meets with Larry Summers and Tim Geithner. White House Photo by Pete Souza.
With health care stopped, climate legislation stalled, true unemployment at record levels, Wall Street unreformed, a new round of mortgage foreclosures on the way, and murmurs of inflation in the air, President Barack Obama needs a new domestic game plan.
Unfortunately, his economic team is simply not coming up with one. It appears that chief economic advisor Larry Summers and Treasury Secretary Tim Geithner have become the Dick Cheney and Don Rumsfeld of economic policy—limiting the debate and cooking the options presented to the President while dragging their feet on implementing the president’s priorities.
Sticking with the Summer-Geithner Wall Street orthodoxy is also irresponsible. Even Alan Greenspan has admitted that his faith in bankers was misplaced. With the economy triaged but still in intensive care, it is time to forge a new economic engine, not to return to the status quo ante. Instead of relying on expensive stimulus and narrow reforms in well-defended sectors, the president needs to design an economic engine that changes the debate. For that to happen, however, Mr. Obama needs a process that can allow his progressive, market-friendly instincts to break out of the policy ruts in which Washington is trapped. Done right, the President can define and unleash a deep reservoir of sustainable demand to power a 21st Century economic renaissance.
The president has already done this once. After the flawed Afghan elections demonstrated that the existing policy risked strategic failure, the president took over Afghanistan and Pakistan policy personally. In a process that took a relatively short three months, Mr. Obama was able to define a new strategy that is now turning things around. Indeed, the sea change in Af-Pak news—that Afghan President Karzai is preparing a national reconciliation process, that Pakistan’s Inter-Services Intelligence has begun rolling up the leadership of the Afghan Taliban and that India is restarting talks with Pakistan—is the product of this new strategy.
The Af-Pak process worked for three very specific reasons that are equally essential to forging a new economic strategy. First, the process provided for a wide diversity of opinion—from General McChrystal’s heavy footprint to Vice President Biden’s light footprint. Second, the president allowed for broadening of the problem definition to include the resources for the solution, which meant going beyond even “Af-Pak” to include South, West, and Central Asia. Third, the president insisted that robust policy debate be carried on in his presence—a technique that minimizes manipulation, guards against groupthink and raises his advisers’ game.
Application of these lessons requires four steps. First, the president needs to recognize that unlike his national security advisor, General James Jones, his chief economic advisor, Larry Summers, is not a neutral agent of the president. In addition to cooking the current debate, Mr. Summers and the Treasury Secretary helped create or endorsed the cornerstones of the 2008 recession: hollow growth based on asset bubbles fueled by mountains of cheap debt, the repeal of the Glass-Steagall act separating sober banks from high-stakes investment gamblers, and the complete lack of oversight for derivatives. While the president would be ill-advised to remove Mr. Geithner and Mr. Summers before the shape of a new economic engine emerges, he must not give them a veto over the coming process. Rather, the president should pick another trusted member of his economic team, such as Paul Volcker or Austan Goolsby, to manage the process.
Second, the president must expand the scope of the effort to include enough latitude to craft a bold new economic engine. At a minimum, that means bringing into the discussion taxes and federal subsidies. It is long-past time to re-examine outdated economic assumptions made in the 1940s, like the universal income tax and the subsidies that powered the baby boom. Indeed, the great rule of tax policy is that you tax that which you want less of. Today, more than 80 percent of our federal budget comes from income and wages while we subsidize everything from oil to sprawl. By expanding the pie to include these and other perverse incentives, the president will be able to articulate a more effective economic engine designed to meet the demands of the 21st Century. By taking over the mantle of tax reform, he will also win much-needed votes.
Third, the President must understand that America’s economy is the foundation of the global economy. Therefore, any new economic strategy must serve our long-term strategic interests. Right now, the American economy is increasing the likelihood of great power competition and conflict over resources and markets while making the global economy is extremely vulnerable to man-made or natural shocks. Echoing the themes and analysis in The Audacity of Hope, the president must instead challenge his expanded advisors to craft an economic engine that addresses the two core global challenges of the 21st Century: the inclusion of 4 billion people into the global economy and the need to shift to sustainable, resilient solutions. With these core imperatives and the full breadth of economic tools at his disposal, a market-friendly engine of 21st Century American prosperity becomes not only conceivable, but possible.
Finally, to grapple with the expanded pie and strategic challenges, he must return to the broad tent of economic advisors that marked his candidacy and transition. His transition economic advisory board included such clear-eyed thinkers as Warren Buffett, Robert Reich, Laura Tyson, and Eric Schmidt. The president should expand this team to include a host of other leaders, including Nobel Prize-winning economists Joe Stiglitz, Paul Krugman and Amartya Sen; as well new-economy visionary John Doerr; pragmatic, infrastructure-focused New York City Mayor Michael Bloomberg; hard-nosed sustainability engineer Amory Lovins; the nation’s master of metropolitan revival, Peter Calthorpe; and China watchers Stephen Roach and Zachary Karabell.
There is no time to waste. Mr. Obama is on the verge of squandering the historic opportunity to scrap the toxic economy that triggered the worst recession since the Great Depression. Indeed, the election of Senator Scott Brown in Massachusetts indicates that many blue-state voters already feel that Obama represents “more of the same.” Luckily, the President has demonstrated the ability to break with groupthink and inject his own vision into essential debates while drawing on the expertise of myriad others to solve major strategic challenges. With three years remaining in his term, it is time to get on with it.