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White House Won, Obama To Focus on Economic Policy

Posted by Yogesh on Wednesday, 5 November, 2008

Even after a decisive election victory Tuesday, President Elect Barack Obama’s platform policies will almost certainly be scaled back based upon the current economic maelstrom, particularly if it carries over into next year with significance, as expected. So what will the new, leaner Obama policies look like?

Many in the Obama brain trust already are studying President Franklin D. Roosevelt’s first term, and there is talk of a new “New Deal.”

Most analysts expect Obama to hew to liberal mainstream economic measures, including large government deficit spending, albeit with a strong emphasis on reducing wealth and health inequalities, which have widened markedly in recent years.

Here’s what to expect:

ECONOMY

The rescue and resuscitation of the financial system will remain the primary focus of Obama’s policies. He is already gearing up to have an economic team in place well before the inauguration.

“If this downturn lasts a long time and is much deeper than what we are saying, then there is no question that it will change the agenda dramatically—much more aggressive than anybody is talking about” said Nariman Behravesh, chief economist at Global Insight. That changed agenda could include more aggressive action on foreclosures, and stimulus packages that could raise to $500 billion.

Martin Baily, former chairman of Council of Economic Advisers, and now at Brookings Institution, says $300 billion will be needed to ameliorate a recession.

Economic Rescue Plans
It remains unclear how Obama would try to alter current economic rescue plans, including the increasingly controversial Troubled Asset Rescue Program (TARP), but most expect he will support recent moves to more directly support homeowners with troubled mortgages. (See more below under Housing subhead.)

Greater Regulation
Expect the pendulum to swing back to more regulations, although a significant expansion of the government may not be stymied by fiscal constraints. The most immediate agenda item will be a far-reaching regulatory overhaul of the financial sector, aimed at expunging the incentives encouraging excessive risk. Expect a broadened focus from individual institutions to ensuring systematic stability. A roadmap for this will evolve from an expected blue-ribbon commission, possibly headed by former Federal Reserve Chairman Paul Volcker, an Obama advisor.

“There is always an overreaction after a crisis,” says Thomas Cooley, dean of the business school at New York University, adding that Volcker’s involvement could help mute this.

“The question is which sectors within the financial sector will bear the brunt of the regulatory reforms,” says Robert Johnson, a former managing director or Soros Management Fund. “When the vultures are circling looking for a scapegoat, the hedge funds might look at little vulnerable,” he adds, even though they have been major early Obama supporters.

The New “New Deal”
Expect a stronger government hand in planning or at least channeling investment as part of the New “New Deal.” A premium will be investments with “the most transformational impact,” according to Lawrence Summers.

Besides renewable energy technologies, and the infrastructure to support them, this is likely to include broader applications of biotechnologies and greater broadband connectivity. The aim is to unlock productivity gains that in previous decades were triggered by the interstate highway, widespread air travel, electronics and later, information technology.

ENERGY

With an emphasis on spurring alternative energy to reduce dependency on overseas oil, Obama has called for spending $150 billion over 10 years, hoping to create 4 million “green” jobs. Funding was meant to come from an auctioned cap-and-trade carbon emissions program that has probably been pushed down the road.

“Obama has a real commitment to investing in areas that have been ignored or under-invested in by government for decades, including energy – that [$150 billion] plan is a major public investment plan, and it is transformational,” says CNBC contributor Jared Bernstein of the liberal Economic Policy Institute.

HOUSING

Obama’s room for maneuver is narrowing as a flurry of new initiatives to deal with the mortgage crisis get underway. Meanwhile, there is a growing consensus of the need for urgent action to stem accelerating foreclosures and repossessions.

“The Obama people may take a more interventionist approach and force negotiations on mortgages that are close to foreclosure,” says Nariman Behravesh. “the problem you very quickly get into is a question of fairness, what about all those people who are stressed but still making their payments and if you put together a rescue package, would you [inadvertently] encourage more foreclosures?”

SOCIAL SECURITY

The crush of pressing economic crisis demands has almost assuredly pushed the issue of Social Security’s long-term solvency to the back burner.

“Given the other issue we have on the table I find it hard to think they are doing a big Social Security reform,” says The Brookings Institute’s Martin Baily. “Do I think it is going to be a priority? Sure, but not for awhile.”

Still, Obama has given some indications of how he will deal with the looming crisis:

* “Asking” those with annual income of more than $250,000 to kick in more (2 to 4 percent, split between employer and employee)
* A range of initiatives to encourage more savings, including a program for the government to match 50 percent of the first $1,000 of savings for families that earn less than $75,000.
* Employers that do not already offer a retirement plan, will be required to enroll their employees in a direct-deposit IRA account.
* Company pension programs will have to be more transparent, including issuing detailed annual disclosures about their investments.

There are also a number of measures to restrict company executives from feathering their own retirement nest eggs, while cutting into workers’ pensions. This may involve changes in bankruptcy laws to try to put pensions higher in the debt payback chain.

TAXES

The rising cost of rescuing the financial sector and softening the recession will require a recalculation of Obama’s tax plan, which called for trimming the federal income tax for the middle class — those making between $47,600 and $66,400. These were to be balanced by an increase on taxpayers making more than $200,000 a year ($250,000 for two-earner households) from the current 35 percent to the pre-Bush levels of 39.6 percent.

Obama’s other tax proposals were to raise corporate taxes — especially on those exporting jobs through outsourcing — and to raise capital gains taxes (from 15 to 20 percent for families making more than $250,000), which seem to have less justification in the face of cratered equity and real estate markets. Source CNBC.com

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