Inside Obama's economic crusade
With a fast and furious start, the President's team is launching trillion-dollar programs to rescue the economy and remake the face of America. But will they get it right? Fortune went behind the scenes where his advisors are waging war on the recession.
301 Moved Permanently
Fortune Magazine -- On a day in early February when incoming White House officials under previous administrations would have just been learning how to use their office phones, the Obama economic team is already racing against the clock.
As Christina Romer rushes back from an urgent meeting on the economic stimulus package, she passes by a Scotch-taped paper next to her door denoting her new title as chair of the Council of Economic Advisors. The President's much-vaunted Economic Recovery Advisory Board - outside experts led by Paul Volcker - isn't yet in place, even though Obama's plan almost is. From a bare-walled office in the Old Executive Office Building, Austan Goolsbee is busy calling the 16 CEOs, labor leaders, and economists who have been chosen for it.
Over in the West Wing, Jason Furman dials up members of Congress from a paper-strewn desk crammed outside the small office he will eventually have to share with fellow National Economic Council deputy Diana Farrell. Their boss, Lawrence Summers, insists I meet him downstairs in the ornate Roosevelt Room rather than in his work-in-progress corner office upstairs. Both men are swamped, fielding queries from Capitol Hill on President Obama's ambitious economic plan.
At this White House there's no time to settle in. Even as their wall art sat in bubble wrap, Obama's economic team was pushing through Congress the most expensive emergency spending package in the nation's history. And they were helping Treasury Secretary Timothy Geithner craft his own sweeping plan to rescue the nation's banking and housing sectors, phase two of a $700 billion effort launched by his predecessor, Hank Paulson.
That's just the start. The team is fast at work on health-care reform, energy independence, vast changes in banking regulations, and the possibility of a "grand bargain" to curb entitlement costs that envisions historic sacrifices on both sides of the aisle: Republicans supporting tax increases and Democrats conceding to benefits cuts. "This is not a small-ball President," says Summers, Obama's top economic advisor and chair of the National Economic Council. "He wants to take on the large issues."
There is a breadth and breathlessness to these under-takings, a frenzy of policymaking that will shape the contours of America's economic future. Top Obama advisors who talked (often as they walked) with Fortune in early February put a premium on speed - speed to catch the right moment to turn around a deepening recession, speed to take advantage of this moment of crisis to put in place a Democratic vision of government's role, speed to pass major legislation while the President is riding high in the polls. Obama's White House has been endlessly compared to Lincoln's team of rivals, or J.F.K.'s best and brightest. But we might also toss in the image of Sandra Bullock trying to control a runaway busload of passengers before the bomb goes off. (That scene was of course from the movie - "Speed.")
If that means rolling over a growing chorus of critics and forsaking a more measured and thoughtful lawmaking process, Obama officials insist they have no choice. Romer's own academic research concludes that no post-World War II recession (nor the Great Depression) was solved by fiscal policy. While opponents say this proves that the spending-laden package that barreled through Congress is a nearly $800 billion experiment to overcome that history, Romer insists it's all about timing. The main reason fiscal policy didn't work in the past, she says, was government hesitation. "Normally that process didn't happen until the recession was practically over," says the former Berkeley economist. "What's so exciting and amazing is precisely that we're getting our act together in time to do some good."
On the other side of the White House, in the cavernous Treasury Department, the kinetic and boyish-looking Geithner shifts in his sedate wing chair like a man who can't sit still - and he hasn't since he took office: Ethics rules were issued the first day, pay caps on executives seeking government help the 12th day, massive changes to the financial rescue effort known as TARP the 15th day - the last item the product of eight weeks of furious work.
"There is a basic lesson on financial crises that governments tend to wait too long, underestimate the risks, want to do too little," Geithner told Fortune. "And it ultimately gets away from them, and they end up spending more money, causing much more damage to the economy." The Treasury chief seems chastened by his experience of the past 18 months, when as head of the New York Federal Reserve he was a central figure in the escalating bailouts of the banking system. Geithner now believes the federal government should have acted in early 2007. "What happened was that the Fed had broader authority than the government did," says Geithner. "But this was not going to get solved by liquidity. Financial crises require governments. The tragic mistake was to not get authority earlier, not to ask."
Are there unforeseen consequences to this rush to expand the federal government's presence in a free- market economy? "I know of no evidence that more speed is the answer," says Stanford economist John B. Taylor, author of a forthcoming book critical of past government interventions. "Just last year the government acted as speedily as possible with a big stimulus package sending $115 billion worth of checks to people. It did no good. So the idea that 'all we need is speed' should be questioned based even on very recent experience."
Vincent Reinhart, former director of monetary affairs at the Fed and now a fellow at the American Enterprise Institute, warns against the lasting effects of hasty actions. "We have limited resources," he says. "Everything we spend has to be financed and the interest paid. A dollar spent inefficiently is a dollar too much. Changes to entitlements tend to stick. A bridge can be built in the wrong place. These are long-term decisions that affect the budget baseline for years to come."
Geithner was so eager to get his bank and home-owner rescue plan out the door that he unveiled it without the kind of operational detail that would soothe investors: The stock market reacted by plunging. "Geithner leaves questions, and markets make him pay," shouted a Bloomberg headline that echoed others. Likewise with the stimulus package. While top Obama officials like Summers and Furman spent hours meeting with labor leaders, executives, and economists to design the broad outlines of a stimulus package, they punted the details to Congress led by liberal Democrats.
Publicly Obama officials insisted that the new President wanted everyone's input rather than handing out a dictate from on high. Privately, however, they acknowledge that they weren't equipped during the transition to write such a large and complex piece of legislation. As a result, disgruntled Republicans labeled the Economic Recovery Act in the House "Nancy Pelosi's bill" and it failed to become the bipartisan expression-of-unity bill that Obama once promised. The bill contributed to the loss of Obama's third Cabinet nominee when his choice for Commerce Secretary, GOP Senator Judd Gregg of New Hampshire, withdrew his nomination over "irresolvable conflicts" with the President's agenda.
Furman, who met with House and Senate budget writers nearly a dozen times before taking office, notes, "We did go to Congress with a reasonable degree of specificity in terms of the overall size, in terms of the breakdown between taxes and spending, in terms of priority areas for spending. But this timetable was thrust on the President by the state of the economy. It wasn't a timetable he chose."
Obama's economic team sees both the TARP and the stimulus as just the first steps in their prolonged war against a deepening recession. In interviews, both Summers and Geithner left open the possibility of asking Congress for more funds beyond the $700 billion already slated for the financial rescue effort, which now includes a new public-private investment fund to buy bad assets and a $50 billion measure to stem foreclosures. But they note that the partnership to buy up toxic assets is an investment cost that the government can recoup, not outlays of taxpayer dollars never to be seen again.
"We're going to do it at a minimum cost to the taxpayer, with maximum benefits. But we've got to make sure we do enough," says Geithner. "There's this big, dangerous dynamic" of an ailing financial sector working against the economy - and an ailing economy working against a turnaround in finance. "It's like riding your bike into a 40-mile-an-hour headwind," he says.
The economic team is geared up to monitor the stimulus plan, with the possibility of mid-course corrections. "We have to make sure it works the way it's designed to work, to make sure all the money hits the ground the way we want it to," says domestic policy advisor Melody Barnes. Adds Goolsbee: "Within six months, for sure, you want to see that the recovery package is doing things." The University of Chicago economist says he'll consider the effort successful if the worst scenarios don't come to pass, "if by the end of 2009 we aren't looking at GDP numbers that are huge negatives, if unemployment rises to the 8% range rather than the 11% that some are predicting."
Even in this rush of events, close associates say Geithner understands (more than his predecessor did) that he needs to spend considerable time as salesman to both Congress and the public. As with Summers, the brilliant and sometimes abrasive former Harvard president, people skills aren't his strong suit. Where Geithner succeeds, though, is in internal bureaucratic warfare, where he has a reputation for coming to the table with a smart and detailed plan that trumps opponents.
"He's the guy who can bring order to chaos in a roomful of people," says a former Treasury official. "He can get 15 exhausted people in a room on a Sunday night before the Asian markets open and come to a conclusion." Already the Treasury Secretary has beat back efforts by White House political strategists to put more controls - including more stringent pay caps - on banks receiving federal aid.
Part of reassuring markets that he has Obama's ear means distancing himself from Paulson, his Bush administration mentor and fellow Dartmouth grad. And so far that's exactly what Geithner is doing, not only in policy changes he says will bring the accountability and transparency that had been missing in past months, but also in how he presents his life story.
Three days before unveiling his new financial rescue package, Geithner traveled to Williamsburg, Va., to persuade a closed session of Democratic lawmakers that he is not a creature of Wall Street. He told them he was the son of a Navy pilot and a teacher, that he tended bar and washed dishes to work his way through school, and that he is married to a social worker and sends his kids to public school.
As president of the New York Federal Reserve, Geithner made $411,200 last year and spent much of his time earning the trust of Wall Street titans. But in front of Democratic lawmakers, he stressed his credentials as a longtime public servant who was "deeply offended" by what he has witnessed on Wall Street.
In their rush to action, Team Obama doesn't mind leaving critics on the roadside because of an über-confidence that the facts are on their side. Goolsbee, an economist who has been at Obama's side since day one of the campaign, likes to call the economic team "data dogs" who bring post-partisanship to policymaking because they are driven by evidence rather than ideology. But Greg Mankiw, the Harvard economist who chaired Bush's CEA for two years - and who counts many of Obama's picks as friends - offers a more politically charged label: Keynesians, after the British economist who championed interventionist policy. "They are extremely committed Keynesians," he says. "I hope they show the requisite humility that not all economists share their view."
I asked Romer if she would apply the label Keynesian to herself, and she reacted the way many successful women today refuse the title feminist. "I think it's an old-fashioned term," she says. "If that's how you define Keynesian - that changes in government purchases are going to matter, then absolutely. But it's based on empirical research rather than what I read or what I was taught in graduate school."
On an afternoon in early February, Larry Summers emerges from an hour-long meeting with Barney Frank, chair of the House Financial Services Committee and one of the few House lawmakers whose brain wattage is on a par with his. As the President's advisor stands in the hallway conferring with aides, the rumpled figure of Frank flies out the door to offer one last thought on their meeting, which covered everything from TARP's new foreclosure plan to changes in financial regulation. They part ways with cracks about "being bipartisan" that have a sarcastic tone.
"No comment," says Summers when I ask about it. In fairness, one could overhear the same kinds of conversations among Republican lawmakers. Just weeks after Obama came into office promising an end to bitter partisanship, there is deep distrust on both sides. Part of the problem is that all of Obama's conciliatory rhetoric can't gloss over the fact that there are serious divisions between Republicans and Democrats on the role of the federal government. To Team Obama, the onset of the financial crisis only proves their argument that Americans need a more muscular federal government. "I think events have emphasized for us that while the market system is self-stabilizing most of the time, it is not self-stabilizing all the time," says Summers.
The President's first budget, expected to be unveiled by budget director Peter Orszag within weeks, will chart much of the administration's ambitious course beyond stimulus and TARP - and it will be a document that Obama's own shop, not Congress, produces. "In his budget the President is going to lay down markers around his seriousness on all the major issues," notes Summers.
It's likely that the decisions and debates on these issues - ranging from health-care reform to what government programs should be cut to ease the deficit - will keep on coming at Congress at mind-numbing speed. The President wouldn't have it any other way.