Big Government Will Be Barack Obama’s New Deal

President-elect Barack Obama is well aware that he is inheriting a very difficult economic situation indeed. Economists with whom I have spoken — and these are the people listened to at the highest levels in both parties and at the Federal Reserve Board – believe that the unemployment rate, now at 6.7%, will hit double digits sometime in 2009, and stay there well into 2010. They expect house prices to drop another 15% and share prices at least another 10% before finding a bottom. Worse still, they are predicting an extraordinarily sluggish recovery.

The Obama team sees the crisis as an opportunity to push through a reformist domestic agenda as comprehensive and radical as anything wrought by Franklin Roosevelt. And that is the agenda on which Obama intends to focus.

Hillary Clinton at the State Department and General Jim Jones, the national security adviser, should be able to handle foreign policy, which will have the modest objective of preventing conflagrations. Forget about spreading democracy. The economist-superstars – Tim Geithner (Treasury), Larry Summers (director of the National Economic Council, located in the White House), Paul Volcker (chairman of the Economic Recovery Advisory Board), and a bevy of distinguished academics – will manage the macro-economy, initially along with Fed chairman Ben Bernanke.

Bernanke receives high marks for his ingenuity in crafting programmes to contain the recession, including last week’s decision to cut short-term interest rates to zero, and to become the nation’s capital-supplier, buying up mortgage-backed and other securities. Nevertheless, when his term as chairman expires early in 2010 he will be replaced by Summers. As one wag puts it, by then everyone who has dealt with Summers at the White House will be glad to see his back, and no politician brought up in the Chicago Democratic regime, as was Obama, can leave a plum job in the hands of a non-crony.

Obama, who sees himself as a transformational figure, has several things going for him: President George Bush’s obliteration of the line between the public and private sectors; the crisis atmosphere; the acceptance of multi-hundred-billion dollar programmes as being, well, normal; the relative strength of Treasury IOUs in the face of budget deficits that will hit 10% of GDP; the belief that government spending creates jobs.

The president-elect has appointed former senator Tom Daschle to organise a takeover of the healthcare sector. Carol Browner, perhaps the greenest of America’s regulators, is charged with transforming the energy sector by substituting wind, sun and batteries for coal-fired electricity generation and petrol-powered vehicles, at whatever cost. New York City housing commissioner Shaun Donovan’s claim to his new post as secretary of housing and urban development is his record of attempting to increase the role of government in the housing sector. There will be more, but you get the idea: when Obama leaves office, the government will have expanded its reach as much as it did during Roosevelt’s New Deal.

Obama also plans to rebuild and expand the nation’s infrastructure. He will pour hundreds of billions – more likely, at least a trillion dollars – into new roads, bridges, schools, and into repairing existing facilities, as well as into building “human capital” – read, teachers’ salaries. The incoming president believes that the states have numerous projects “shovel-ready”, and has the enthusiastic support of his trade-union allies, who know that when the federal government funds a project, union wage levels are protected, and most of the jobs go to union members.

Finally, Obama intends to revise the free trade system that has more or less prevailed since the end of the second world war. No, he will not repeal the North American Free Trade Agreement (Nafta). But his new US trade representative will be directed to renegotiate Nafta to force Mexico and Canada to adopt American labour and environmental standards, and to eschew any new trade-opening deals.

Obama will have a Congress that is, if anything, to his left. So it is difficult to imagine an Obama tax or regulatory programme that the House will not approve. The Senate might be a slightly restraining influence, but Republican “moderates” are likely to vote with the Democrats as often as not, giving Obama effective control of that body.

But Obama will quietly shelve his campaign promise to raise taxes on families earning more than $250,000 a year. Rather than face the charge that he has defiled the memory of John Maynard Keynes by increasing taxes during a recession, Obama will simply allow the Bush tax cuts to expire at the end of 2010, at which time the rate on long-term capital gains will go from 15% to 20%, the rate on dividends from 15% to 38.6%, and the top marginal income-tax rate from 35% to 38.6%. However, 150m Americans will immediately get new handouts – $1,000 per working family, mortgage-interest and tuition credits, and tax relief for lower-income pensioners. Given the widespread belief that middle-class families have not shared in the benefits of economic growth, the disrepute into which highly paid corporate executives have fallen, and with the electorate inured to deficits set to run at 10% of GDP, there will be little political resistance to whatever Obama proposes to alleviate what he sees as the plight of the middle class.

Which inevitably brings us to Robbie Burns, and his famous observation, “The best-laid schemes o’ mice an’ men gang aft agley, an’ lea’e us nought but grief an’ pain for promised joy”. Presidents elected to concentrate on the economy often end up diverted by the need to fight a war or cope with foreign attacks.

Enough worry. Only a Grinch would steal from Obama the joy he must feel in this run-up to the inauguration, and the satisfaction the nation feels in having elected a black president. All the people with whom I have spoken, many of whom voted against him, wish Obama well. We know it is in the national interest that our new president succeed.