When it comes to the economy, Barack Obama has been managing expectations the way Joe Torre managed the 1990s Yankees: with grim-faced seriousness and an aversion to rah-rah cheerleading. Just as Torre never promised great results from his teams of all-stars, Obama never misses a chance to remind the voting public that there are “no shortcuts or quick fixes to this crisis.” But the ongoing recession and market turmoil have driven expectations through the roof all the same. It’s a rare event indeed when a cabinet pick can drive the Dow up 500 points, or when a president-elect can draw a nationwide audience with radio addresses about the economy. (Franklin Roosevelt didn’t launch his “fireside chats” until after he got sworn in.) Starting Jan. 20, Obama’s own economic dream team officially takes the field—carrying all those expectations with them.
|More from SmartMoney.com:|
• 7 Inauguration Day Rip-Offs
• Money Makeover: 5 Sites for Your Finances
• Obama's Big Tax Plan
But how much can any president really do to turn around a $15 trillion economy? Obama’s agenda is certainly ambitious, and the new Oval Office occupant will have enlarged Democratic majorities in Congress and even some Republicans lining up behind his rescue plans. On the other hand, Obama doesn’t have the overwhelming public support FDR enjoyed or the arm-twisting savvy of a Lyndon Johnson. And the entitlement programs that those big-government presidents enacted may tie the new president’s hands. Federal spending now accounts for almost 20 percent of U.S. economic activity—compared with about 7 percent when FDR took office—in large part due to Social Security and Medicare. Roosevelt nearly doubled the federal budget in his first term to launch public-works programs and unemployment benefits, but Obama has less room to maneuver, explains Babson College history professor James Hoopes; a similar expansion of federal debt today “would have terrible consequences in terms of cramping other economic activity or boosting inflation.”
With Obama finally taking the reins, SmartMoney decided to take a look at his odds of success—not only the likelihood of getting his agenda passed during his first-year presidential honeymoon but also of actually turning around the economy in the coming year. After all, the debate on his ambitious efforts on taxes, energy policy and even health care—and what it all may mean to Americans’ personal finances—has already begun. Here’s our take.
The First Weeks
Obama’s been talking for months about jump-starting the economy with a massive stimulus package, and it’s almost certain to be what he’s working on the first days after taking the oath of office. But while the outgoing Bush administration tried to stimulate the economy with tax rebates, Obama will focus on government spending—at least $480 billion for starters, with the likelihood of more to come in hopes of creating millions of jobs. The plan is to invest heavily in infrastructure and green technology while providing money to the states to shore up their yawning budget deficits. The logic behind Obama’s plan: Boost the earning power of those who are struggling—unemployed construction workers, say—and they’ll spend that income in ways that boost the broader economy.
There’s evidence that Obama’s approach is the more effective one. A tax-rebate stimulus “is the equivalent of a sugar shock,” says James Galbraith, a professor at the University of Texas who gave advice to the Obama campaign. “You mail the checks in July, and by August we’re back in the soup.” A recent study by Moody’s Economy.com found that for every $1 spent on a lump-sum tax rebate, the country’s GDP grows by only $1.02 within the first year; spend the same dollar on aid to state governments and infrastructure and the economy grows by $1.36 and $1.59, respectively. Investing in construction of roads, schools and water-treatment plants, Galbraith and others argue, will create employment opportunities for years to come. But critics counter that because of the legwork and logistics involved in getting infrastructure investments up and running, the benefits might not be felt immediately or even until 2010.
Some of Obama’s other priorities, of course, are also aimed at saving jobs. The Center for Automotive Research has estimated that a General Motors bankruptcy could drive 2.5 million people out of work—one reason Obama will face pressure to provide more help to Detroit. And the stimulus package is part of a plan to spend $150 billion over 10 years on renewable energy and other green investments, part of a shift that the U.S. Conference of Mayors estimated could help create 4.2 million jobs by 2038. Jennifer Amann, a senior researcher with the American Council for an Energy-Efficient Economy, sees potential for jobs like energy auditors, who inspect homes for leaks or inefficiencies. “It’s not like you can ship that job overseas,” she says.
Though big spending projects may command the headlines, Obama will also try to make good on the blizzard of tax breaks he promised during his campaign. His proposed tax credits—most targeted at middle- and lower-income families—would cover expenses like child care and education and offer incentives for buying homes or saving for retirement. Roberton Williams of the Tax Policy Center explains that unlike typical rebates, most of Obama’s credits are refundable, meaning families making too little to owe income taxes will get their credits in cash, “putting money in the hands of the folks who are the most likely to need to spend it.” And research suggests that such credits do more than straightforward rebates to boost the economy.
The Obamas—a couple that was still saddled with student loans well into their 30s—are also likely to take a stab at whittling down college debt. The president-elect wants to more than double the $1,800-a-year tax credit for college tuition and fees, which would apply to families making up to about $115,000 a year. But “things are never as simple as they seem,” notes Lauren Asher, vice president of the Institute for College Access and Success. In the past, for-profit colleges have often either raised tuition or decreased their own student aid to offset such gains in federal aid. For now most college funding advisers are assuming that strapped parents won’t see much relief.
It’s hard to imagine an economic turnaround happening without some kind of solution to the housing crisis. The havoc that falling home prices have wreaked on the financial markets is, of course, just part of the problem. Every home foreclosure drags down the resale prices of the homes around it. And for every dollar lost in property value, consumer spending drops by five or six cents a year—scary stuff, considering American home values have declined by more than $5 trillion since the real estate slump began.
But consensus on the best housing fix has been hard to find. Mortgage rates have dropped steadily without doing much to put a floor under housing prices. On the campaign trail, Obama advocated giving bankruptcy judges power to restructure mortgages. But that idea was recently defeated three times in the Senate. Mortgage bankers dislike the restructured loans so much, they refer to them as “cram downs,” because banks are forced to take them without financial incentives. Critics say they’ll also drive up borrowing costs, especially in struggling local housing markets.
| More from Yahoo! Finance: |
• Why You Should Use Your Rewards Points -- Now
• How Everyday People Build Their Wealth
• The 2009 Economy and Your Wallet
Visit the Banking & Budgeting Center
Obama is weighing other options—including reviving the Depression-era Home Owners’ Loan Corporation, which bought distressed mortgages from banks. Also gaining attention is a proposal by Sheila Bair, head of the Federal Deposit Insurance Corporation, to restructure 2.2 million mortgages so payments are reduced to 31 percent of a holder’s gross monthly income. Under Bair’s plan, the government would cover some losses from any defaults and pay $1,000 per rewritten loan, an arrangement more palatable to skittish lenders. But consumers in “upside down” loans—where they owe more than their home is worth—wouldn’t have that situation remedied.
If there’s one thing that could make a housing-market rescue look easy, it’s health care reform. The country certainly needs it, with 46 million uninsured people and millions more threatened economically by bills they can’t pay. Businesses and even insurers who were once leery of widespread reform are now rallying behind it, in a bid to control their own soaring health care costs. Any attempt to corral this enormous sector of the economy would be complex and expensive. But Obama has insisted that health care policy can’t wait long.
During his campaign, the president-elect proposed a plan that would let workers either keep their employer-provided insurance or buy insurance on a new national exchange; low-income workers would get subsidies to pay their premiums, and no one could be rejected by insurers for preexisting conditions. Democratic Sens. Max Baucus and Ted Kennedy have been trying to hash out a plan that could be palatable to the GOP and industry. But each senator may also introduce his own bill, and there are signs that their ideas will have key differences from Obama’s. “You’ve got all these warring old bulls on Capitol Hill,” says Grace-Marie Turner, president of the Galen Institute, a research group that favors free-market approaches to health care reform. “I’m not convinced they’ll accomplish anything.”
Whether ObamaCare would actually curb health costs—themselves a drag on the economy—is an open question. The U.S. system currently spends about $27,000 per family of four; Obama has said he’d cut that by $2,500. He proposes to test drugs against each other to determine the most cost-effective therapies and to back adoption of electronic medical records. But critics doubt those reforms can produce significant savings, at least in the short term.
Down the Road
It’s a safe bet that Obama’s energy advisers had a different read on the film An Inconvenient Truth than the folks close to former oilman George W. Bush. What’s more surprising: Even with gas prices dropping, the Obama team will likely get started this year on an extremely aggressive energy agenda. The decision to replace Rep. John Dingell, a Michigan Democrat loath to challenge Detroit, with environmentally minded Rep. Henry Waxman (D–Calif.) as head of the House Energy and Commerce Committee, means that body is likely to consider aggressive cap and trade legislation—which tries to lower greenhouse gas emissions by charging companies for the pollution they pump into the air—for the first time ever. Leaders have said they could pass that, and mandate wider use of renewable resources, by 2010.
A cap-and-trade program probably would hit consumers at the gas pump. It would also have fairly big consequences for manufacturing businesses. Gilbert Metcalf, a professor of economics at Tufts University, has calculated that if carbon credits cost $15 per ton, a typical rate, slight price increases would ripple through all kinds of products that take energy to produce—things like clothing and cleaning products. He estimates that the average household cost of living would increase by 1.5 to 1.9 percent, with costs at the higher end of that range in Midwestern states like Indiana, Ohio and Iowa, which are more dependent on high-polluting fuels like coal for electricity.
Whatever happens with this “carbon tax,” it seems likely that other tax increases—at least at the federal level—will be off the table for a while. Obama’s intention to “spread the wealth around” made for some fiery campaign exchanges; his full tax plan involved increasing capital gains, dividend and income taxes for families pulling in $250,000 or more per year, mostly by repealing cuts enacted under Bush. But with the economy far from stable, more analysts now expect Congress to hold off on any increases until the beginning of 2011, after the Bush cuts expire. By then, with any luck, politicians will be arguing over slices of a much bigger economic pie.
Matthew Heimer contributed to this story.
- Barack Obama