President-elect Barack Obama will not be short of economic advice. Little of that advice will be unanimous. The Byzantine complexity of the White House economic policy-making machine means that a range of institutions and individuals will be pushing, pulling and shoving in different directions. With a new President who knows little if anything about economic matters, the adviser who comes out on top in the internecine struggle to be the Alpha-Adviser will effectively be running US economic policy. What are the institutions and who are the people in this play? Will it be drama, tragedy, comedy or farce?
- The US Department of the Treasury. Here Obama has nominated Timothy Geithner, the current President of the New York Fed (a position he has held since 2003), to be the next Treasury Secretary. He was Under Secretary of the Treasury for International Affairs (1998–2001) under Treasury Secretaries Robert Rubin and Larry Summers. He spent the years 2001-2003 at the IMF as Director of the Policy Development and Review Department (aka the Pain Department).With Paul Volcker he is the only one of the inner circle of economic advisers without a Ph.D. in economics. I leave it to the reader to decide whether this is an advantage, a disadvantage or an irrelevance. One crisis-related development that will strengthen the hand of the Treasury Secretary in the war for Obama’s ear is the fact that the Treasury and the Fed have, unavoidably, become a seamless web. With rate cuts all but exhausted as an instrument of monetary policy in the US, quantitative easing is the main monetary policy instrument. This means the Fed increasing the size of its balance sheet by purchasing private securities, and financing these purchases by expanding the monetary base (bank reserves with the central bank). The scale on which the Fed is now acting as direct purchaser of private securities is massive. It also results in a large and growing exposure of the Fed to credit risk (default risk). The Fed is of course also exposed to private sector default risk through the private securities it accepts as collateral in its repos, at the discount window and in the ever-expanding number of special facilities it has created. Should the risk taken on by the Fed materialise, it is essential that the Treasury stand behind the Fed to recapitalise it. Without such tax payer support, the Fed can only repair a hole in its capital base by monetary issuance. Under current conditions, with liquidity preference just about unbounded, this would not present a problem. But when normalcy returns, in two or three years, such forced liquidity injections could become excessively inflationary. The Treasury must therefore stand behind the Fed, ready to indemnify it for losses it incurs as part of its lender of last resort and market maker of last resort roles. This symbiosis strengthens the position of the Treasury and the Treasury Secretary.
- The National Economic Council (NEC). The NEC was created in 1993 by president Bill Clinton as part of the Executive Office of the President. The Director of the NEC is also Assistant to the President for Economic Policy. According to its website “It was created for the purpose of advising the President on matters related to U.S. and global economic policy. … the NEC has four principal functions: to coordinate policy-making for domestic and international economic issues, to coordinate economic policy advice for the President, to ensure that policy decisions and programs are consistent with the President’s economic goals, and to monitor implementation of the President’s economic policy agenda.” The NEC has become what the Council of Economic Advisers used to be. It was indeed, as far as I can tell, created because the CEA was increasingly perceived by the White House as to independent – a bit of a rogue elephant. The significance of the office depends on the interest of the president in economic issues and on the personality of the Director. Until I did the background research for this post, I had never heard of the current incumbent, Keith Hennessey. On the other hand, the Director could take on the role taken by Henry Kissinger when he Assistant to the President for National Security from 1969 till 1975. Before he become Secretary of State (a position he held from 1973 till 1977), he completely overshadowed the Secretary of State William P. Rogers. The NEC will be headed by Larry Summers. Adding Larry to a team is like putting a whale in an aquarium. There won’t be much room for independent movement for the other creatures supposedly sharing the same space. There must be a real concern that Summers will (try to) do a Kissinger to Geithner’s Rogers.
- The Council of Economic Advisers (CEA). This is the academic wing of the President’s advisory councils edifice. The Chair and the two other members tend to serve short terms (typically 2 years) after which they return to academe. They tend to operate with one eye fixed on their past and future academic hunting grounds. Not losing academic cred is important to most CEA members. This occasionally leads to manifestations of independent thinking, and even to independent statements to the public or the press that embarrass the administration. Martin Feldstein made himself deeply unpopular with elements of the Reagan Whitehouse during his tenure as Chairman of the CEA and Chief Economic Adviser to president Reagan (1982 through 1984), when he kept objecting privately and in public to government deficits. The CEA has become steadily less influential since then. Christina Romer, a professor of economics at the university of Berkeley and a monetary historian has been nominated by Obama to Chair the CEA. She has no previous economic policy experience. Austan Goolsbee, a Chicago professor of economics who is close to Obama, will be a member of the CEA as well as Chief Economist to the Economic Recovery Advisory Board.
- The Economic Recovery Advisory Board (ERAB). This is a new creature, modelled on the President’s Foreign Intelligence Advisory Board, established by President Eisenhower in 1956. It is a collection of the great and the good from outside government, and is supposed to provide the President with independent advice (whenever you hear the word ‘independent’, always ask: independent of whom and of what?). Paul Volcker has been appointed to head the ERAB.
- The Office of Management and Budget (OMB). This is a Cabinet-level office, within the Executive Office of the President of the United States. Through it the White House oversees the activities of federal agencies. The OMB also gives expert advice to senior White House officials on federal policy, management, legislative, regulatory, and budgetary issues. Obama has nominated Peter Orszag, currently Director of the Congressional Budget Office to be Director of the OMB. Orszag’s self-confidence is in the Summers league. It will be interesting to hear them clash, even from a distance.
As far as I can tell, Jason Furman, who played an important role in Obama’s campaign, has not yet been given an official slot in the White House political economy edifice, but he is unlikely to disappear from the scene. Also, the identity of the new US Trade Representative, a key appointment for a Democratic party that reeks of protectionism, is not yet known.
So much for the president-elect’s own economics team. He can also count on counsel from the Chairman of the Federal Reserve Board, Ben Bernanke and the other Federal Reserve Board members. My first impression is that, with Geithner, Summers, Romer, Goolsbee, Volcker, Orszag and Furman, we have too high a ratio of ego to team spirit. I foresee a significant diversion of effort and time from the design and implementation of policy to fighting over turf. I hope to be proven wrong.
Even if the President’s team come up with a common recommendation, getting it through the Congress will not be trivial. Although the Democrats will control both houses and may have a filibuster-proof majority in the Senate, party discipline tends to be dreadful when there is a large majority. And the interests of the House and the Senate are not necessarily aligned with those of the White House. Reaching agreement on any economic policy will not be easy (never mind reaching agreement on the right economic policy).
Some may call the organisation of economic advice and competencies in the White House ‘checks and balances’, or ‘letting a hundred flowers bloom’. Others will call it institutional balkanisation and a recipe for organisational chaos and incoherent policy making. We shall see.