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Obama prepares for huge economic challenges ahead


WASHINGTON — One year in, President Barack Obama faces a perilous economic choice.

He can’t pull back the stimulus too quickly, despite the public’s concerns about rising deficits, because that could kill a fragile recovery. If he steps too hard on the throttle to create more jobs, responding to another voter imperative, he risks feeding inflation and restarting the dangerous cycle.

The GOP Senate upset in Massachusetts shows that the political risks of any bold move are enormous.

Either way, the road ahead probably means painfully slow job creation accompanied by more government debt and higher taxes.

“Without significant changes to tax and government spending policies, the budget outlook will deteriorate rapidly even after the costs associated with the financial crisis abate,” said Mark Zandi of Moody’s, a former adviser to Republican Sen. John McCain who now counsels congressional Democrats.

When Obama took office in January 2009, financial markets were teetering, jobs were evaporating and global economic activity was tanking faster than in the 1930s. A depression seemed imminent.

Now the economy is back from the brink, thanks largely to the most aggressive global government intervention in history.

“The economy is growing, albeit at an unsatisfactory rate,” said Lawrence Summers, director of the White House National Economic Council. While chances of a depression are “remote,” there is still “a long, long, long way to go,” Summers acknowledged.

He said job creation will be the prime emphasis in the coming months, a priority to be reflected in the president’s State of the Union address and in his budget proposal expected to be released next month.

Even before Democrats lost the Senate seat long held by the late Edward Kennedy, the emphasis was beginning to shift from health care to jobs. The election race is accelerating the process.

“I think that is a wake-up call for everybody in this town,” White House spokesman Robert Gibbs said.

He said Obama will press for doing “everything possible to create an environment where the private sector is hiring again.” Ambitious health overhaul plans are being scaled back, at least for now.

While White House officials still insist they inherited a broken economy from President George W. Bush, there’s little doubt that people now fully see it as Obama’s economy — and expect him to lead the way in fixing it.

More than half of the 7 million-plus jobs lost since the recession began in December 2007 vanished since Obama signed the $787 billion stimulus package last Feb. 17. That aid was intended to help reverse job losses.

The unemployment rate then was 7.6 percent. Now it’s 10 percent.

“If we as a country are not successful in establishing job growth and economic growth soundly, we will not achieve any of our objectives,” Summers said.

Obama and the Federal Reserve must get their exit strategies just right. They must unwind the low-interest rates and multibillion-dollar stimulus spending that have propped up the economy. Otherwise inflation could return with a vengeance and deficits become unsustainable.

Pulling back too quickly could plunge the economy into a “double-dip” recession.

President Franklin D. Roosevelt made that mistake in 1937 when he thought the Depression was over and decided to cut spending while the Fed tightened monetary policy. That only made things worse.

Few economists see a solid way ahead without higher taxes, and not just for the wealthy.

“Taxes are going to have to go up,” said William Galston, a domestic policy aide to President Bill Clinton and now a scholar with the Brookings Institution. To suggest otherwise is “a denial not only of reality, but of necessity.”

Obama faces rising public fury toward bankers and bailouts at a time of double-digit unemployment along with pressure to rein in spending. This populist anger helped sweep little-known Republican Scott Brown to victory in the Massachusetts Senate race.

Taking a harder line that some Democrats say was late in coming, Obama has proposed a special tax on large banks to recover “every last dime” of bailout money and wants to let regulators break up banks deemed too big to fail.

Beating up on banks and bankers is one of the few causes in town embraced by Democrats and Republicans alike.

He plans to create a bipartisan commission to make recommendations by the end of 2010 on how to reduce the budget deficit. This year’s projected $1.4 trillion deficit would add to a $12-trillion-plus national debt.

Associated Press