Larry Summers’ planned departure at the end of the year as director of President Obama’s National Economic Council is, no doubt, politically convenient. The brilliant but prickly 55-year-old Harvard economist has been a lightening rod for anger on the right and the left. Liberals have charged that he was too cozy with Wall Street, where after serving as Bill Clinton’s Treasury secretary and president of Harvard, he drew a hefty salary from D. E. Shaw & Co., a New York investment and technology firm. Meanwhile, Republicans have pilloried the policies he helped craft as ineffective. Most recently House Minority Leader John Boehner, the man who would be speaker if Republicans retake the House in November, called for the resignations of Summers and Treasury Secretary Timothy Geithner.
Coming on the heels of two other resignations at the top of President Obama’s economic team – Budget Director Peter Orszag and Council of Economic Advisors Chairwoman Christine Romer – Summers’ departure leaves only one of Obama’s original econ team standing: Geithner, who now seems more likely than ever to survive his own trashing from left and right. “Summers’ departure almost guarantees that Geithner will stay because everyone else is gone,” says veteran Washington watcher Greg Valliere of the Potomac Research Group. “Geithner is now very, very powerful.”
More important, it hands Obama a unique opportunity to remake his economic policy at a time when Wall Street and Main Street are both mad as hell about his approach. “Betrayed!” screamed the headline of the New York Post yesterday, quoting the first questioner at Monday’s CNBC event, an African American mother, government worker and one-time Obama enthusiast who told the President: “I’m exhausted of defending you.” At the other end of the economic spectrum, SkyBridge Capital Founder Anthony Scaramucci gave voice to Wall Street’s frustration when he told Obama that he and other Wall Street bankers feel like they’ve been “whacked with a stick” like a “piñata” by this administration.
Executive Search?
Speculation around who would replace Summers centered on business leaders. Among the names whirling about Washington was former Xerox Corp. chief executive Anne Mulcahy, who also chairs the Save the Children Foundation and recently dined with top Obama advisor Valerie Jarrett. Also on Washington’s list of CEO candidates: Richard Parsons, former head of Time Warner AOL and current head of Citigroup; GE’s CEO Jeffrey Immelt; and Ann Fudge, a former senior executive at Kraft Foods who is now head of Young & Rubicam. Still other names afloat: Berkeley economist Laura Tyson, who chaired Clinton’s Council of Economic Advisors; Mark Zandi, chief economist at Moodys’ Analytics; NEC Deputy Director Jason Furman; and Geithner advisor Gene Sperling.
gives the president an opportunity post-election to remake his team.
But will Obama seize this opportunity to change policy direction? “I don’t see a cosmic policy shift in the making,” says Valliere. “Summers was a lousy salesman for administration policies. This gives the president an opportunity post-election to remake his team, and put someone in Summers position with some experience dealing with regulation and making a payroll.”
So far at least, it looks more like a change in style than substance. At the CNBC summit the president dug his heels in further on key issues that could actually help stimulate the economy, bolster the financial markets short term, and fix the deficit long-term. Though his tone was more conciliatory to business and Wall Street than it’s been in the past, he gave no sign of budging on key issues of concern to economists and Congress like extending the Bush tax cuts on income and dividends high earners. Although even Speaker Nancy Pelosi has shown a willingness to extend the tax cuts more broadly, Obama used the forum to give a full-throated defense of raising the dividend tax to 20 percent and increasing rates for those earning over $250,000 a year.
So why has the stock market been rallying? Well, the market reacts to many things, including signs that the economy is continuing to recover, albeit slowly. But my bet is that another motivator is the creeping realization that the Democrats will lose the House, perhaps by a wide margin, along with their filibuster-proof 60-vote majority in the Senate. In any event, little will happen in Congress before the elections, and a lame duck Congress will need to deal with a host of difficult tax issues. If the elections prove a debacle for the Dems, there’s a good chance that a lame duck Congress will extend most, if not all of the Bush tax cuts, reinstate the estate tax (at a lower rate than it would be otherwise next year) and pass some patch to prevent the alternative minimum tax from whacking more middle-income Americans.
That’s all relatively good news for investors. Then next year with Washington divided between the parties, we’ll have gridlock. That means no new initiatives that add to business costs will get through Congress. So forget cap and trade, or another round of costly financial or health care reforms. In that environment, the only way Obama can accomplish anything is to move to the center as Bill Clinton did after a bruising mid-term election in 1994.
Obama should take a page from Clinton’s playbook. Listen to the people. Make a midcourse correction. Use that golden tongue to give voice to the recommendations of the fiscal commission, which is likely to suggest long-term reform to save on Social Security and Medicare, as well as fundamental tax reform. And rally Republicans and Democrats behind a long-term plan to boost growth and cut deficits. That would be a plus for investors.
Or, he could dig his heels in further, and gridlock would prevail. Clearly, the former is better for investors. But after two years of massive government expansion, even gridlock is better than the status quo.
