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The brain trust

The Baltimore Sun

WASHINGTON - The economic team that President-elect Barack Obama unveiled yesterday, studded as it is with some of the most brilliant economists in the nation, reflects more than a confident leader's desire to surround himself with talent: It's a recognition that the nation faces troubles the likes of which it hasn't seen in almost three-quarters of a century.

Sunday night's rescue of one of the world's biggest banks and the threatened collapse of the U.S. auto industry are the most recent examples of how great the problems are - and there are almost certainly more to come.

In picking Lawrence Summers, Timothy Geithner, Christina Romer and Melody Barnes for the top economic spots in his administration, Obama has chosen smart, centrist thinkers who until recently advocated cautious, sensible-shoe policies to do such things as boost savings, reduce deficits and allow markets maximum feasible rein.

But the assignment that Obama has given his new team is anything but cautious and sensible-shoe.

Obama has instructed them to craft a plan to create or save 2.5 million jobs in his first two years, and he urged the new Congress, which convenes Jan. 6, to have the legislation ready for him to sign as soon as he is sworn in as president two weeks later. "We do not have a minute to waste," he said.

His goal is to make Washington the consumer of last resort in an economy where consumption is plunging. It is to devise industrial policy-like programs to salvage a collapsing auto industry and turn green an energy industry wholly focused on fossil fuels. It is to dip more deeply into the lives of ordinary Americans - especially those with housing troubles - than the government has done in generations.

Obama declined to say how much the stimulus package might cost but declared that the federal government must act "swiftly and boldly" to resolve an "economic crisis of historic proportions." There are estimates that the package could be $700 billion over two years - compared with the $175 billion per year he proposed during the campaign - or even more.

But so much has gone so wrong in the past 15 months that what would have been beyond the political pale a few years ago is quickly becoming the consensus.

"These are not moderate, centrist times so economists who in normal times are moderate and centrist aren't going to act that way now," said J. Bradford DeLong, a University of California, Berkeley economic historian and prolific economic blogger. "The wild-eyed radicals are looking pretty sensible."

At bottom, the Obama team's task is to reconcile the nation's historic commitment to free markets even as the government is being forced to intervene ever-more deeply in the financial system, in individual companies and in people's lives.

"Larry and the rest have to restrike the balance that FDR sought in the New Deal of harnessing the market's potential while at the same time damping its destructive social impulses," said Robert Z. Lawrence, a prominent Harvard economist.

That means the new administration must navigate uncharted and uncomfortable terrain. It must thread its way, for example, between calls for an expensive health care overhaul and the need to expand the deficit to boost the economy. It must deal with union demands to rewrite labor laws while trying to coax businesses into expanding. And it must satisfy environmentalists who want "green" policies even at the cost of economic growth.

In announcing his economic picks yesterday, Obama, who had intended to lay low during the final months of the Bush administration, acknowledged that the flood of bad news has forced him to show his economic hand much earlier and more forcefully than he had intended.

No sooner had the president-elect thanked them for accepting their new position than he informed them that their work "starts today, because the truth is we don't have a minute to waste."

"Right now," he said, "our economy is trapped in a vicious cycle: The turmoil on Wall Street means a new round of belt-tightening for families and businesses on Main Street.

"And as folks produce less and consume less that just deepens the problems in our financial markets."

"These extraordinary stresses," he said, "require extraordinary policy responses."

The idea of a big new fiscal stimulus is the first and least controversial step the administration might take.

With President Bush's $168 billion stimulus from earlier this year having worn off and the roiling financial crisis having stalled both U.S and world growth, there is essentially no other actor but Washington that can get the economy going again.

As a result, calls for an extra $500 billion to $1 trillion in government spending over the next few years are coming from across the political spectrum.

"I'm a fiscal conservative who dislikes increased government spending and increased deficits," Harvard economist and former Reagan chief economic adviser Martin Feldstein said in an e-mail. "But this is a time when we need both, and they need to be really big."

Economists of diverse political opinion also believe that bailouts of once high-flying financial firms must continue and that a much more aggressive rescue program must be mounted for millions of troubled homeowners. This, despite the fact that such efforts help many financiers dodge the consequences of their own bad decisions.

The damage to the economy as a whole of letting companies collapse and homeowners go bust is too great to accept, even if some of those saved are undeserving, economists agree.

It is what comes after a huge new stimulus package and continued bailouts that is really complicated, both for the country and for Obama's new team.

The scope of the challenge facing policymakers was reflected in the weekend decision to shore up banking giant Citigroup, which came only days after Congress deadlocked over whether to bail out Detroit.

The Detroit decision is not final: Congressional leaders have promised to return to Washington and consider the issue again if General Motors, Ford and Chrysler submit detailed plans for making the companies viable in the long term.

But huge as the consequences of a Big Three collapse would be, in the current environment of triage, Citigroup's size and global reach meant its collapse posed a much greater risk.

"It's a multi-trillion dollar exposure we're talking about which just dwarfs the entire auto industry," said David Stowell, a finance professor at Northwestern University's Kellogg School of Management. "With limited resources to bail out industries, you have to focus on the financial industry."

Beyond autos lie such policy questions as how Washington can reduce the nation's energy use, recast its multi-trillion dollar health care system and restore a kind of economic security and prosperity that Americans had come to take largely for granted.

The Boston Globe contributed to this article.

Timothy

Geithner

Treasury secretary

The New York Fed chief (in photo, left) has worked closely with Treasury Secretary Henry M. Paulson Jr. on the credit crunch and spent time in Treasury during three administrations, during which time he helped shape the U.S. response to the late-1990s Asian currency crisis.

Christina

Romer

Chair, Council of Economic Advisers

Romer (in photo, center), an expert on the Great Depression and monetary policy, splits her time as a University of California, Berkeley economics professor and co-director of the Program in Monetary Economics at the National Bureau of Economic Research. She served as an adviser to the Obama campaign.

Lawrence

Summers

Director, National Economic Council

Obama calls this former Treasury secretary "the central architect" of policies that fueled the nation's longest economic expansion during the 1990s. In a November 2007 column, he warned of recession and urged an economic stimulus package.

Melody

Barnes

Director, Domestic Policy Council

Barnes, whose office will play a key role in health care issues as well as the economic recovery, served for eight years as chief counsel to Sen. Edward M. Kennedy on the Senate Judiciary Committee.

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