Obama Era Opens With Economy In Peril, Tough Choices Ahead

WASHINGTON --In sending Barack Obama to the White House, voters embraced the Democrat's call for a broad rewrite of U.S. economic policy following eight years of Republican control.

Now comes the hard part: Delivering on expensive campaign promises at a time when the U.S. is almost certainly mired in a recession and the federal deficit is racing toward $1 trillion.

The Illinois Senator easily eclipsed the 270 electoral votes needed to secure the White House, capping a nearly two-year campaign and becoming the first African American to win the U.S. presidency. The race was framed by voters' economic unease, a referendum on each candidates' plans to restore growth and confidence from their current depths.

"Even as we celebrate tonight, we know the challenges that tomorrow will bring are the greatest of our lifetime - two wars, a planet in peril, the worst financial crisis in a century," Obama told supporters in Chicago after his win Tuesday.

The mix of challenges facing Obama hasn't been seen since Franklin Roosevelt took office in 1933 amid the Great Depression. Voters have watched their retirement accounts plunge with the Dow Jones Industrial Average down more than 30% from a year earlier. Thousands more each week have lost their jobs and home foreclosures remain a record levels. The global credit crunch is sapping confidence and crimping lending to businesses and consumers.

Against that backdrop, Obama has ambitious plans. His non-health tax proposals would total $2.7 trillion over 10 years, according to the nonpartisan Tax Policy Center. His health care proposals would cost up to $65 billion a year, according to his campaign, though experts say the actual price tag would be far higher.

These expensive proposals worry fiscal conservatives and make many big business interests sweat. But the economic downturn hasn't prompted Obama to publicly pull back on his agenda.

"There certainly is a time for budget austerity and this isn't it," said Jared Bernstein, senior economist at the liberal Economic Policy Institute and an adviser to the Obama campaign.

These plans will widen a budget gap that hit a record $455 billion last year. The deficit is expected to soar far higher this year, possibly all the way to $1 trillion, as the economic slump continues to drain federal resources.

In addition to the more mundane tax and spend issues, the new president will be charged with making sure the $700 billion financial-market rescue legislation works, and putting out any new fires the arise from the credit crisis, a potentially expensive proposition.

Some of the U.S.'s closest allies are pushing for a dramatic overhaul of the rules of global finance. That discussion will arise early in Obama's presidency, though he hasn't divulged much of his thinking on the issue.

American Enterprise Institute scholar Charles Calomiris said he's worried that a misdiagnosis of the economy's ills could provoke a harmful reaction from the new administration in the form of high taxes, anti-trade policies and unwise financial regulation. That's just what prolonged the Great Depression, he said.

"If we repeat what the political equilibrium gave us in the 1930s, we're in big trouble far beyond the credit crunch and the recession," said Calomiris, co-director of the right-leaning American Enterprise Institute's program on financial market deregulation.

Obama will be forced to make consequential decisions quickly. With the Bush administration's 2001 and 2003 tax cuts due to expire at the end of 2010, he must decide how strictly to adhere to his campaign's tax agenda.

Past presidents have abandoned campaign pledges in the face of pressing economic reality, most recently Bill Clinton's embrace of deficit reduction at the expense of the tax cuts he promised for the middle class.

Obama wants to extend the Bush tax cuts for people who make less than $250,000 a year, but repeal them for people making more. He would eliminate income taxes for senior citizens with less than $50,000 in income, boost the capital gains tax rate from 15% to 20% for people making more than $250,000, extend a patch on the Alternative Minimum Tax and lift the cap on the Social Security payroll tax.

The senator has been vague on how the economic slump would impact that agenda.

"The costs of this economic crisis, the costs of the war in Iraq means that Washington's going to have to tighten its belt, just like families are having to tighten their belt, just like businesses are having to tighten their belt," he said at a rally Sunday in Pueblo, Colo. "We've got to put off spending on things that we don't need."

Yet there are items he believes should be addressed immediately.

To get the economy going in the short-term, Obama wants to implement a $3,000 tax credit for each new employee a company hires and boost the small business investment expensing limit to $250,000 through the end of 2009. He also would scrap the capital gains tax for investments in small businesses, spend $25 billion on infrastructure projects, give ailing auto makers an additional $25 billion in loan guarantees, extend unemployment benefits, freeze mortgage foreclosures for 90 days, and expedite his middle-class tax cuts.

Another decision likely to come quickly for Obama: his choice for Treasury Secretary. Given the intricacies of the market-rescue package, Obama isn't expected to waste time putting together his economic team.

The campaign has been mum, but the list of likely candidates includes former Treasury Secretary Larry Summers, New York Federal Reserve Chairman Tim Geithner and JPMorgan Chase Chief Executive Jamie Dimon.

Last week, Obama listed Summers, former Federal Reserve chairman Paul Volcker, and billionaire investor Warren Buffett as the kind of people he would surround himself with, but said it would be premature to discuss cabinet selections.

"I think he's going to assemble a very high quality cabinet and economic team," said Jay Timmons, executive vice president of the National Association of Manufacturers. "I anticipate they will reach out to all consitutuencies, including the job creators, on how policy proposals affect the economy."

While Wall Street is likely to embrace Obama's Treasury Secretary, business interests have concerns in other areas.

One sore spot is Obama's support for legislation that would make it easier for labor unions to organize. The Bush White House long threatened to veto so-called card-check legislation, but that resistence will disappear with Obama in the Oval Office.

Businesses also are skeptical about Obama's trade agenda. The senator supports free trade, but has vowed to revise the North American Free Trade Agreement, and incorporate labor and environmental standards in new pacts. That clouds the future of outstanding trade deals with Colombia, Panama and South Korea.

These looming challenges mean it may not be a bad time for a new president to move into the White House, said Lawrence Harris, professor of finance and business economics at the University of Southern California's Marshall School of Business.

"How much worse can it get than this?" Harris said.

"And if it gets worse, it's going to be blamed on Bush."

-By Henry J. Pulizzi, Dow Jones Newswires; 202-862-9256; henry.pulizzi@dowjones.com