Obama's Economic Brain Trust Breaks With `Status Quo' (Update1)

By Rich Miller and Matthew Benjamin

May 10 (Bloomberg) -- Senator Barack Obama portrays himself as a new kind of leader who transcends conventional politics. Judging by the economists he has enlisted in his campaign for the Democratic presidential nomination, he may just be.

Obama's economic brain trust -- a blend of up-and-coming academics and former officials in President Bill Clinton's administration -- displays a fondness for backing innovative solutions to the nation's problems. Among them: offering ailing U.S. automakers aid in return for increased investment in hybrid cars and rewarding doctors for the improvements they make in patients' health.

``They bring to the campaign some fresh thought on approaches that are non-status quo,'' says Alan Blinder, a Princeton University economist and former vice chairman of the Federal Reserve.

Obama, 45, is a freshman Illinois senator who, thus far, has been known more for soaring oratory than policy specifics. His surging candidacy, which has made him the chief rival to the Democratic frontrunner, Senator Hillary Clinton of New York, and the decision of many states to move up their 2008 primaries and caucuses, put pressure on Obama to begin filling in the blanks.

Three academics -- Austan Goolsbee, 37, a University of Chicago professor and columnist for The New York Times, Jeffrey Liebman, 39, a pension and poverty expert at Harvard University, in Cambridge, Massachusetts, and David Cutler, 41, a Harvard health economist -- form the core of Obama's economic team.

`Top-Notch Economists'

``They're all top-notch economists,'' said Greg Mankiw, a Harvard professor and former chief White House economist for President George W. Bush. ``Their views are left of the political center, as one would expect, but only slightly.''

A trio of seasoned Washington hands bolsters the academics: Karen Kornbluh, policy director in Obama's Senate office; Daniel Tarullo, a professor at Georgetown University in Washington, and a former senior economic adviser in the Clinton administration; and Michael Froman, the chief of staff for former Treasury Secretary Robert Rubin who now works with his old boss at Citigroup Inc.

Obama's economic cadre, like the candidate himself, is still evolving. The candidate is shopping for a big-name macro economist to join the group, perhaps one with the cachet of former Bush economist Glenn Hubbard, who recently joined the team of Republican candidate Mitt Romney.

Most national polls show Clinton in the lead for the Democratic presidential nomination, with Obama coming in second. In last month's Bloomberg/Los Angeles Times poll, Clinton was favored by 33 percent of primary voters and Obama was the choice of 23 percent.

Detroit Speech

Obama made his most detailed economic proposal to date on May 7, in a speech in Detroit. He proposed a novel remedy for helping automakers while also curbing America's energy consumption. Under the plan, the federal government would help the industry pay for some retiree health benefits if automakers invest in more fuel-efficient vehicles. The partnership idea, which Mankiw criticized as an unjustified bailout, would cost an estimated $7 billion over 10 years.

Kornbluh, 44, who joined Obama's Senate staff in 2002 after working for the Clinton administration and the New America Foundation in Washington, helped fashion the trade-off proposal.

Goolsbee said the health-care-for-hybrids plan is the sort of thinking that Obama is encouraging. Obama, he said, ``wants to get beyond the normal debate between A and B, to try to dream up things that are different and better.''

GM Reaction

That may not always work. Greg Martin, a spokesman for Detroit-based General Motors Corp., the world's largest automaker, reacted coolly to the plan, saying GM preferred a national solution to the problem of soaring medical costs.

What's more, there's no guarantee that Obama will sign on to every idea his economists advance because a candidate's political aides often dilute economists' suggestions for fear of stirring controversy. ``As the campaign gears up, there will be a tension between the right policy response to a problem and the politically expeditious one,'' said Steven Clemons, senior fellow at the New America Foundation.

Obama could also find himself hemmed in by labor unions, which are pressing the party to abandon the free-trade policies espoused by the Clinton administration. Goolsbee, the campaign's top economic adviser, described himself as a free-trader. He does see a role for government in cushioning the impact on those workers who lose out from globalization.

Trade Policy

The tough task of helping to develop a trade policy that avoids overt protectionism may fall to Tarullo, a 54-year-old trade expert. Tarullo ``escapes easy labeling,'' said former Clinton chief of staff John Podesta, president of the Center for American Progress, a self-described progressive advocacy group in Washington. ``That makes him especially valuable in finding new solutions to a new set of thorny problems.''

At the top of the Obama team's to-do list: drafting a plan to extend medical coverage to all Americans by the end of 2012 while making the system more efficient. One of Obama's rivals for the Democratic nomination, former North Carolina Senator John Edwards, has proposed a detailed universal health plan and has challenged his rivals to follow suit.

Cutler, whom Obama has put in charge of developing such a blueprint, has tried to go beyond the long-running debate between advocates of a government-run ``single-payer'' system and proponents of a market-driven approach based on health savings accounts for consumers.

Pay for Performance

Under a pay-for-performance system devised by Cutler, doctors would be reimbursed not for the services they provide but for the improvements they make to patients' health. Patients would be encouraged to take better care of themselves through preventive care and comparison shopping for medical cost savings.

``It can help us get past the ideological battles,'' said Mark McClellan, who served as Medicare and Medicaid Services administrator and commissioner of the Food and Drug Administration under Bush.

The plan isn't without problems. Henry Aaron, a health-care expert at the Brookings Institution in Washington, questioned how widely it could be turned into practice, given the difficulties involved in measuring the worth of many procedures.

Costly Software

It's also costly. Cutler has suggested the government spend anywhere from $115 billion to $156 billion on information- technology equipment and software for the medical industry.

Liebman, an expert on Social Security, isn't easily pigeon- holed either. He has supported partial privatization of the government-run retirement system, an idea that's anathema to many Democrats and bears a similarity to a proposal for personal investment accounts that Bush promoted, then dropped in 2005.

``Liebman has been to open to private accounts and most people in town would say he's a moderate supporter of them,'' said Michael Tanner, a Social Security expert at the Cato Institute in Washington, a research organization in Washington that advocates free markets and often backs Republicans.

In a 2005 policy paper Liebman, along with Andrew Samwick of Dartmouth College in Hanover, New Hampshire, and Maya MacGuineas, a former aide to Senator John McCain, advocated a mix of benefit cuts, tax increases and mandatory personal accounts to shore up the system, which will begin paying more in benefits than it takes in through taxes by 2017 under current actuarial estimates.

Obama has called Social Security's problems ``real but manageable'' and has pledged to preserve what he's called the ``essential character'' of the pension program.

The veteran Washington hands on Obama's team also get high marks for their willingness to embrace new ideas. As chief operating officer of New York-based Citigroup's alternative investments business, the 44-year-old Froman pushed micro- lending and securitization to finance vaccine programs and promote job creation in poor countries.

Froman is ``very creative in the way he thinks about such issues as globalization, trade and economic development,'' said Rubin, the chairman of Citigroup's Executive Committee, who isn't involved in Obama's campaign.

To contact the reporters on this story: Rich Miller in Washington at rmiller28@bloomberg.net Matthew Benjamin in Washington at mbenjamin2@bloomberg.net

Last Updated: May 10, 2007 11:27 EDT

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