Executive Summary

After campaigning in 2008 as a reformer, President Obama found himself hired as a fireman. Taking over as financial markets plunged and unemployment soared, he took admirably to the job. The administration put together -- from scratch, and in the face of unanimous Republican opposition -- a massive and effective fiscal stimulus which doused the flames, ending the panic in the spring and restarting growth by summer.

But the fireman's job isnt over yet. A year into the president's first term, unemployment may not have peaked, and the economy relies on government spending rather than the business investment and consumer confidence that characterize a normal expansion. And as government debt has risen, the public's enthusiasm for putting more water on the blaze -- if that is the right metaphor for fiscal stimulus in crisis -- has waned. This year, the fireman needs to begin rebuilding a damaged house, to make it livable again and safer from fire.

In practical terms, as the economy shifts back from reliance on emergency stimulus to the private sector, this means helping make businesses confident that they will have markets for the goods and services they produce. If so, they will begin to invest once again in hiring new workers and adding capital equipment. But this transition will be more difficult in 2010 than it was after earlier recessions. With the job market weak and home values down, families -- rightly worried about job security and retirement -- now prefer savings to shopping and home buying. To replace the shoppers, over the next two years the administration has a double task:

• First, find foreign buyers. We need not only a continued commitment to reject protectionism, but a stronger effort to open foreign markets, so foreign demand and rising exports can substitute for the shopping and rising debt that drove the 2002-2007 expansion.



• Second, develop a credible plan to recover control over government finances, to give the private sector confidence in America's long-term growth prospects and encourage lending to small businesses, tech firms, and other likely sources of investment and job growth.

These tasks are as important as the pressure-hose tactics that fitted the 2009 emergency, and in some ways more politically complex. In addressing trade, the president needs -- as Presidents Clinton, Carter, and Johnson also needed -- to defuse a current of economic isolationism on the party's left. In restoring fiscal discipline, he needs a plan credible in bringing budgets under control, but must be careful to avoid new shocks to the economy through rapid reductions in spending or tax increases. But, complex as they are, these tasks are essential if the administration is to heal the damage it inherited, and leave to the next president an economy restored and a nation confident once again.