Editorial Cartoon by David Horsey

Long before Barack Obama stepped up to the podium in January to take the oath of office, there was no doubt about what his biggest challenge as president would be.

"That we are in the midst of a crisis is now well understood," Obama said in his inaugural address.

"Our economy is badly weakened. . . . Homes have been lost, jobs shed, businesses shuttered." With the economic thunderclouds only growing, he warned, "the state of our economy calls for action, bold and swift."

Obama's response has certainly been both of those, but there is still some question about whether it will work, not to mention what its long-term consequences will be. Hundreds of thousands of homes are being foreclosed on every month, and jobs are still being shed. Some of Wall Street's biggest banks still haven't stepped up their lending, and the unemployment rate has moved ever closer to 10 percent.

The recession Obama inherited, which has wiped out more than 5 million jobs in a 17-month swath of destruction, may get worse before it gets better. "We're in something closer to the Great Depression than any of us have experienced," Richard Levin, an economist who is the president of Yale University, said at a policy forum this spring on the causes of the crisis.

When Obama took office, many economists were skeptical about how the largely untested former senator would handle the array of economic problems before him.

While there certainly has been no shortage of quibbling about the specifics of his recovery plans and there continues to be little certainty about what lies in store for the economy, many experts marvel at all Obama has accomplished.

"He's been extremely active on multiple fronts," says David Walker, former head of the Government Accountability Office and current president of the Peter G. Peterson Foundation, a philanthropic organization devoted to the issues of taxes, deficits, and fiscal responsibility.

"Reasonable people can and will differ about whether or not his proposed approaches are the best choices. But I think he's proved himself a clear leader. He's stepped into the breach. Only time will tell."

Time certainly didn't seem to be on Obama's side when he arrived in Washington.

He gave Congress three weeks to produce a stimulus bill that would help revive the staggering economy, only to see the promise of bipartisanship that graced the capital during the inauguration quickly evaporate. After bitter divisions emerged between advocates of tax cuts and spending, not a single House Republican voted for the sweeping $787 billion stimulus bill, which promised to pour money into infrastructure projects, aid to the states, and small tax credits for taxpayers.

In the end, only three GOP senators approved of the plan.

On February 17, less than a month after he was sworn in, Obama signed the bill into law.

Seeing the money.

Whether the package was too big or too small is still the source of heated debate at both ends of the political spectrum.

As the sparring continues, the funds are beginning to flow. More than $60 billion is now pouring into food stamp programs and an expansion of unemployment benefits.

Nearly $100 billion is headed for state education budgets to help prevent teacher layoffs. The stimulus has also offered a reprieve to more than 40 states facing a combined $200 billion gap between projected tax revenues and spending, helping many governors avoid immediate budget cuts.

Economists have generally applauded the size and scope of the recovery program, which is expected to create or save as many as 3.5 million jobs. But because so much of the funding isn't expected until June and July, when it will finally clear the last bureaucratic hurdles, and a sizable portion of the money isn't scheduled to be spent until 2010, many experts believe the recovery package wasn't as focused on immediate stimulus as it could have been. "Nothing of significance is going to happen until this summer and, at that point, the declining phase may be over," says Barry Bosworth, a senior fellow of economic studies at the Brookings Institution. "Initially, we were hoping the government could fill the gaps when demand was falling sharply, so we wouldn't have to go through these months of hundreds of thousands of job losses. But it's a lot harder than you think to come up with an expenditure program that can be done quickly and efficiently."

The same could be said about Obama's plan for the struggling housing market, another vulnerable pillar of the economy, which he announced the day after he signed his stimulus bill. With nearly 1 in 10 homes in the country either delinquent or in foreclosure, Obama proposed a $275 billion package to help homeowners who owe more on their mortgages than their homes are worth. The plan has given an estimated 9 million borrowers more flexibility to alter the terms of their loans, but its effectiveness, too, is not yet clear. Foreclosure rates still haven't hit bottom, experts say, and construction of new homes declined through the spring. Most analysts expect a long, drawn-out housing slump. "I think we'll see foreclosures surge through the summer," Mark Zandi, chief economist at Moody's Economy.com, predicted after a wave of negative housing reports in April.

In the meantime, Obama has been left to grapple with what has become his biggest political problem: the lingering meltdown on Wall Street. As soon as he took office, his secretary of the treasury, Timothy Geithner, began fielding questions about how he would use the $300 billion remaining in the Troubled Asset Relief Program, or TARP, the bank bailout plan initiated under President Bush. But after a lackluster rollout, Obama's plan to form partnerships with private lenders to clean up $1 trillion of bad loans on bank balance sheets continues to be the most controversial of his recovery proposals.

Calming the growing backlash against sending any more taxpayer funds to the same institutions that caused the economic meltdown remains at the top of Obama's agenda. "I understand that TARP is not popular," he said in a wide-ranging speech on the economy in April. "But whether we like it or not, history has shown repeatedly that when nations do not take early and aggressive action to get credit flowing again, they have crises that last years and years instead of months and months."

Even if Obama's words haven't satisfied everyone, they have sobered economists, many of whom remain deeply uncertain about when the credit freeze on Wall Street will end. "The truth is, at this point in the financial bailout, we're sort of learning as we go along--not just the administration but much of the economic profession," says Alan Auerbach, a professor of law and economics at the University of California-Berkeley. "Even what to do with the automakers is simple by comparison; it's just a straightforward economic issue. No one's sure exactly how best to do the banks. Frankly, I don't know what the postmortems will look like in a year or two."

In spite of the rising political temperature, most voters seem willing to wait and see how Obama's recovery efforts pan out. His approval rating remained steadily above 60 percent during his first months in office, and polls showed roughly half of voters believed the economy was on the right track, compared with 80 percent who felt things were going in the wrong direction in the fall. Most analysts don't believe this honeymoon will last forever, of course, and Obama has started to talk up the prospect of recovery, saying in April that he sees "glimmers of hope."

Post-recovery problems.

If he's right and the economy does begin to bounce back this fall, there are still plenty of obstacles ahead. Some of them, in fact, are of the administration's own making. Undeterred by either the recession or the more than $12 trillion the government has already spent, lent, or guaranteed this year, Obama has pressed forward with his costly campaign promises to pursue healthcare reform and combat global warming. His $3.6 trillion budget not only includes huge, bailout-heavy deficits this year; it projects a total of $7 trillion in deficits over the next decade.

Obama's political opponents aren't the only ones worried about the long-term implications of this growing pile of debt.

While Obama continues to speak broadly about reforming everything from the tax code to Social Security, more and more economists believe the time is coming when boldness and swiftness may need to give way to some prioritizing.

"He's exactly right. We need to do all of that. But what he hasn't done is explain how we're going to get there," says Walker. "We've seen all too frequently how government can give people what they want but not pay for it. The last thing we need is to shoot ourselves in the foot again."

Obama has been marching boldly and spending freely since he took office.

Even as the bill comes due, his pace still shows no sign of slowing.

(c) 2009 U.S. News & World Report

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