But Geithner already had the president’s ear. Privately, Obama offered reassurance. “I’d have said the same thing,” Obama told him, according to two people familiar with the conversation.
By early last year, Geithner was beginning to gain the upper hand in a rancorous debate over whether to propose a second economic stimulus program to Congress, beyond the $787 billion package lawmakers had approved in 2009.
Lawrence Summers, then the director of the National Economic Council, and Christina Romer, then the chairwoman of the Council of Economic Advisers, argued that Obama should focus on bringing down the stubbornly high unemployment rate. This was not the time to concentrate on deficits, they said.
Peter Orszag, Obama’s budget director, wanted the president to start proposing ways to bring spending in line with tax revenue.
Although Geithner was not as outspoken, he agreed with Orszag on the need to begin reining in the debt, according to current and former administration officials. Some spoke for this article on the condition of anonymity to discuss internal deliberations.
Even before the president had been inaugurated, Geithner had been urging him to set a target for the budget deficit that would require shrinking its size to 3 percent of the U.S. economy. At that level, the national debt would eventually become manageable.
“From the earliest moments of the administration and even before, he clearly had a big focus on long-term deficit reduction and making clear, not just to the markets but for the entire economy, that the government is living within its means,” Goolsbee said in an interview.
The economic team went round and round. Geithner would hold his views close, but occasionally he would get frustrated. Once, as Romer pressed for more stimulus spending, Geithner snapped. Stimulus, he told Romer, was “sugar,” and its effect was fleeting. The administration, he urged, needed to focus on long-term economic growth, and the first step was reining in the debt.
Wrong, Romer snapped back. Stimulus is an “antibiotic” for a sick economy, she told Geithner. “It’s not giving a child a lollipop.”
In the end, Obama signed into law only a relatively modest $13 billion jobs program, much less than what was favored by Romer and many other economists in the administration.
“There was this move to exit fiscal stimulus a lot sooner than we should have, and we’ve been playing catch-up ever since,” Romer said in an interview.
Some of Obama’s Democratic allies felt let down. Andrew Stern, former president of the Service Employees International Union, said in an interview that Geithner looks at the world “from his experience, which is predominantly a Wall Street, Treasury, fiscal and monetary policy point of view.”
‘Plan beats no plan’
Even as Geithner stumbled in his first months, Obama stood by him. And they grew closer, their relationship nurtured by daily meetings and occasional basketball games. “They don’t get worked up when things are going wrong. They don’t get worked up if things are going well,” a senior White House official said.
By the middle of last year, Geithner’s fortunes had shifted. Even the gargantuan bailout of American International Group by the federal government wasn’t looking so bad anymore. Last summer, Jim Millstein, an investment banker assigned to oversee Treasury’s rescue of AIG, walked into Geithner’s office with good news: Taxpayers were going to get their investment in AIG back, and maybe a profit.
“Get the [expletive] out,” Geithner responded. “I haven’t had any good news on AIG.”
In reality, this was one in a series of successes Geithner was enjoying. Banks were paying back hundreds of billions of bailout dollars to the government. Ambitious legislation to overhaul financial regulation had finally passed Congress. The financial system was on the mend.
And Geithner’s influence with the president was growing on a wide range of issues, including sanctions on Middle East regimes and policy toward China.
Buoyed by his successes, Geithner felt ready to fire the administration’s first salvos in the debt war last summer.
Republicans were pushing for an extension of tax cuts for the wealthy enacted during George W. Bush’s presidency. It was administration policy to oppose extending them, but neither White House advisers nor congressional Democrats, facing tough midterm elections, wanted to engage in a tax fight.
Geithner, however, believed the tax cuts were a waste of money at a time of growing deficits and began giving speeches about the importance of letting them expire. When the Republicans won the midterm elections, Obama negotiated a deal with GOP leaders to extend the tax cuts in exchange for other measures that would stimulate the economy.