Summers defends economic policies

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By Jon Ward

President Obama's top economic adviser on Friday defended the administration's efforts to right the staggered U.S. auto industry, capping a weeklong offensive by the White House to allay fears and argue that its handling of the economy has been carefully tailored to go only as far as necessary.

Throughout a 30-minute speech, Lawrence H. Summers repeatedly emphasized that the Obama administration's policies are intended to provide guide rails for the free-market capitalist system and not to destroy it.

"There is nothing that should be seen as remarkable about the way in which finance was provided during the Chrysler or General Motors transactions," said the director of the president's National Economic Council, acknowledging that the government's treatment of bondholders and unions has "generated some controversy."

But Mr. Summers attempted to frame the delivery of better results for unions than for bondholders as financial and not political decisions, pointing to similar decisions made in the past by steel companies that "made a business judgment that to run steel companies effectively in the future, they needed to maintain a smooth ongoing relationship with the representatives of their employees."

"For the same reason, certain creditors of various forms ... are often treated much more generously than other creditors in bankruptcies," Mr. Summers told members of the Council on Foreign Relations in New York.

The speech ended a dizzying week in which the president and much of the White House message machine focused on driving home the point that they are trying to bring the economy back from severe recession while also controlling spending and fixing the country's health care system. It came as a USA Today-Gallup poll showed approval of Mr. Obamas handling of the economy dropping four percentage points.

Mr. Obama did events on Monday, Tuesday and Thursday focused on the economy and health care, and Vice President Joseph R. Biden Jr. traveled to a handful of states to promote ways in which the administration's $787 billion stimulus spending package is helping states and local communities.

On Tuesday, the president stated that the government "turned a profit" of around $1.8 billion with the first round of loans that were repaid to it with interest by some of the nation's largest banks that took money under last fall's $700 billion bailout.

Treasury Secretary Timothy F. Geithner on Wednesday scrapped the administration's idea to cap executive pay at financial institutions that have taken bailout money at $500,000, after the idea prompted resistance from companies that said top talent would go outside the country and hurt U.S. competitiveness.

The White House was helped by mildly encouraging economic data. Retail sales rose modestly, and first-time jobless claims declined, while the stock market fluctuated but followed a generally upward trend.

But Mr. Obama also took some substantive hits on his administration's claims of job creation and preservation, by nonpartisan economists who said the White House was overselling the impact of the stimulus. He also came under criticism for touting pay-as-you-go rules on spending as evidence of fiscal restraint, though the guidelines do not apply to large portions of the federal budget and traditionally have been flouted.

Additionally, the president's push for a government-run health insurance option to private plans ran into some trouble on Capitol Hill, where Democratic senators said the votes do not exist to push through such a plan.

Next week, the White House will roll out plans to prevent another economic crisis in the future through better oversight of the financial system. The plans have been the subject of anticipation on Wall Street and elsewhere for months.

Mr. Summers, a former Treasury secretary under President Bill Clinton, laid out general principles in his speech before the Council on Foreign Relations that will undergird the administration's attempts to provide "greater stability and safety" in the U.S. economy.

He said that complicated financial products such as derivatives should be regulated, that the government should be able to take over non-bank financial institutions on the brink of collapse, that there should be more stringent capital reserve requirements for institutions, and that consumers should enjoy greater protections.

Mr. Geithner also said this week that executive pay should be linked to the long-term performance of a company and not to short-term incentives that could encourage excessive or irresponsible risk-taking.

Valerie Jarrett, a senior adviser to Mr. Obama and liaison to the business community, said she knows there is anxiety about the government being overly involved in the economy, through regulation and through partial or majority ownership of car companies and banks.

"Everyone's always concerned with government regulation. But I think what they will learn in time is that the president really does understand their challenges," Mrs. Jarrett said in an interview with Bloomberg Television.

The end goal of the administration, Mr. Summers said, is that when high school students open their history text books in 2040, "they don't learn about how the economy was performing in 2008 and 2009" in a unit following study on the Great Depression of the 1930s.