Continuing to make bold moves in the first 100 days of his administration, Obama will announce this week two blockbuster appointments to senior positions at the Department of Treasury.

Freakonomist

Sure to raise eyebrows will be the appointment of University of Chicago economist Steve Levitt to Tim Geithner’s team. Rarely venturing into the realm of policy,  the author of Freakonomics is better known –and often derided– for research focusing more on cute trivialities like cheating by Sumo wrestlers.

Ironically, his foray into Sumo-economics appears to be exactly why he is getting the call.  As readers of Freakonomics know, Levitt made headlines when he used the same statistical analysis to expose widespread cheating by teachers in the Chicago Public Schools.  How does this help the Department of Treasury you ask?  Stress Tests.  The big headline of Geithner’s first announcement as Treasury Secretary was the promise  to screen out banks doomed to fail.  Strangely, Treasury has since been mum on the results from the stress tests. Now we know the reason:  it turns out all the banks are getting passing marks and the suspicious Treasury Secretary is calling on Levitt to bring his Sumo-scrutiny to bear on the banks.

Colleagues at the University of Chicago economics department are cheering the move.  “I could not think of a better choice than Steve Levitt to move to Washington and help the Obama team” says Nobel Laureate James Heckman, adding that he expects the job to occupy Levitt for two full Obama administration terms. “We will miss him, but he has an important job to do.”

When we finally reached Levitt, he was at McDonalds headquarters at Oak Brook, IL.  Some of their franchises have been cheating by hiding Big Mac revenues that they have to share with McDonalds.  Levitt has found a way to benchmark performance that can reveal suspiciously underperforming locations.  “This is what economists call ‘moral hazard,’ ” Levitt said over a carton of Chicken McNuggets. “Look, economics is not rocket science.  Think of the US Government as like McDonalds, a bank and a toxic asset are just like a franchisee and a Big Mac.  Once you see it that way, its simple.”

Former Bushie

Joe Lieberman supported John McCain during the election, made a speech at the Republican Convention and said Obama was not ready for the Presidency.  And yet Obama later forgave him because he knew Lieberman’s vote was going to be crucial in the Senate.

Now, Obama has shown the same pragmatic streak in inviting Greg Mankiw to join his administration.  Mankiw was the head of Bush II’s Council of Economic Advisors.  He has so far played a role on the sidelines, an informal referee of the contest between Obama and his right-wing critics.  Mankiw is often skeptical of Obama’s plans but at the same time he does not fully endorse their antithesis.  This ambiguity has suited Mankiw well, as he has been courted by both sides of the political spectrum.  Finally, he has chosen his prom date and decided to join the Obama administration.  He will serve alongside his old Harvard colleague Larry Summers as Co-Director of the National Economic Council.

Why did Obama choose Mankiw for this post?

Mankiw said, “Well, in all modesty, I must point out that I proposed something like the Geithner plan – of course, I call it the Mankiw plan (!) – last October.  There are some differences in the details but the principles are the same.  I’m looking forward to improving the plan and being involved in its implementation.  Whenever you are asked to serve your country, I think you should do it, even if there are  ideological differences with some of the people involved.”

The additional intellectual heft of having Mankiw on board will certainly help in the coming months.  Mankiw is also quite familiar with the rump of the Republican party that is still left standing in Congress.  He is one of the rare individuals who has a good relationship with both John Boehner and Mitch McConnell.  McConnell and Mankiw were bridge partners and they have the camaraderie and preternatural ability to wordlessly communicate that comes from expertize at that genteel but vicious game.  But Mankiw can also be a populist and is a great expositor of complex ideas, a fact that Obama hopes will help in persuading at least some House Republicans to occasionally vote for some of his economic plans.

There is another factor at play.  True to predictions, Larry Summers has proved hard to control within the West Wing.  Orzag and Geithner have not been able to do it.   In any case, they are fantastically busy trying to implement Obama’s healthcare policies and manage the financial crisis.  Furman and Goolsbee , who were both students in Cambridge, are in awe of their former teacher and find it hard to contradict him.  Summers and Mankiw respect each other, or at least Mankiw respects Summers!  Obama has watched Biden and Clinton argue over Afghanistan policy.  As a lawyer, Obama has always favored the “team of rivals” approach and wants to replicate it in economic policy.

Only one thing stands in the way.  Mankiw has amassed a huge fortune by selling economics textbooks all over the world.  He is incorporated in Switzerland as a Verein for tax purposes. A verein is an association of independent businesses and each international textook is an independent “firm” within the Mankiw Verein.  This has several tax advantages and seems to be all quite legal. But with the current furor over AIG bonuses the administration wants to tread carefully.

Jeff and Sandeep

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