Expectations for the President-elect

President Elect Obama must quickly act to reset expectations, or a new Newt Gingrich will sweet the Republicans back into a majority in the Senate in 2010.

Here is what I recommend, issue-by-issue:

On Iraq:
Obama should keep Gates as his Secretary of Defense. Not only is the man capable, but he's been one of the masterminds of the strategy that is currently working. Obama should push to have some of the US troops there as long as needed, probably until some time in 2012 or so. He should then request that a small contingent remain to fight terrorism and support the Iraqi government. I imagine this being a base of about 20,000-30,000 soldiers, similar to what we used to have in Saudi Arabia. Part of the point of this whole war, after all, was to move our permanent bases out of Saudi Arabia.

On Afghanistan:
Obama should immediately confer with General Petraeus and craft an aggressive plan for pacifying Afghanistan. Much as we will have spent three quarters of a trillion dollars in Iraq, we should now be prepared to spend several hundred billion dollars to clean up and rebuild Afghanistan and parts of Pakistan.

On the Economy:
Obama must avoid the temptation to over-regulate the economy, and the banking industry in particular. We don't need safeguards to keep people from borrowing or lending money. We need regulations that ensure that transactions are transparent and understandable, and that the risk level of securities can be assessed and insured correctly. We need markets for all securitizable entities, so that things like collateral debt swaps don't get traded "off the market" in one-to-one exchanges, which provide no information to the broader market. Yes, this is a form of regulation, but moving things out into the open is the regulation we need; simply restricting what people can do is not what we need. Too much restriction and businesses will turn against Obama.

On Taxes:
Obama needs to start being honest with people about how taxes are going to rise. The net tax paid by most people will go up under Obama, not down. The "tax cuts for 95%" are misleading, because half of those people pay little federal income tax, and even if the taxes are raised on, say, businesses for their part of health care insurance, this ultimately affects employees. They either get higher payroll taxes, lower salaries, or fewer jobs. There is no such thing as a free lunch. Obama needs to explain how raising taxes could help the economy. If he doesn't, then he will come under harsh criticism for taking money out of circulation precisely when the economy is sputtering. If the total federal tax receipts go up as a result of policy, during a rough economic time, Obama will appear to be doing the opposite of what Keynes suggested.

On Energy:
A cap&trade system, or anything that puts the burden correctly on polluters, is good. The alternative energy and green fuel subsidies he's proposed are probably a bad idea because: a) they are distortive and b) they don't help the economy enough to justify them as "stimulus" measures.

If you still think the subsidies are a good idea, think about the ethanol/corn subsidies of the last few years. Not only has ethanol not made the hoped-for major strides as an alternative, but the government has spent TONS of money promoting it, raising corn prices, which has raised many food product prices worldwide. Lest you think that was just "the wrong specific thing to push" ethanol seemed very logical. Corn was cheap and abundant a few years ago. The US can produce lots of ethanol. Many cars on the road could already use E85 (which is 15% gasoline and 85% ethanol) and making more cars that could run on ethanol required only minor engine modifications. Just because something seems like a good idea, doesn't mean that it is. The market is much better at deciding which ideas are truly valuable. Obama should use it.