Fed alone can't avert recession: Obama's adviser

WASHINGTON (Reuters) - U.S. Democratic presidential hopeful Barack Obama's rapid ascent has investors eager to pin down his fiscal policies as a suspect U.S. economy pushes pocketbook issues to the fore.

Austan Goolsbee, the Illinois senator's top economic adviser, on Monday described Obama's economic policy as an eclectic mix favoring middle-class tax cuts as well as raising the capital gains tax. He backs raising the minimum wage and wants to reopen trade pacts such as NAFTA to add labor and environmental protections.

In a Reuters interview, Goolsbee said the economy was clearly sagging under the weight of a housing downturn, tightening credit conditions and rising inflation -- problems that he said interest rate cuts alone would not solve.

"It's at least going to be painful and it certainly has the possibility of being quite a difficult situation," said Goolsbee, an economics professor at the University of Chicago Graduate School of Business.

"We can't just rely on the Federal Reserve at this point. I do think it makes sense to consider what the fiscal policy options are for helping prevent this thing from spreading."

Fresh off a win in the Iowa Democratic caucuses and with polls showing him pulling well ahead of New York Sen. Hillary Clinton in New Hampshire's primary election on Tuesday, Obama is coming under particularly close scrutiny as voters and the media try to get a handle on his policies.

The Wall Street Journal predicts he would impose a record tax increase while others in the financial world are not sure what to expect of an Obama presidency.

Obama has called for a tax credit of up to $500 per person, or $1,000 per family, to offset the payroll taxes they pay. According to his Web site, that would completely eliminate income taxes for 10 million people. At the same time, he also favors letting Bush administration tax cuts expire and raising the capital gains tax. (For more on Obama's key policy positions,

Goolsbee said Obama's plan for cutting middle-class taxes would ease short-term pressure on household budgets and lift the economy, which relies heavily on consumer spending.

Economists worry that rising costs for food and energy, along with financial market turmoil, were sapping discretionary spending, putting more strain on an already fragile economy.

On Friday, a government report showed the economy created far fewer jobs in December than economists had expected, and the unemployment rate jumped to 5 percent, the highest in two years, heightening fears of an imminent recession.

That has helped to shift the election focus toward economic issues rather than the war in Iraq.

The Wall Street Journal's editorial page, known for its conservative approach, said Obama's "orthodox policy liberalism" was a potential weakness in the November presidential election. The newspaper called him "left even of Mrs. Clinton" on taxes, and said his policies would amount to "the biggest tax increase in history by far."

Goolsbee said Obama's tax policies were too eclectic to be characterized as left-wing orthodoxy, adding, "I completely reject the premise." He pointed out that Obama was well ahead of the curve in proposing tax cuts months ago to shore up a faltering economy.

Wall Street is anticipating tax cuts as President George W. Bush considers a fiscal stimulus package, which may be unveiled in his State of the Union address later this month.

For investors, Obama's support of higher taxes on capital gains and dividends are the biggest issues, said Greg Valliere, chief strategist at the Stanford Group in Washington. He said Wall Street had widely expected Clinton to win the Democratic nomination, so Obama's swift rise has left them scrambling for clarity on his economic positions.

"My sense is that he's pretty flexible, he's not hamstrung by rigidity on a lot of these issues," Valliere said. "For the markets, that represents an uncertainty and markets don't like uncertainty."

(Editing by Bill Trott)

(To read more about the U.S. political campaign, visit Reuters "Tales from the Trail: 2008" online at blogs.reuters.com/trail08/)