Fiddling while the economy burns

April 11, 2008

THE NUMBER of Americans who depend on food stamps to feed themselves and their families climbed last year to the highest level since the program was introduced almost half a century ago. The U.S. economy shed a quarter-million jobs in the first three months of this year.

Three million homes lost to foreclosure by the end of the year. Forty-seven million Americans without health insurance.

And financial analysts say that if the coming recession--or more accurately, the recession almost certainly underway already--is only as bad as the 1970s, we'll be lucky, because at least we avoided a 1930s-style Great Depression. "[I]f this is not The Big One, it is likely to be A Big One--and a long one," wrote Economic Policy Institute founder Jeff Faux in the Nation.

Those are the grim facts about the U.S. economy, and in the face of them all, the presumptive Republican presidential nominee John McCain has one basic proposal.

More tax cuts.

No, that's not a seven-year-old echo from the early days of the Bush administration, or from George Bush Sr. or Ronald Reagan before that.

The scale of the looming disaster may have Wall Street executives quaking, but the presidential nominee of the first party of American business is sticking with a warmed-over stew of what Bush Sr. once called "voodoo economics": tax breaks to "stimulate" the economy and more cuts in government spending--except, of course, the $1 trillion that goes to the Pentagon and rest of the national security state.

"What really happens is that the economy grows more vigorously when you lower tax rates," insists McCain adviser Kevin Hassett of, predictably, the American Enterprise Institute. "It is beyond the reach of economic science to explain precisely why that happens, but it does."

It is also beyond the reach of economic facts to sustain the discredited claim of "supply-side economics" that handing out tax cuts to the super-rich leads to prosperity "trickling down."

But that isn't stopping McCain. According to Fortune magazine, his chief adviser on economic issues is none other than Phil Gramm, the former Republican senator from Texas, known even in Reagan's day as a supply-side fanatic.

Sure enough, Gramm claims today that the only problem with George Bush's $1.3 trillion in tax breaks for the rich is that the administration didn't make enough spending cuts in social programs at the same time. "If we'd had had them, we could cut taxes again and not make do with some temporary stimulus," Gramm said.

BY COMPARISON, the Democratic presidential contenders sound, well, in touch with reality.

For example, both Barack Obama and Hillary Clinton responded to the crack-up of investment bank Bear Stearns and the threat of a Wall Street crash with calls for re-regulation of the finance industry.

"[I]nstead of establishing a 21st century regulatory framework," Obama said in a speech, "we simply dismantled the old one--aided by a legal but corrupt bargain in which campaign money all too often shaped policy and watered-down oversight."

Of course, everyone expects tough talk from two candidates dueling for support from the Democratic base. But the combination of the drawn-out primary battle and the worsening crisis has pushed Obama and Clinton to go further than they would have otherwise--and given prominence to the case for overturning the neoliberal dogmas that have dominated the bipartisan Washington establishment for a generation.

Nevertheless, if you set their rhetoric aside, there's less to the two Democrats' criticism of business than meets the eye.

For example, to deal with the mortgage crisis and come up with a program to help homeowners in trouble, Hillary Clinton last month proposed an "Emergency Working Group on Foreclosures," led by a "distinguished, non-partisan group of economic leaders." The "leaders"? The top two are Alan Greenspan and Robert Rubin.

"Alan Greenspan, former head of the Federal Reserve, is the official most directly responsible for the current crisis," wrote liberal commentator Robert Borosage. "He not only failed to demand and enforce regulation of the shadow banking system at the heart of the credit collapse, but he served as cheerleader-in-chief for both the housing bubble and the exotic financial innovations that turned the staid home mortgage market into a speculative casino.

"Bob Rubin, Secretary of the Treasury under Clinton, made financial deregulation his signature, including repeal of the Depression-era Glass-Steagall Act designed to limit the conflicts of interest at the heart of the current debacle. As chief strategist of Citibank, he presumably helped lead that bank into billions of losses in mortgage-backed securities."

Clinton's proposal amounts to asking the foxes' "distinguished" leaders to talk about how they would fix the holes they designed themselves so the henhouse could be raided.

And Obama? After Clinton's speech, his campaign released a statement boasting that the Illinois senator had made a similar proposal last fall.

If Wall Street itself is concerned about either Obama or Clinton taking harsh action as the next president, you'd never know it from their campaign contributions. The two top Democrats have each taken in more than $6 million from securities and investment firms, far more than McCain.

THE SEVERITY of the financial crisis is so grave that Democratic and Republican lawmakers are uniting behind calls for new financial regulations, at least on investment banks like Bear Stearns.

But the regulations are small potatoes compared to the unprecedented rescue being undertaken by the Federal Reserve Bank to limit damage to the financial system--which has put U.S. taxpayers on the hook for tens of billions of bad debt racked up by Wall Street banks and hedge funds.

The question to ask is: Why are taxpayers being stuck with the bill for a crisis that Wall Street created? "[I]f the taxpayers are going to be responsible for bailing out greedy financial giants like Bear Stearns, they ought to get a piece of them in return, as well as some say in how they are run," liberal journalist James Ridgeway wrote in Mother Jones.

Likewise, the proposals currently being discussed in Washington to help homeowners facing foreclosure let the real culprits off scot-free.

Dean Baker, co-director of the Center for Economic and Policy Research, wrote that the plans "could give hundreds of billions of dollars to the banks, while providing little help to homeowners. Most would still be paying far more on their mortgage, property taxes and insurance than they would to rent a comparable home. Furthermore, the bailout conditions virtually guarantee they will never have a dime in equity."

When you look at the fine print, Barack Obama and Hillary Clinton's denunciations of predatory lending and hedge fund speculators aren't matched by the substance of their proposals to deal with the crisis.

That's no surprise. In spite of their increasingly populist rhetoric, both belong to the moderate mainstream of the Democratic Party establishment.

The same factors that are making the Democrats the favorites to take back the White House in November--the implosion of the Bush administration, the discrediting of the Republicans' right-wing agenda, the ever-worsening scale of the crisis--will likely force the next president, whoever it is, to take more decisive action than any mainstream politician is proposing now.

The U.S. ruling establishment has reached a rough consensus that it faces the worst economic crisis in at least three decades--and the next administration will be responsible for cleaning up the mess.

This could mean that Washington will be forced to take more dramatic measures to help ordinary people, if only to head off the threat of worse economic damage. But whether the victims get real help will depend on the scale of the opposition that develops from below.

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