Intro to Obamanomics

December 16, 2008

Will the new Obama administration live up to the expectations of real change? Alan Maass and Petrino DiLeo look at who's been put in charge and the questions they'll have to answer.

A FEW weeks ago, Time magazine featured Barack Obama on its cover, morphing his image with that of Franklin Delano Roosevelt, over the headline "The New New Deal?" The cover article speculated about the dawn of a "new liberal order" that would resurrect the big-government economic policies associated with Roosevelt in the 1930s.

But if Obama had been pictured with his administration's economic team that he was in the process of assembling at the time, the headline might have read "Same Old Same Old."

His appointees all belong to the center-right of the mainstream political establishment and are known for championing the very policies of neoliberalism and deregulation that pushed the economy deeper into the worst crisis since the Great Depression.

So how will Obamanomics shape up over the coming months? On the one hand, Obama's appointments signal a commitment to orthodox economic policies--to the left, of course, of the tax-cuts-and-more-tax-cuts Bush administration, but equally devoted to the interests of Wall Street and big business.

Barack Obama and National Economic Council Director-designate Lawrence Summers
Barack Obama and National Economic Council Director-designate Lawrence Summers (John Gress | Rapport)

Yet Obama faces an economic crisis that won't respond to the tame measures his advisers promoted in the past. Plus, the impact of the crisis on working people and the high expectations for Obama are already starting to produce greater political pressure from outside Washington than the U.S. political system has felt in a long time.

Thus, the "same old same old" could find themselves forced to deal with something new.

IF THE hawkish character of the new administration's foreign policy team was symbolized by Obama's choice of Hillary Clinton--his pro-war critic from the primaries--as secretary of state, the touchstone for economic appointments seems to be the other Clinton. Virtually every top-level policymaker has a stint in Bill Clinton's White House on their résumé.

None among them is associated with the labor movement or even the more liberal economic think tanks. For example, Jared Bernstein of the left-leaning Economic Policy Institute was thought to have Obama's ear during the campaign. But he was passed over, and will serve instead as an adviser to Joe Biden, the vice president.

The real common denominator among the economic team seems to be a relationship with Robert Rubin, the former Treasury Secretary under Bill Clinton and now head of Citigroup, the Wall Street giant that had to be rescued from the brink by a $300 billion federal bailout.

During Clinton's presidency, Rubin engineered the administration's adoption of the pro-free market agenda known as neoliberalism--including, for example, deregulation of the banking system that allowed the wild speculation on Wall Street at the heart of the current crisis. Now, though he isn't in the new administration himself, his acolytes hold top positions.

One is Larry Summers, Rubin's deputy at the Treasury Department and his successor as treasury secretary toward the end of the Clinton years. He'll head Obama's National Economic Council.

Summers was one with Rubin in opposing new financial regulations as the high-risk market in esoteric investments called derivatives began to thrive. Along with Rubin and then-Federal Reserve Chair Alan Greenspan, he was part of the trio dubbed the "Committee to Save the World" by Time magazine for promoting neoliberal policies that helped set the stage for the crisis underway now.

Previously, Summers was chief economist for the World Bank, imposing the gospel of neoliberalism in less developed countries. Summers was notorious for a memo he signed that argued poor countries in Africa were "vastly UNDER-polluted," and that "the economic logic behind dumping a load of toxic waste in the lowest wage country is impeccable."

Timothy Geithner, Obama's Treasury Secretary, is also a protégé of Rubin's, having served as an under-secretary in the Clinton-era Treasury Department. Since 2003, he's been the head of the Federal Reserve Bank of New York, where he helped engineer the government response to the financial crisis.

Geithner set up the forced sale of the Bear Stearns investment bank to JPMorgan Chase, and he reportedly played a pivotal role in the decision to bail out insurance giant AIG, but let Lehman Brothers--a competitor to Rubin's Citigroup--go bankrupt, which dramatically intensified the crisis. According to the Nation's William Grieder:

[Geithner's] strategy has not only failed, it has arguably made things worse as savvy market players saw through the contradictions and rushed out to dump more bank stocks.

On Wall Street, Geithner is known as a highly competent technocrat, well versed in the financial complexities. But he has also been seen as a weak and compliant regulator of Wall Street firms, someone who did not see the storm coming. Occasionally, Geithner would anguish publicly about the accumulating time bombs like credit derivatives and urge bankers to do something, but he did not use his supervisory powers to compel action.

Obama's embrace of figures associated with the Clinton administration didn't begin after November 4. As his main adviser on economic issues during the campaign, Obama selected Jason Furman, who owed his previous job as head of the Brookings Institution's Hamilton Project think tank to--who else?--Robert Rubin.

Furman is well known to labor activists for a 2005 article defending the antiunion retailer Wal-Mart as a "progressive success story" and denouncing the efforts of labor-backed groups like Wal-Mart Watch to expose the company's ruthless practices.

One leading person on the Obama economic team doesn't owe his career to Robert Rubin. That's former Federal Reserve Bank Chair Paul Volcker, who will chair a newly formed Economic Recovery Advisory Board. But Volcker's record shows he's no more likely to side with working people.

Volcker was appointed to lead the Fed by Democratic President Jimmy Carter, but he was kept on by Republican Ronald Reagan for much of his two terms. He engineered the so-called "Volcker Shock"--an attempt to drive down inflation by hiking interest rates to historically high levels. The goal was achieved--inflation fell--but at a heavy cost: A sharp recession in the early 1980s, during which unemployment hit 10 percent, and a worldwide rise in interest rates that greatly exacerbated the debt crisis in developing countries.

Volcker loudly applauded the attack on the PATCO union for air traffic controllers. When Reagan, operating under a plan drawn up by the Carter administration, announced that the striking PATCO workers would be fired, Volcker said it was "the most important single action of the administration in helping the anti-inflation fight."

THUS, IT can be alarming to read in the Wall Street Journal that:

Obama is increasingly relying on Mr. Volcker. His staff now routinely reviews policy proposals and speeches with Mr. Volcker. Conference calls and face-to-face meetings of the Obama economic team are often reorganized to accommodate his schedule. When the team discusses the financial crisis, "The most important question to Obama: What does Paul Volcker think?"

But does this mean that the die is cast, and the Obama administration will carry out the same economic policies that Volcker, Rubin and the rest pushed in the past? Are we in for another Reaganite assault on the working class of the sort Volcker helped carry out, or a resurrection of Rubin-style neoliberalism that vastly increased the gap between rich and poor during the Clinton years and beyond?

Like Obama today, Bill Clinton won the presidency in the midst of a recession. But the early 1990s recession wasn't one that shook the free-market system like today's crisis has. The depth of the problems plaguing the economy is driving the political establishment toward a different economic program--with the support of Wall Street and Corporate America.

Case in point: In the past year, the U.S. government has carried out its most dramatic intervention in the American economy since the Great Depression. Estimates of the total cost of federal bailouts and nationalizations run to a mind-boggling $8 trillion. And all this was done by the Bush administration, which has been devoted to the dogma of tax cuts for the rich and cutting government spending (except on defense).

In other words, events in the real world forced Republican true believers to abandon the economic orthodoxy that reigned for the past 30 years.

The Obama administration can be expected to continue in this direction--with full recognition by those involved that they are changing course. Thus, in recent columns in the Financial Times, Larry Summers has argued for bigger and bigger measures to stimulate the economy--proposals he probably would have rejected before as belonging to that once-upon-a-time "era of big government."

"Just as patients hear advice regarding diet and exercise differently after a heart attack," Summers wrote before the election, "so recent events should make it possible for the next U.S. administration to accomplish more than might previously have been thought possible."

In general, the new strategy taking shape bears resemblances to Keynesianism--the economic doctrine, named for economist John Maynard Keynes, that dominated from the 1930s to the 1970s. Keynesianism came to stand for heavy state intervention in the economy, fueled by deficit spending on jobs programs and other measures meant to spur demand and consumption.

This shift is, in itself, a break from the dominant neoliberal model that succeeded Keynesianism in the 1970s and 1980s. The idea of "supply-side" economics--of cutting taxes for the rich and corporations, and providing subsidies to them in a variety of ways, in the belief that their investments would spur growth and ultimately "trickle down" to the rest of the population--has lost whatever credibility it still had.

But the exact shape of these policies remains to be seen. The key is how working people mobilize to make their demands felt on the political system. If there isn't pressure from below, the political establishment--under a President Obama, as under a President Bush--will try to put the interests of Corporate America first, whatever the exact tactics they decide to use.

TO SEE which direction Obamanomics is headed, keep a close eye on these issues:

An economic stimulus package
Obama is promising to make the passage of a new economic stimulus package his first order of business. At the end of November, Obama was talking about a two-year plan with the goal of saving or creating 2.5 million jobs. (That sounds impressive, but consider that the economy has already shed 1.9 million jobs in 2008, and that's not the total for the full year yet.)

The size of the stimulus proposal keeps growing. During the Democratic primaries, Obama resisted matching plans put forward by Hillary Clinton and John Edwards--he put a $50 billion price tag on his package. That grew to the $150 billion to $200 billion range by October. Since the election, the size ballooned further to more than $500 billion--and there's speculation in the media that it might be doubled again to $1 trillion when the Obama economic team meets this week.

The danger, according to New York Times columnist Paul Krugman, lies on the side of not doing enough. "My advice to the Obama people," he wrote last month, "is to figure out how much help they think the economy needs, then add 50 percent. It's much better, in a depressed economy, to err on the side of too much stimulus than on the side of too little."

Obama and leading Democrats in Congress are agreed on a much broader range of measures than the Bush administration's favored tool of tax rebates. There will be a tax cut package for lower- and middle-income workers, but in congressional testimony this fall, Summers--already seen to be speaking for an upcoming Democratic administration--argued explicitly for government spending designed to "[raise] the demand for goods and services."

Among his suggestions for a post-election stimulus package were expansion of the food stamps program, extending unemployment insurance, infrastructure spending, investment in renewable energy projects, and federal assistance to state and local governments facing deficits to prevent cutbacks.

A stimulus package built along these lines will feel like a breath of fresh air after eight years of the Bush administration's Robin-Hood-in-reverse policies--not to mention the Clinton-era packaging of similar neoliberal policies with a slightly more liberal face.

Nevertheless, it will be important to look closely at the details. For one thing, Obama continues to portray himself as a disciplined budget watcher. "To make the investments we need, we'll have to scour our federal budget, line by line, and make meaningful cuts and sacrifices," Obama said at a press conference.

Plus, Obama advisers have suggested that the new administration might not seek to repeal the Bush tax cuts for the richest Americans, as Obama insisted he would during the campaign, but let them expire in 2011, as scheduled.

So look out for the tradeoffs when the stimulus package takes shape--in particular, whether the Obama administration tries to take away with cutbacks in other areas what it gave in new spending.

Infrastructure and green jobs
Throughout the presidential campaign, Obama talked about government programs to create "green jobs" and to revitalize the U.S. infrastructure.

In the near term, the benefits in stimulating the economy are obvious. "It turns out that putting money into green technologies...has a very large positive employment effect relative to tax cuts," economist Robert Pollin told the Associated Press. "It's very efficient in terms of creating jobs for a given amount of spending, and it has the added benefit that the short-term effects are compatible with long-term needs in the economy."

Infrastructure investment could have even larger impact in providing a short-term burst to the economy through job creation and stimulating demand for industrial goods.

But there is a longer-term benefit for American capitalism--using state spending to lay the groundwork for reindustrialization. During the economic expansion that began at the end of 2001 and ended late last year, the number of factories in the U.S. declined--making this the first boom in U.S. history that resulted in a net decrease in capital stock.

The leading voices of Obama's economic team believe that this situation has to be turned around, and that an additional benefit of spending on infrastructure projects would be to spur the expansion of U.S. industry, in contrast to the financial boom of the 2000s that took place at the expense of other sectors of the economy. Thus, Paul Volcker has said repeatedly in interviews that the U.S. produced too many financial engineers and not enough civil engineers in the past 30 years.

But again, the devil will be in the details--the specific form that investments in infrastructure or green technology take place.

Obama's advisers aren't arguing for a New Deal-style program like the Works Progress Administration that directly employed millions of people on a vast array of projects. Rather, they support a so-called "public-private" approach--using public funds to finance work carried out by private companies.

This will bring a number of political questions into play--above all, whether the priority in such programs is on creating good-paying union jobs, or on pumping up the balance sheets of big business.

Regulating the financial system
The new Obama administration will have the project of re-regulating the U.S. financial system.

No one can dispute that the disastrous financial crisis on Wall Street was caused by high-stakes gambling by the biggest banks and investment firms, taking place beyond any government oversight. Even determined defenders of the free market like the editorial writers at the Wall Street Journal acknowledge that Washington's deregulation frenzy of the last several decades has run its course, and new rules will have to be imposed.

Timothy Geithner sounded a warning in congressional testimony that likely represents the attitude of the incoming administration. "It is going to require significant changes in the way we regulate and supervise financial securities," Geithner said, "changes that in my view, need to go well-beyond modest adjustments to some of the specific capital charges in the existing capital regime as it applies to banks."

But the pressure is on for the Obama administration to put off re-regulation until the financial system is stabilized. That would be a mistake, as Paul Krugman wrote in a recent column:

[O]nce the economy is on the road to recovery, the wheeler-dealers will be making easy money again--and will lobby hard against anyone who tries to limit their bottom lines. Moreover, the success of recovery efforts will come to seem preordained, even though it wasn't, and the urgency of action will be lost...The time to start preventing the next crisis is now.

Labor and the Employee Free Choice Act
In an unusual op-ed article published in the New York Times on the eve of the election, Robert Rubin teamed up with liberal Jared Bernstein to make some suggestions for economic policy. In a section titled "Capital versus labor," the two wrote:

[T]he benefits of [U.S] productivity growth have largely eluded working families. Though productivity grew by around 20 percent from 2000 to 2007, the real income of middle-class, working-age households has actually fallen $2,000, down 3 percent.

One factor behind this outcome is the severely diminished bargaining power of many workers, and here the decline in union membership has played a key role. A true market economy should have true labor markets in which labor and business negotiate as peers...To re-establish that [relationship], workers should be allowed to choose to be unionized or not.

That sounds like a pretty unambiguous plea for the Employee Free Choice Act (EFCA), which would require employers to recognize a union if 50 percent plus one of workers in a given workplace sign union cards. Obama himself supported EFCA in similarly unvarnished language.

The question now, however, is whether President Obama will fight for EFCA. Corporate America has made it clear that it won't give in without a battle--or worse, if Home Depot founder and CEO Bernie Marcus gets his way. According to author Thomas Frank, Marcus declared in October that EFCA represents "the demise of a civilization. This is how a civilization disappears. I'm sitting here as an elder statesman, and I'm watching this happen, and I don't believe it."

Organized labor is gearing up for a campaign to push for EFCA, but there are signs that some union leaders don't want to go too far--for fear of alienating the Obama administration. Thus, John Wilhelm of UNITE HERE wrote in a memo that labor shouldn't launch an all-out campaign for the law.

But if unions don't fight for EFCA, who will? Corporate America certainly won't hesitate to make its voice heard and influence felt.

Labor has momentum on its side on this issue--not only from the huge turnout for Obama from people hoping his election would mean that working people finally get a hearing in Washington, but from a series of significant victories like the Republic Windows & Doors occupation in Chicago and the Smithfield Foods union certification election in North Carolina. That momentum can't be squandered.

As in every other aspect of Obamanomics, there's one factor that goes beyond the back and forth of mainstream politics in Washington: Will working people mobilize to demand what's due them from the new Obama administration--and not take "no" or "later" or "be patient" for an answer?

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