The Economic Crisis and the Failure of Obama
The following interview was originally published at New Left Project http://www.newleftproject.org
Robin Hahnel is Professor of Economics at American University. His most recent book is Economic Justice and Democracy. He is co-author with Michael Albert of The Political Economy of Participatory Economics. This is the second of a three-part interview about the global economic crisis. Part 3 will follow shortly; part 1 can be found here.
How do you view the way in which the Obama administration responded to the crisis?
The Obama administration has been a major disappointment in every area. Instead of the change he campaigned on, Obama has actually brought us more war instead of peace, a continuation of imperial foreign policy most noticeably in Latin America and the Mideast, healthcare give-aways to the insurance and pharmaceutical industries instead of healthcare reform for consumers, further erosion civil liberties, and weak and counterproductive leadership on both domestic and international climate policy. But Obama has disappointed most in economic policy because the economic crisis created great opportunities which he did not taken advantage of but squandered instead. The proximate cause is that instead of choosing from a long list of distinguished economic advisors who warned against financial deregulation and the bankruptcy of trickle down economics, and who have excellent ideas about how to put our economic house back in order, he instead chose as his advisors the very people responsible for the policies that brought on the economic crisis in the first place.
The advice of economists such as Dean Baker, Jamie Galbraith, Jane D’Arista, Robert Pollin—not to speak of Nobel Laureates Joseph Stiglitz and Paul Krugman—is still being ignored. Instead, President Obama has unwisely chosen Laurence Summers as his Chief Economic Advisor and Timothy Geithner as his Secretary of the Treasury, neither of whom has a Nobel Prize to his name, and both of whom were key sponsors of the disastrous policies which got us into the mess we now find ourselves in. A very wise man once said: “We can’t solve problems by using the same kind of thinking we used when we created them.” President Obama better hope that Albert Einstein was wrong, because so far he has chosen to follow the advice of a team of economists with close personal ties to Wall Street whose discredited ideas bear a major responsibility for creating the perfect economic storm that is by no means over. Laurence Summers is not change, he is Clinton redux. Timothy Geithner is not change, he is a shill for Wall Street. And Ben Bernanke who Obama just re-nominated to be Fed chair for another term bears as much responsibility for the policies that led to the greatest financial crisis in over eighty years we are still suffering from.
Of course the underlying question is why Obama chose the economic advisors he did, and why he continues to listen to them despite overwhelming evidence that their advice has failed to produce desirable economic results and has now revitalized a Republican Party that was in hopeless disarray only fifteen months ago. I am not particularly inclined to speculate about motives, but I suspect the answer to that question lies in where Obama has gotten his campaign finance support in the past, and continues to plan to raise money in the future. The answer lies in a political strategy that came to be known in the Clinton Administration as “triangulation.” And the answer lies in the fact that Obama personally is a centrist not a progressive, and Obama is cautious not audacious—even though present circumstances would reward boldness and will punish timidity. Finally, people I trust who have taken the time to examine his career carefully tell me Obama always “talks the talk” but seldom “walks the walk.”
How has Obama “blown it?”
1. We needed a fiscal stimulus twice as large as the one Obama got us.
In January 2009 political support for a fiscal stimulus to reverse the recessionary slide was so overwhelming that even Republicans ended up voting for the stimulus bill that was passed – and now we know what a rare occurrence that truly was! But Obama got us a much smaller stimulus than we needed, and than he could have gotten. First he let Larry Summers severely restrict the size of the stimulus in deliberations within the Administration. Then he made the strategic mistake of proposing the size he wanted to the Republicans in Congress rather than inflating it for negotiating purposes knowing they would whittle down whatever he proposed considerably.
What we got was a stimulus that was only half the size we needed and insufficient to reverse the recessionary slide. With hindsight almost everyone recognizes we needed a bigger stimulus, and because we did too little in 2009 we need to do more in 2010. But there were plenty of economists who warned at the time that the stimulus was too small and the negotiating strategy was naïve to the point of criminal incompetent. Paul Krugman waxed poetic on this subject twice weekly in the New York Times, and he was not alone.
Obama also allowed the Republicans to remove a crucial component of the stimulus bill. As Krugman pointed out in a brilliant column at the time, while the federal government was trying to avoid repeating the mistake Herbert Hoover made in 1930 of reducing spending to balance the federal budget in light of lost tax revenues from the economic collapse, our fifty state governors were being forced to act exactly like Herbert Hoover because the recession had crippled state revenues and they were being forced to cut state expenditures as a result. Obama let the Republicans remove the aid for state governments from the stimulus bill that could have saved millions of public employee jobs at the state and local levels. Every state government has cut and is continuing to cut its own payrolls and reducing aid to local governments, who then must fire teachers, librarians, and transit workers exactly when we need governments at all levels to hire more not fewer people.
And now it is more difficult to get further fiscal stimulus than it would have been back in the winter of 2009. Now that the deficit drummers have been given time to drum up a storm, and popular anger over the bank bailout, which is erroneously but routinely conflated with a fiscal stimulus, has swelled, passage of a second fiscal stimulus is much more difficult.
2. We needed a stimulus whose composition was designed to give us the most jobs for our deficit dollar and help state governments who cannot sustain budget deficits as easily as the federal government.
Keynes was famously quoted as saying to British politicians during the depths of the Great Depression that if they could not be even as creative as the Pharoses of Ancient Egypt and create public works programs to build pyramids, then they should simply hire people to dig holes one day and hire them the next day to fill them back up. But we can do better than paying people to accomplish nothing. We can hire people to teach our children, repair our dilapidated public infrastructure, and begin the work necessary to switch from fossil fuels to renewables and make our economy more energy efficient. Without the need for more spending and more tax breaks created by the recession it would have been harder to win support for this kind of activity. Political gridlock and ideological myopia would have stifled demand for greening the economy more had not the need for a massive stimulus appeared. The best part of Obama administration policy to date was the green part of the initial stimulus bill, yet we can do far better in this regard at both the national and state levels. Moreover, the advisor most closely associated with Obama’s best policy to date, “green jobs,” is the only advisor that Obama has fired unceremoniously. Van Jones and green jobs are both long forgotten in Obama’s Washington. At the federal level, and in a few states like Oregon, we got a stimulus that was light green. Obama could have made the federal and state stimulus packages run as dark green as the Chicago River on St. Patrick’s Day.
The Political Economy Research Institute at the University of Massachusetts at Amherst published a study titled Green Recovery: A Program to Create Good Jobs and Start Building a Low-Carbon Economy in 2008, and PERI co-director, Robert Pollin testified before the House Committee on Education and Labor about the findings on October 24, 2008. The study provides a remarkable piece of good news about the impacts of tax cuts and spending in different areas on job creation for those of us who prefer spending increases to tax cuts, and spending on greening the economy and improving human capital rather than expanding our military arsenal and increasing our capacity to broil ourselves by expanding production of oil and natural gas. The study confirms that with regard to the composition of the stimulus those of us who prioritize education, healthcare, and protecting the environment can have our cake and eat it too.
The study revealed that a $150 billion stimulus comprised of spending increases on educational and health services, public infrastructure, and green investments would create 2.9 million new jobs, while a $150 billion stimulus comprised of tax cuts for household consumption, military spending, and spending on the oil and gas industry would only create 1.5 million new jobs.
The study estimated that increasing the federal deficit this year by $1 million dollars would create 23.1 new jobs if the money was spent on educational and health services, 17.2 new jobs if the money was spent on public infrastructure, 16.7 new jobs if the money was spent on green investments, 14.0 new jobs if personal taxes were reduced by $1 million, and 4.4 new jobs if the money was spent on the oil and natural gas industries.
Want jobs? Go Schools! Go Healthcare! Go Green! What does that bumper sticker say? “I look forward to the day when our schools get the money they need and the pentagon has to hold a bake sale.”
Of course there are reasons why different ways of increasing the deficit have different effects on job creation—savings out of tax cuts, differences in the capital-labor ratios of different industries, differences in wage levels in different occupations, and differences in the indirect effects from spending in different areas. But the good news is that when all this is factored in the way to get the maximum employment impact from our stimulus is to spend in exactly the ways environmentalists, educators, and healthcare providers have long argued is also the most socially useful. What good luck! Bang for your buck, i.e. jobs, and socially useful work, fortuitously coincide. Unfortunately firing Van Jones was not the way to take advantage of this fortuitous coincidence.
3. We needed to pass legislation to level the playing field for organized labor.
Obama lied to organized labor who help him defeat first Clinton and then McCain. Hillary Clinton had the early advantage with organized labor during the primary campaign. A surprising number of unions came out for Obama over Clinton in part because he promised to champion the Employee Free Choice Act and they did not trust that Clinton would follow through no matter what she promised since her husband had once promised to support the bill and then squandered the opportunity to do so. During the general election Obama re-affirmed his pledge to get the EFCA passed in return for all-out support from all of organized labor, and organized labor delivered. But now Obama has also managed to send the bill to the legislative graveyard. Obama slapped organized labor in the face by putting the ECFA at the back of his legislative cue even before he told single payer health advocates that their proposal was not worthy of consideration, and had guards turn Congressman John Conyers and a delegation of AMA doctors supporting single payer away at the White House door when they tried to attend a meeting to discuss healthcare reform being attended by CEOs from the insurance and pharmaceutical industries. Ironically, the feeble excuse he offered was that because of the severity of the economic crisis there were more important pieces of legislation he had to prioritize than the EFCA. Now that the Democrats have lost their 60 vote majority in the Senate Republicans are sure to filibuster the bill as they have done before. Organized labor was “had” and knows it.
4. We needed to get the credit system up and running again so Main Street was not starved for the loans it needs to get back on its feet.
The approach taken by the Obama Administration was to continue the Bush Administration policy: Have taxpayers pay much more than the going market price for as many toxic assets as the banks tell us they need to sell off before they feel they can begin lending again. Before leaving as Treasury Secretary Hank Paulson got Congress to pass TARP I, which gave Treasury $700 billion of taxpayer money to use to purchase toxic assets through a “reverse auction” that was so hampered by perverse information asymmetries and conflicts of interest that Paulson could not achieve lift off for his plan before leaving office. In TARP II Geithner and Bernanke disguised and expanded the subsidy in the form of “private public partnerships” where the Federal Deposit Insurance Corporation and Federal Reserve Bank provide free insurance against downside risk to induce private party participation. But nobody should have any doubts. Obama has fully endorsed the “No Banker Left Behind” approach of his predecessor in the White House: Keep applying ever larger doses of taxpayer bailout funds to banks deemed too big to fail even when those banks refuse to begin lending again in earnest, and stonewall pressure to renegotiate terms of mortgages that are unpayable.
A much better bet to get credit flowing to the real economy would have been to take over insolvent banks either through government purchases of a majority of their shares when share prices were low, or by intervention through bankruptcy followed by sales of assets to healthy institutions. In either case the cost to the taxpayer would have been far less than endless bailouts. In either case credit would have flowed more freely to Main Street.
Unfortunately there is little chance the Obama Administration will abandon its misguided bailout policy until Summers and Geithner are fired. To achieve this, concerned citizens will have to make our displeasure with the policy of bank bailouts without end but no help for Main Street and its architects in much more forceful ways. This will require ridding ourselves of the myth that the wizards of finance who brought on this crisis are the only ones smart enough to make decisions about the disposition of society’s investment resources, and that financial wizards are only able to choose wisely when working for private financial institutions who pay them obscene bonuses.
5. We need financial reform.
The Administration proposal to regulate the financial industry is seriously flawed and would not prevent financial crises in the future even if it were passed by Congress in its present form. Immediately after his election President Obama announced that Paul Volker would chair a special commission to make recommendations on financial regulatory reform. Whatever his faults may be, one thing Paul Volker understands is the need to regulate financial institutions and how to do it. Unfortunately the Administration proposal was the work of meetings presided over by Laurence Summers and Timothy Geithner not Paul Volker, where lobbyists from Wall Street were invited to suggest cosmetic changes and carve out loopholes sufficient to allow them to continue to do the things that led to this financial crisis. Paul Volker was visibly absent and in Europe when the regulatory reform proposal was first announced. We are now about to witness the inexorable process of lobbyists from the financial industry working to further weaken the bill as it moves through the banking and finance committees in the House and Senate. Again, prospects are bleak absent a massive public outcry.
Part three to follow soon…