Obama should have listened to Krugman

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Obama’s first mistake was to take responsibility for the economic crisis. In his quixotic quest for a bipartisan solution, he made George W. Bush’s problem his own. Margaret Thatcher and Ronald Reagan never made this mistake. They took no responsibility for the economic problems of the 1970s, heaping the blame entirely on their liberal predecessors and eschewing any bipartisan alliance with those they considered their ideological enemies. Roosevelt, too, slammed — and slammed hard — his ideological foes, those he termed ‘economic royalists.’

Insofar as Obama and his lieutenants identified villains, this was Wall Street. Yet saying the financial elite brought on the crisis while bailing out key Wall Street financial institutions such as Citigroup and AIG on the grounds that they were ‘too big to fail’ involved Obama in a terrible contradiction. The least that he could have done was to remove the existing boards and top managers of these organizations as a condition for government funds. Instead, unlike in the case of General Motors, the top dogs stayed on board and continued to collect sky-high bonuses to boot.

The strong sense of disconnect between word and deed was exacerbated rather than alleviated by the Democrats’ financial reform. The measure did not have the minimum conditions for a reform with real teeth: the banning of derivatives; a Glass–Steagall provision preventing commercial banks from doubling as investment banks; the imposition of a financial transactions or tobin tax; and a strong lid on executive pay, bonuses, and stock options.

Third, Obama had a tremendous opportunity to educate and mobilize people against the neoliberal or market fundamentalist approach that deregulated the financial sector and caused the crisis. Although Obama did allude to unregulated financial markets as the key problem during the campaign, he refrained from demonizing neoliberalism after he took office, thus presenting an ideological vacuum that the resurgent neoliberals did not hesitate to fill. No doubt he failed to launch a full-scale ideological offensive because his key lieutenants for economic policy, National Economic Council head Larry Summers and Treasury secretary Tim Geithner, had not broken with neoliberal thinking.

Fourth, the stimulus package of $787 billion was simply too small to bring down or hold the line on unemployment. Here, Obama cannot say he lacked good advice. Paul Krugman, the Nobel laureate, and a whole host of Keynesian economists were telling him this from the very start. For comparison, the Chinese stimulus package of $580 billion was much bigger relative to the size of the economy than the Obama package. For the White House now to say that the employment situation would be worse had it not been for the stimulus is, to say the least, politically naive. People operate not with wishful counterfactual scenarios but with the facts on the ground, and the facts have been rising unemployment with no relief in sight.

Politics in a time of crisis is not for the fainthearted. The middle-of-the-road approach represented by the size of the stimulus was the wrong response to a crisis that called for a political gamble: the deployment of the massive fiscal firepower of the government against the predictable howls of anger from the right.

Fifth, Obama and Federal Reserve Board chairman Ben Bernanke deployed mainly Keynesian technocratic tools — deficit spending and monetary easing — to deal with the consequences of the massive failure of market fundamentalism. During a normal downturn these countercyclical tools may suffice to reverse the downturn. But standard Keynesianism could address such a serious collapse only in a very limited way. Besides, people were looking not only for relief in the short term but for a new direction that would enable them to master their fears and insecurities and give them reason to hope.

In other words, Obama failed to locate his Keynesian technocratic initiatives within a larger political and economic agenda that could have fired up a fairly large section of American society. Such a larger agenda could have had three pillars: the democratization of economic decision-making, from the enterprise level to the heights of macro-policymaking; an income and asset redistribution strategy that went beyond increasing taxes on the top 2 percent of the population; and the promotion of a more cooperative rather than competitive approach to production, distribution, and the management of resources. This agenda of social transformation, which was not too left, could have been accommodated within a classical social-democratic framework. People were simply looking for an alternative to the Brave New Dog-Eat-Dog World that neoliberalism had bequeathed them. Instead, Obama offered a bloodless technocratic approach to cure a political and ideological debacle.

Related to this absence of a program of transformation was the sixth reason for the Obama debacle: his failure to mobilize the grassroots base that brought him to power. This base was diverse in terms of class, generation, and ethnicity. But it was united by palpable enthusiasm, which was so evident in Washington, D.C., and the rest of the country on Inauguration Day in 2009. With his preference for a technocratic approach and a bipartisan solution to the crisis, Obama allowed this base to wither away instead of exploiting the explosive momentum it possessed in the aftermath of the elections.

At the eleventh hour, Obama and the Democrats are talking about firing up and resurrecting this base. But the dispirited and skeptical troops that have long been disbanded and left by the wayside rightfully ask: around what?