Obama must cast aside the dead weight of anti-government ideology

From In These Times

March 8, 2009
A Spectre is Haunting America
Ghosts of neoliberalism trouble Obama's response to the recession
By David Moberg

Since 1980, the idea that government is bad has dominated American politics —
from Ronald Reagan's maxim that government is the problem, not the solution, to
Bill Clinton's declaration that "the era of big government is over." But
President Barack Obama's inaugural address marked the beginning of a new — or at
least renewed — paradigm that shifts the balance between government and markets,
or public and private power.

"The question we ask today is not whether our government is too big or too
small, but whether it works — whether it helps families find jobs at a decent
wage, care they can afford, a retirement that is dignified," Obama said in his
inaugural speech. "Nor is the question before us whether the market is a force
for good or ill. Its power to generate wealth and expand freedom is unmatched,
but this crisis has reminded us that without a watchful eye, the market can spin
out of control and that a nation cannot prosper long when it favors only the
prosperous."

Obama's pragmatic formula rejects the prevailing ideology that the smaller
government, the better (except for the military and the protection of property
rights). It also taps into the notion that while Americans may not like big
government in theory, they want government to solve many problems. And the
problems now facing Americans demand a much broader role for government.

The issue is not just what works, but also for whom and for what ends. Obama
needs to shift policymakers and the public toward seeing that government, when
well run, can be a beneficial force that does more than monitor the flaws and
clean up the wreckage left by the market and by big corporations.

The majority of working- or middle-class Americans will trust government more
only if it consistently works for them. And if government works for them, then
the economy will work better. That's the message of economist Jeff Madrick's new
book, The Case for Big Government (Princeton University Press, 2009).

Despite the laissez-faire culture in the United States, government intervention
— from protecting infant industries to forming public universities — has always
played a central role in the country's development. And big government has
produced results, Madrick argues, such as faster growth and greater equality
during the first quarter-century after World War II, particularly when compared
to the stagnant standard of living for most Americans and the growing inequality
and insecurity that resulted from neoliberal policies of recent decades.

Government, Madrick argues, has advantages over private corporations. It has an
ability to coordinate large systems, to take a long-term perspective, to attend
to the common good, to be held accountable, to provide greater stability and to
benefit everyone (positive externalities, in economist's terms). While the
limits of government are endlessly trumpeted, few note the numerous areas where
big government often works best.

In his first weeks in office, Obama's recognition of government's potential has
been mixed, with far more promise in his economic stimulus plan than in his
approach to fixing the financial sector.

Economists of diverse political views agree that the roughly $900 billion
stimulus package over two years will likely reduce unemployment, but is not big
enough to lift the economy out of a deepening slump. Although one-third of the
plan goes toward tax cuts and rebates that are not the most effective way to
create jobs, they at least are skewed to low- and moderate-income households,
making them more potent than the tax cuts tilted to richer households and
business that Republicans favored.

The tax cuts will take effect quickly, which is important. But equally quick,
and more effective in stimulating demand, are the expansions of unemployment
insurance, Supplemental Social Security benefits, food stamps, health insurance
and education grants, which Republicans dismiss as social welfare. Likewise, aid
to states to avoid layoffs and service cuts deliver quick results. The
Congressional Budget Office calculates that 85 percent of the House stimulus
bill and 94 percent of the Senate bill would take effect by the end of September
2011.

But the economy will need even more public investment before then. If the
recession deepens, as seems likely, a recovery will have barely begun by the end
of 2010. And employment growth could be unusually slow, as it was in the jobless
recoveries from the much shallower downturns of 1990-91 and 2001.

Moreover, the past two recoveries have relied on asset bubbles: the dot-com boom
and the housing boom. This time, recovery must be based on the real economy,
which produces goods and services that provide employment and broad-based
prosperity. It must also reverse the current accounts deficit that has left the
global economy so unbalanced.

That will require greater public investment and — to the horror of the right
wing — greater government planning of the new economy for sustainable, long-term
growth. In a tentative fashion, Obama's stimulus plan does this.

First, it encourages growth of alternative energy production and energy
efficiency, including creation of an electricity grid that can better take
advantage of wind power and other alternatives.

Second, the stimulus package includes investment in roads, transit, ports, water
systems and other physical infrastructure. This creates immediate employment and
increases both productivity and investment in the private sector.

Third, the plan invests in developing the human skills needed for a new economy
— from pre-school to universities, covering both modernization of buildings, as
well as aid to students, research and strained school systems.

The right hates even these modest steps toward planning. For example, free
traders have attacked the stimulus' modest Buy America provisions. But such
requirements have been standard in past infrastructure legislation. Most of the
provisions do not violate trade agreements, says Lori Wallach, director of
Public Citizen's Global Trade Watch. She notes that other governments also
insist that public funds kick-start their domestic economies (such as France
requiring its auto industry to invest domestically as a condition of industry
aid).

The provision will stimulate more domestic job creation, especially in
manufacturing, ultimately helping to restore the United States as a market for
imports. And it will nurture manufacturing in key emerging sectors needed for
long-term growth, like alternative energy systems, where domestic production has
suffered from neglect by private investors and public policy.

The package invests too little in traditional infrastructure and in many cases
fails to make the strategic choices that it should to maximize future benefits,
such as favoring infrastructure that discourages sprawl, renovates central
cities and promotes varied forms of public transportation. (See "The Future of
Transit," page 17.) It does not launch many needed new projects, like
development of high-speed rail systems. Yet it is a dramatic departure from
Republican anti-government deference to exclusively private decision-making by
corporations.

The dead weight of anti-government ideology is taking its heaviest toll on
Obama's emerging plans for reviving and reforming the financial system, even
though the Bush administration had already promoted a big — if often bad —
government role.

After dallying far too long out of deference to private speculators and
hostility to government intervention, former Treasury Secretary Henry Paulson
and Federal Reserve Chairman Ben Bernanke committed trillions of dollars in
various efforts, from capital infusion to financial guarantees, to resolve the
financial crises caused by subprime loans and the huge market of worthless,
derivative financial investments.

But despite the great cost of these efforts, the anticipated losses for banks
continue to grow, banks are reluctant to lend, and toxic assets still on the
books are crippling the financial system. Yet bank executives who put the world
economy in the toilet continue to enrich themselves at the public's expense.
They gave themselves an estimated $18.4 billion in bonuses last year, and in the
case of former Merrill Lynch CEO John Thain, bought a $35,000 toilet.

University of California at Berkeley economist Brad DeLong argues that the
government has three options with the banks: It could let the insolvent banks
fail, as it did in the early years of the Depression. (Of course, when Paulson
and Bernanke allowed only one investment bank, Lehman Brothers, to collapse, the
crisis deepened.) It could try to bail out the banks in some way, which was the
path of Bush and now Obama. Finally, it could nationalize the banks.

Nationalization is the best option. And it will work much better if it's done
forthrightly, not through a creeping nationalization that many observers think
will be the ultimate outcome of the bumbling bailout.

Economists like DeLong, Nobel laureates Joseph Stiglitz and Paul Krugman, and
William Buiter, former chief economist of the European Bank for Reconstruction
and Development, are among the growing advocates of nationalization or full
public ownership and control. Many observers, however, dismiss it out of hand.

The financial-political elite, such as Treasury Secretary Timothy Geithner,
National Economic Council Director Larry Summers, and Clinton's former Treasury
Secretary — and disgraced former Citigroup director — Robert Rubin, find
nationalization undesirable as well as unworkable. "We have a financial system
that is run by private shareholders, managed by private institutions, and we'd
like to do our best to preserve that system," Geithner told reporters on Jan. 28

"America is not about widespread nationalization," New York Times columnist
Andrew Ross Sorkin recently wrote. Manhattan College financial historian Charles
Geisst says that nationalization is "not a term in the American vocabulary." And
Max Holmes, an asset management executive, warned in a Times op-ed,
"Nationalization would be hugely expensive and would undermine our free market
system."

But it is the private managers who have been "hugely expensive" to the
government and to the millions of Americans who are losing jobs and income.
These managers have also undermined "our free market system." If the test is
what works, why not seriously consider nationalization?

After all, Sweden's center-right government undertook nationalization, which
worked well during its financial crisis in 1992. The cost of nationalizing the
nation's biggest, effectively insolvent banks would be high, but continuing the
"lemon socialism" of the bailout may prolong the crisis and prove more
expensive, thus dragging down the economy.

Unlike the emerging plan to create a government "bad bank" to buy up toxic bank
assets, nationalization allows the government to take control of, and benefit
from, the increased values of both good and bad assets over time. There would be
little or no problem setting a price for those toxic assets, and it would be
easier for the nationalized banks to resolve the roughly $55 trillion in credit
default swaps hanging over the financial system.

Nationalization would also mean that the shareholders and executives who
profited from the banks' wild speculation would pay a price for their reckless
greed. A continued bailout with a bad bank is costly public protection for
private shareholders, even if the government receives stock as part of the
bailout deal. And with nationalization, the government would have enough control
to make sure banks resumed lending and stopped feathering executives' nests.

There's a strong case that nationalization would work best, thereby meeting
Obama's criteria for pragmatic governance. But private interests and ideological
blinders are blocking the administration from seriously considering it.
Ironically, nationalization could do more to save — and perhaps even favorably
transform — capitalism than more timid uses of government power and money.

The era of big government, it has turned out, isn't over after all. But the
much-needed era of big thinking remains in its precarious infancy.

http://inthesetimes.com/article/4280/a_spectre_is_haunting_america