Well I am now back in Newcastle and in the last two weeks the ocean has slumped from a cold 19 celsius to a freezing 16. See what happens when you turn your back. I think the sharks like the cold water less though. At least that is what I am telling myself as I read another surfer (on the south coast) was mauled last week. Anyway, my casual travel reading also saw me read the July edition of the Harper’s Magazine which had two very interesting articles about developments in the US, which ultimately have global implications. In recent months, I have been becoming more pessimistic about the idea that the current global economic crisis will represent a major change in ideology, away from free market neo-liberalism towards a more sustainable and fairer social democratic policy structure. The articles reinforce that pessimism.
The main essay in the July edition is by Kevin Baker, who is a New York-based novelist and journalist and contributing editor of Harpers. It is entitled Barack Hoover Obama: the best and brightest blow it again. Baker begins with this:
Three months into his presidency, Barack Obama has proven to be every bit as charismatic and intelligent as his most ardent supporters could have hoped. At home or abroad, he invariably appears to be the only adult in the room, the first American president in at least forty years to convey any gravitas. Even the most liberal of voters are finding it hard to believe they managed to elect this man to be their president.
The main aim of the article is to compare the current president with Herbert Hoover, who was the 31st president of the US. This comparison is motivated by his claim that the US has rarely faced “such emergencies” as the Great Depression and while it is usual (in the popular press) to compare Obama with FDR the better comparison is with the failed Hoover who was a Republican president between 1929 and 1933. Hoover, by the way, spent his early professional years in Western Australia as a mining engineer.
Baker says of this comparison between Obama and Hoover, that it is:
not meant to be flippant. It has nothing to do with the received image of Hoover, the dour, round-collared, gerbil-cheeked technocrat who looked on with indifference while the country went to pieces. To understand how dire our situation is now it is necessary to remember that when he was elected president in 1928, Herbert Hoover was widely considered the most capable public figure in the country. Hoover – like Obama – was almost certainly someone gifted with more intelligence, a better education, and a greater range of life experience than FDR. And Hoover, through the first three years of the Depression, was also the man who comprehended better than anyone else what was happening and what needed to be done. And yet he failed.
Hoover was faced with a major economic meltdown – the collapse of the share market in 1929 and outlined various plans which were clearly progressive. He wanted to suspend the debt Europe owed the US after the First World War but only if the successful European nations allowed Germany breathing space. Baker says that this was “statemanship at its most enlightened, and if any single U.S. Action at the time could have prevented the rise of the Nazis to power, this would have been it.”
Domestically, Hoover tried to get direct job creation going unsuccessfully and instituted wthe Reconstruction Finance Corporation (RFC) which was a government institution designed to assist individuals in refinancing their loands to prevent major bankruptices. The conservative approach wanted the banks to fail as part of a “creative destruction” notion – good rises from bad. But the RFC lent the banks money in a similar way to the current TARP is doing so. More about which later.
Baker quotes the excellent work of David M. Kennedy who said that Hoover’s ambitions were thwarted by the fact that he could not eliminate the dominant “legacy of perception and understanding of economic theory”. It was the age of the gold standard and as Europe went deeper into depression, gold flowed from the US to Europe (to shore up wealth losses there). Hoover chose to follow conservative economic advice of the day which:
… was the textbook economic response of the time to fleeing gold reserves; in the midst of the Great Depression, it was a disaster.
The RFC also “performed with TARP-like langour, secrecy, and nepotism … a record of its operations revealed that most of its money had … gone to a very few of the country’s biggest financial institutions”.
The allegations of bucks for buddies that now haunt the TARP are well documented in the operations of the RFC. Baker says:
In … 1932, the RFC’s president Charles G. Dawes … resigned his post, took a new job as head of the Central Republic Bank in Chicago, and promptly procured for his employer an RFC loan that nearly equaled the bank’s total deposits. Dawes’s successor … then lent another $12 million to a Cleveland bank of which he remained a director.
The problem then is the same problem that we have now. The money was being distributed by those who prior to the crash were major forces in the structural decay that led to the crash. Baker quotes a writer from the day who said that the “immense sums they dispensed were given to borrowers, many of whom, to put it mildly, have forfeited, justly or unjustly, the confidence of the people”.
The idea that the top-end-of-town would get bailed out while unemployment rose resonates again today. The RFC handed millions of public $s to the rich but did very little to help the plight of the real economy. Just as the TARP is doing very little now other than to redistribute billions of public funds to the rich, which could have been used to employ the poor in employment guarantee schemes.
Ultimately, Hoover failed and was replaced by FDR. On reflection, Baker says that:
Ultimately, Hoover could not break with the prevailing beliefs of his day … Hoover’s every decision in fighting the Great Depression mirrored the sentiments of the 1920s “business progressivism”, even as he understood intellectually that something more was required. Farsighted as he was compared to almost everyone else in public life, believing as much as he did in activist government, he still could not convince himself to take the next step and accept that the basic economic tenets he had believed in all his life were discredited; that something wholly new was required.
I agree with his point that now is not the time to be cautious, pragmatic or adopt politically-strategic approaches.
On Obama, Baker says:
It is impossible not to wish desperately for his success as he tries to grapple with all that confronts him: a worldwide depression, catastrophic climate change, an unjust and inadequate health-care system, wars in Afghanistan and Iraq, the ongoing disgrace of Guantanamo, a floundering education system.
Obama’s failure would be unthinkable. And yet the best indications now are that he will fail, because he will be unable—indeed he will refuse—to seize the radical moment at hand.
Every instinct the president has honed, every voice he hears in Washington, every inclination of our political culture urges incrementalism, urges deliberation, if any significant change is to be brought about. The trouble is that we are at one of those rare moments in history when the radical becomes pragmatic, when deliberation and compromise foster disaster. The question is not what can be done but what must be done.
This thought has been going through my mind a lot lately – that the dominant neo-liberal paradigm is really controlling the attempted recovery programs. In Australia, despite our slowdown being less dramatic to date, than elsewhere, the Government is baulking at direct job creation and is instead allowing the banks to reap increased profits via its bank guarantee.
I was also reminded of this resistance to new ideas at the UNDP workshop I attended last week. I was asked by an audience member (while I was on a panel talking about the fiscal imperatives surrounding employment guarantee programs) whether it was better to forget advancing new macroeconomics ideas in the same discussion as employment guarantees. It led to another audience member arguing it was a disservice to do so – a point I have discussed at length in an earlier blog – Bad luck if you are poor!.
The logic advanced by these characters is that the finance ministry’s have total control over the social policy agenda in all countries, particularly in LDCs. They are resistant to any deviation away from neo-liberal, budget-surplus reasoning but in the current crisis may relent and hand over a few bucks to tackle unemployment. The result, at best, will be temporary programs that generate a few jobs when millions are needed. The dent in poverty will be insignificant and the rich will go on getting as much as they can from the bailout programs.
The point is that it is very cosy to operate within this cone of silence. These officials can then negotiate a few programs that do a bit but ultimately fail to do anything. But by not challenging the constraining ideology that their organisations operate in no real progress is ever made.
My role as an academic is different given I am beholden to no-one other than my professional ethics regarding veracity of research results etc. In that sense, I can more easily see where the system is failing because I am not trapped by the ideology that is driving the failure. So quite apart from the nonsensical notion that you would want to discuss unemployment without reference to the macroeconomic policy regime in place, one should always be prepared to jettson the notions that one is operating within if they offer continued failure.
In my view, the neo-liberal approach has failed dramatically and poverty is rising. We should not contemplate hanging onto the doctrine that has delivered this failure no matter how comfortable it makes us feel or how wealthy it makes the rich. The reality though is that the paradigm is resisting its own demise exactly because the policy structures that it has justified has furthered the ambitions of the rich.
In this regard, Baker says that:
The most appalling aspect of the present crisis has been the utter fecklessness of the American elite in failing to confront it. From both the private and public sectors, across the entire political spectrum, the lack of both will and new ideas has been stunning.
He says that while FDR was able to draw on creative (and progressive) Republicans, Obama “has had to contend with a knee-jerk rejectionist Republican Party”. But worse still has been the response of the Democrats, who have failed to rise to the challenge. He characterises the Democrats in this way:
… we have seen a parade of aged satraps from vast, windy places stepping forward to tell us what is off the table. every week, there is another Max Baucus from Montana, another Kent Conrad from North Dakota, another Ben Nelson from Nebraska, huffing and puffing and harrumphing that we had better forget about single-payer health care, a carbon tax, nationlizing the banks, funding for mass transit, closing tax loopholes for the rich. These are men with tiny constituencies who sat for decades in the Senate without doing or saying anything of note, who acquiesed shamelessly to the worst abuses of the Bush Administration and who come forward now to chide the president for not concentrating enough on reducing the budget deficit, or for “trying to do too much” as if he was as old as as indolent as they are.
Baker considers a number of areas of strategic, forward-looking investments that the US Government should be addressing which have lapsed during the financial crisis. For example, health care, responses to climate change. He notes that in key areas like mass transit, Obama has appointed “a mediocre Republican time-server” as the transportation secretary.
In terms of the economic challenge facing the US (and the world), Baker says:
Still worse is Obama’s decision to leave the reordering of the financial world solely to Larry Summers and Timothy Geithner, both of whom played such a major role in deregulating Wall Street and bringing on the disaster in the first place … The predictable result is that, even as he claims to recognize the interlocking nature of the problems facing us and vows to solve them as a whole, the president is in fact abandoning most of his program …
By “sticking with the ‘key men’ of the 1990s”, Obama seems to be embracing the so-called Third Way approach adopted by the Clinton Government, which sought a “pragmatic, non-ideological” alternative to, as Obama puts it in his 2006 book The Audacity of Hope (which isn’t worth buying by the way!), “the tumult of the sixties and the subsequent backlash” which “continues to drive our political discourse”.
Baker calls the Clinton approach the era of “business liberalism” and claims that Obama is embracing it with fervour. But:
Clinton’s business liberalism … is a chimera, every bit as much a capitulation to powerful and selfish interests as was Hoover’s 1920s progressivism. We are back in Evan Bayh territory here, espousing a “pragmatism” that is not really pragmatisim at all, just surrender to the usual corporate interests.
Evan Bayh will be remembered as a Democrat who wholly supported Bush in the Iraq disaster and who in recent times has called for deficit cuts. In the Wall Street Journal on March 4 this year he opposed a major funding bill and said such spending increases:
… might be appropriate for a nation flush with cash or unconcerned with fiscal prudence, but America is neither … Washington borrows from foreign creditors to fund its profligacy. The amount of U.S. debt held by countries such as China and Japan is at a historic high, with foreign investors holding half of America’s publicly held debt. This dependence raises the specter that other nations will be able to influence our policies in ways antithetical to American interests. The more of our debt that foreign governments control, the more leverage they have on issues like trade, currency and national security. Massive debts owed to foreign creditors weaken our global influence, and threaten high inflation and steep tax increases for our children and grandchildren.
You can imagine what I would write if I decided to critique this statement. And it is coming from a Democrat! That is the sort of logic that will constrain Obama in his attempts to reform almost anything in the US. It is also the same constraints that are apparent in the Australian debate. The press is steadily fostering the deficit-debt hysteria.
Economists are coming out from right, left and centre telling us that “too much” spending is bad for us. Yes it is once you have full employment and you don’t want the public sector to be any larger. But we are light-years away from that state at present. Even if the GDP growth remains positive in Australia, it will skate along the bottom for a while yet and unemployment and underemployment will continue to grow beyond the 12 per cent labour underutilisation that currently besets us.
The main point of Baker’s essay is that:
Obama will have to directly attack the fortified bastions of the newest “new class” – the makers of the paper economy in which he came of age – if he is to accomplish anything. These interests did not spend fifty years shipping the greatest industrial economy in the history of the world overseas only to be challenged by a newly empowered, green-economy working class. They did not spend much of the past two decades gobbling up previously public sectors such as health care, education, and transportation only to have to compete with a reinvigorated public sector. They mean, even now, to use the bailout to make teh government their helpless junior partner, and if they can they will devour every federal dollar available to recoup their own losses, and thereby preclude the use of any monies for the rest of Barack Obama’s splending vision.
You get a sense of this talking to bankers in the US. I heard stories last week when I was in Florida of private bankers getting “free public money” to re-build their wealth holdings. I read a nice article in New York Times earlier this year which said that:
At the Palm Beach Ritz-Carlton last November, John C. Hope III, the chairman of Whitney National Bank in New Orleans, stood before a ballroom full of Wall Street analysts and explained how his bank intended to use its $300 million in federal bailout money … “Make more loans?” Mr. Hope said. “We’re not going to change our business model or our credit policies to accommodate the needs of the public sector as they see it to have us make more loans.”
The same article said:
A review of investor presentations and conference calls by executives of some two dozen banks around the country found that few cited lending as a priority. An overwhelming majority saw the bailout program as a no-strings-attached windfall that could be used to pay down debt, acquire other businesses or invest for the future.
I have written before about the reasons why quantitative easing (similar to the TARP in the US) is a poor way of addressing the crisis. For a start, it assumes banks are reserve-constrained and need cash to lend. The reason the banks restricted their lending relates to a perceived lack of credit-worthy customers. So the TARP was not addressing any particular real problem. But it was also handing dollars over hand and foot to the wealthier segments of the US society, many of them (some of the big investment banks) who have used the crisis as a means of entrenching their control and power over the economy.
These vested interests are the principle architects of Obama’s rescue plan which in any reasonable sense is an Obamanation!
My US mates tell me that the current stimulus policy structure will constitute the greatest redistribution of income and wealth from the poorest workers to the rich in world history. While unemployment rates continue to rise and wages growth is flat, all the proceeds of the stimulus are going into the pockets of the rich which very little employment creation implied.
Summers, in particular, has his hands all over this crisis. Naomi Klein’s Why We Should Banish Larry Summers From Public Life blog is worth reading on this. See related article in the Washington Post.
I vote to banish Larry Summers. Not from the planet. That wouldn’t be nice. Just from public life … The criticisms of President Obama’s chief economic adviser are well known. He’s too close to Wall Street. And he’s a frightful bully, of both people and countries. Still, we’re told we shouldn’t care about such minor infractions. Why? Because Summers is brilliant, and the world needs his big brain … Back in 1991, Summers argued that the subject of economics was no longer up for debate: The answers had all been found by men like him. “The laws of economics are like the laws of engineering,” he said. “One set of laws works everywhere.” Summers subsequently laid out those laws as the three “-ations”: privatization, stabilization and liberalization. Some “kinds of ideas,” he explained a few years later in a PBS interview, have already become too “passé” for discussion. Like “the idea that a huge spending program is the way to stimulate the economy.” And that’s the problem with Larry. For all his appeals to absolute truths, he has been spectacularly wrong again and again. He was wrong about not regulating derivatives. Wrong when he helped kill Depression-era banking laws, turning banks into too-big-to-fail welfare monsters. And as he helps devise ever more complex tricks and spends ever more taxpayer dollars to keep the financial casino running, he remains wrong today.
There has also been claims that Summers is hopelessly compromised by the conflict of interest of handing over $billions to Wall Street institutions he is closely related to (in one case a former Director). Truthdig documents a company that Summers recently served as a board member and which received millions of public money. The report says:
Last month, a little-known company where Summers served on the board of directors received a $42 million investment from a group of investors, including three banks that Summers, Obama’s effective “economy czar,” has been doling out billions in bailout money to: Goldman Sachs, Citigroup and Morgan Stanley. The banks invested into the small startup company Revolution Money, right at the time when Summers was administering the “stress test” to these same banks … At the very same time that these three megabanks were pouring millions into Summers’ former company, Obama’s economic team, starring Summers, was subjecting these same banks to the stress test to decide how deep in shit these same banks really were. The banks wanted the government to fudge the results for obvious reasons – who wants the world to know how deep of a hole you’ve dug for yourself?
As an aside, the company in question – Revolution Money – claimed in a 2007 press release that it “would make it easier than ever for people with low credit ratings to find access to lines of credit.” That same 2007 press release – view it here – uses Summer’s name (as a Board member) and his Clinton credentials and says:
Unlike most bank credit card issuers who are limited to a narrow scope of credit approval guidelines specific to their bank, RevolutionCard seamlessly utilizes multiple partners to achieve unparalleled consumer approval rates. The platform is able to achieve these high approval rates by giving consumers access to multiple banks, which approve credit across a much broader range of credit scores than traditional credit card companies do, while still only having to fill out one application. RevolutionCard’s centralized application system dramatically increases immediate consumer credit approval rates, on terms appropriate for each consumer.
But then by April 19, 2009, Summers is seemingly rowing a different course. He appeared on the popular US Meet the Press program and said the following:
We’re going to need a less leveraged economy … we need to do things to stop the marketing of credit in ways that addicts people to it and so that our households are again savings, and families are again preparing to send their kids to college, for their retirement and so forth …
Truthdig says that “once again, Summers creates a problem that the rich profit from, then is put in charge of “fixing” it after vulnerable Americans have been picked clean.”
Contrary to my earlier hopes, I don’t think the current crisis has yet delivered a death blow to neo-liberalism. Extraordinarily the moves by governments to provide deficit-stimulus to their ailing economies are being hijacked by the rich to fill their own coffers while at the same time their “spokepersons” (media, economists etc) are mounting an increasingly strident attack on the deficits themselves.
Once these attacks start to resonate politically and governments start cutting back the rich will have pocketed billions in public welfare and we will be left with a huge residual of unemployment and poverty at the other end of the socio-economic scale.
So what is needed is a major intellectual attack on all things neo-liberal at this point in time. The problem is that the progressive voices who should be joining in this battle are being seduced by the conservatives via memberships of various government boards or offers of consultancies and more.
The second article of particular interest to me in the Harper’s magazine was by Ken Silverstein, who is a Washington-based contributor to Harpers. It is entitled Labor’s Last Stand: The corporate campaign to kill the Employee Free Choice Act. His take on the campaign to undermine new legislation that will make it easier for workers to form trade unions is scary. I will review this article and its relevance to Australia in another blog. It reminded me of Work Choices Lite, the current government’s approach to diluting the ugly facets of the previous government’s pernicious IR changes while maintaining the substance of them.