Everyone now knows that President Obama faces an economic crisis unprecedented in recent times. What was less apparent is that he confronts an equally severe political crisis. The interaction of these may amount to more than the sum of the parts.
Unemployment is increasing at alarming rates despite enactment of the stimulus package. That package should be labeled “stimulus lite.” Respected New York University economist Nouriel Roubini remarks: “Of the $800 billion … only $200 billion will be spent in 2009 with most of it being back-loaded to 2010 and later. And of this $200 billion half is tax cuts that will be mostly saved rather than spent as households are worried about jobs. … Thus, given the collapse of five out of six components of aggregate demand (consumption, residential investment, [capital] spending, business inventories and exports) the stimulus from government spending will be puny this year.”
Obama’s bank rescue proposal also seems geared primarily to saving investment bank management and aiding those who profited from toxic securities (Paulson II?). The plan’s below-market-rate loans to purchasers of these assets may allow some money to trickle into future loans. Nonetheless, the system as a whole will remain effectively insolvent, much public money will be squandered on pampered speculators and government activism of any sort too easily given a bad name.
Roubini also puts this case nicely: “The debate on ‘bank nationalization’ is borderline surreal: with the U.S. government having already committed — between guarantees, investment, recapitalization, liquidity provision — about $9 trillion … to the financial system… Thus, the U.S. financial system is de-facto nationalized as the Fed has become the lender of first and only resort rather than the lender of last resort and the Treasury is the spender and guarantor of first and only resort. The only issue is whether [these] financial institutions should also be nationalized de jure … But even in this case the distinction is only between partial nationalization and full nationalization: with 36 percent (and soon to be larger) ownership of Citi the U.S. government is already the largest shareholder of Citi. So what is the nonsense about not nationalizing banks? Citi is already effectively partially nationalized; the only issue is whether it should be fully nationalized.”
Once fully nationalized, the managers who created these problems can be removed. Stockholders can be zeroed out and bad assets taken over by the government. The healthy remnants can then be resold to new private investors. Once the economy begins to recover, even those bad assets would gain some value — for the public who are footing the costs of the rescue.
The president’s portrayal of stimulus lite and Paulson II as setting us on the road to recovery invites public backlash and criticism. Conservatives are already complaining that government spending won’t work and busts the budget. They recommend already discredited tax reductions and an utterly destablilizing freeze on gov-ernment spending.
Nonetheless, if Obama’s limited package fails to restore economic momentum, their views may begin to resonate with voters. That Republicans have a steady media platform says something about our political landscape. Eight years of tax cuts for the wealthy and coddling megainvestment banks have left us huge deficits and an
imploding economy. Yet CNBC remains a virtual megaphone for conservatives. The network attacks Obama’s purported “war on wealth,” but has hardly a word about the role of investment banks in destroying the wealth of ordinary citizens.
A broader study of media presentations on the stimulus showed that the vast majority of guests were either for the limited Obama package or thought it was too large. Those who worried it was much too small — a view held by even such eminent conservatives as Martin Feldstein — were not invited to offer their views.
Obama’s program and rhetoric lack the boldness our situation requires. Those who support him must soon fill the void. In future columns I will discuss some labor and activist interventions that may be appropriate if the crisis deepens. In the meantime in our conversations over the back fence, in letters to the editor, on our blogs and e-mails we must remind Americans that wage stagnation, coddling investment banks, attacking unions and worker wages and neglecting our infrastructure created this crisis. Only actions that eradicate these pathologies can restore our economic health.
John Buell is a political economist who lives in Southwest Harbor. Readers may reach him at firstname.lastname@example.org.