I noted in my last two columns that unfortunately the discussion and debate on global and domestic economic issues which are inextricably interrelated is apparently going to be limited by the campaigns of John McCain and Barack Obama to “Talking Points” that ignore the complexity of those issues. Those “Talking Points” also ignore the reality that the current situation has been described by the International Monetary Fund as “The largest financial shock since “The Great Depression.”
The reasons for this were recently analyzed by David Leonhardt, an economics columnist for the New York Times. Leonhardt points out that the multiple causes of the current economic crisis “are too technical for most of us to understand (they’re too technical for many bankers to understand, which is part of the problem”). This explains why we are in the situation we’re in. It also illustrates how John McCain’s economic vision which so far seems to be limited to a “lightly altered version of Republican orthodoxy” strategically rolled out in “Talking Points” such as “My (McCain’s) tax cuts will produce jobs — His (Obama’s) will reduce jobs,” is at best inadequate and at worst oblivious.
It seems inadequate for a number of reasons. As David Leonhardt points out, “In some fundamental ways, The American economy has stopped working” as we expect it to. Leonhardt illustrates his basic point with several obvious reality-based observations. First, “The fact that the economy grows, that it produces more goods and services one year than it did the previous one – no longer ensures that most families will benefit from its growth.” This means that, “For the first time on record an economic expansion seems to have ended without family income having risen substantially. Most families are still making less, after accounting for inflation than they were in 2000. For these workers, roughly the bottom 60 percent of the income ladder, economic growth has become a theoretical concept rather than the wellspring of better medical care, a new care, a nicer house – a better life than their parents had.”
The country’s psychological reaction to this is new and so far unexplained in terms that a layperson can understand and relate to economic reality. It is complicated by the fact that until recently, as Leonhardt observes, “Americans” were still buying these things but they have been buying them with debt.” Well, guess what! We just found out that a big chunk of that debt will never be repaid. More significantly that news was also late-breaking to large financial institutions led by people who us average guys and gals thought would understand the complexities of what was going on and the risks associated with it. They didn’t.
David Leonhardt sees this fact as “the most basic explanation for the financial crisis.” No doubt, it is. But even if the active intervention into the markets heretofore held to be off-limits by The Bush Administration as well as the rescue by Bush Appointees of four of the nations largest financial institutions with more to come effectively address the immediate crisis, the larger problem of income stagnation will remain for the next administration to address along with the accompanying and interrelated slow but steady unraveling of our country’s employer-based health insurance system as well as the inevitable enormous rise in the government’s Medicare and Social Security obligations.
Apparently the Bush Administration, as Steven Pearlstein recently wrote, facing “The possibility of a global financial meltdown and the prospect of that President George W. Bush could go down in economic history compared to Herbert Hoover rather than Ronald Reagan, has decided to set aside its principals in favor of economic and political pragmatism.” In fact those principals seem almost to be ancient history.
The McCain –Palin campaign however apparently has its own concept of political pragmatism which dictates that it strategically comment as little as possible on these unorthodox Bush Administration actions and keep talking about lowering taxes and not commenting at all about intervening in the economy, saving and regulating financial institutions and dealing with the economic risk. In fact the only comment I have heard recently was that of Vice-Presidential Candidate-Governor Sarah Palin who in response to a question by a reporter regarding Fannie Mae and Freddie Mac responded with words to the effect that they were both “too big and too expensive to the taxpayers.” While they may be the later after they are bailed out buy the federal government, they clearly have not been supported by the taxpayers to this date reflecting an alarming lack of knowledge about the subject matter by Governor Palin and a suspicion at least on the part of this writer that her voice would be neither informed nor helpful in any future discussion of economic policy or regulatory reform.
If John McCain’s economic vision is inadequate and his accompanying political strategy is avoidance, Barack Obama’s economic vision is undefined and his political strategy is unfamiliar and therefore difficult to recognize. In an interview with David Leonhardt Obama described his “economic approach” as “pragmatism” – “figuring out what works.” That may be both candid and accurate. But it doesn’t help us figure out how he might behave as President and what economic policies he might pursue. What it really reveals is that in fact he hasn’t made up his mind. It also presages a framework for the debate that may take place if he is elected President between his economic policy advisors which Barack Obama himself will have to resolve by the policy choices that he makes.
That framework is described by David Leonhardt with historical context as “The Battle of the Bobs.” Leonhardt explains that for the last 15 years Democratic Party economic policy “has been defined by a struggle that took place during the start of The Clinton Administration between economic policy advisors Robert (Bob) Reich, who became Labor Secretary and Robert (Bob) Rubin who Became Treasury Secretary. Reich recommended that the government should invest in roads, bridges, worker training and other public works projects to stimulate the economy and help the middle class. Rubin favored reducing the deficit to soothe the bond market, bring down interest rates and “get the economy moving again.”
Bill Clinton chose to follow Rubin’s advice and prioritized his policies accordingly which Leonhardt characterizes as choosing between “the left and the center, the government or the market.” Clinton chose the center and the market.
Obama’s choice is neither that simple nor that clear because as Barack Obama, himself, told David Leonhardt “Both of the Bobs acknowledge that the world is now more complicated.” “Both have come to acknowledge that the other man is, in part correct — they now occupy more similar ideological places than they did in 1993.” This is reflected in what appears to be somewhat of a consensus among “Democrats In—Waiting.”
The value of the deficit reduction is now documented and no longer debated among mainstream and serious economists and policy-makers. Leonhardt points out that, “It helped usher in the 1990’s boom and the only period of strong broad-based income growth in a generation.” However in the current decade while the economy has continued to grow at a decent pace until recently, most families have seen little benefit from it. As Robert Rubin, himself, has said recently, “The distributional issues are more serious now (than in 1993). Also in 2008, inequality looks like a bigger problem than economic growth; fiscal discipline seems necessary, but not itself sufficient.”
Where will this lead Barack Obama and his economic policy makers if he is elected President? It depends on who his advisors and policy-makers are. It also depends on how the Democratic consensus, which is not yet completely formed is completed. This will depend at least in part on Barack Obama’s ability to market his choice of economic experts and advisors as well as his ultimate policy choices to certain key constituent groups within the party particularly labor unions and rural voters. What those policies who those advisors would be and how he would make decisions if he is elected will determine whether the country will be patient or cruel to him after he inherits what may still be a developing crisis. Who his advisors may be and what their identities will portend for his policies will be the subject of my next column.