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Obama Needs an Economic Philosophy
By Teryn Norris & Adam Zemel
On Tuesday, President Obama signed the historic American Recovery and Reinvestment Act to avoid a spiraling economic downturn. But is it enough?
No. The Congressional Budget Office projects the U.S. economy will lose $2.9 trillion in total economic output over the next three years (PDF). To close that gap, Obama would need to sign a bill with approximately $2 trillion in total spending. But the current plan is less than $800 billion, with almost $300 billion for tax cuts. A recent report (PDF) by the chief economist at Moody's Economy shows that while one dollar of public spending can boost GDP as much as $1.70, every dollar of tax cuts can increase GDP by only $0.30 to $1.00. In other words, spending is up to five times more effective than tax cuts at boosting GDP.
So we have a stimulus bill that contains about $500 billion of public spending and $300 billion of dubious tax cuts. Given the CBO's projected $2.9 trillion output gap, calling the bill weak is an understatement. This gap presents a danger not just to the economy. If the economy is still dragging in two years, and the stimulus is publicly perceived as a failure, Democrats could not only lose the mid-terms in 2010, but the role of public investment could be discredited for years to come.
Why is the stimulus so timid? Of course, a share of the blame goes to Republicans, who continue to cling to market fundamentalism, a failed and outdated economic ideology obsessed with tax cuts, deregulation, and smaller government. But the overarching problem is that President Obama currently lacks an economic philosophy. Obama and his advisors made a critical miscalculation by allowing the political goal of bipartisanship to trump urgent economic necessity and the need for a new economic philosophy. If Obama had shot higher with his initial spending goal -- let's say $2 trillion -- and made a principled case about the role of public investment in laying the foundations for growth, Republicans and centrist Democrats could have bargained it down from there -- to say, $1.5 trillion.
President Obama's next steps are critical. To avoid discrediting the role of public investment, Obama needs to continually advance a new, progressive governance philosophy based on long-term public investments in areas of strategic growth and productivity -- such as clean energy, advanced infrastructure, health care, education, information technology, and other areas of science and technology. These types of public investment are critical not only for growing out of the current recession, but also for promoting U.S. prosperity and strength for decades to come -- just as public investments did for most of the post-war period, from airplanes and highways to microchips, the internet and biotechnology. All of this will require a level of clarity, vision and strong leadership from Obama that was not on display for the stimulus debate.
Establishing a new era of productive public investment requires a systematic overhaul of the federal budget structure and process. Ever since the rise of market fundamentalism, deficit hawks, and the passage of the 1990 Budget Reconciliation Act, the federal government's ability to make long-term investments has been critically weakened. The result has been significant underinvestment in areas like infrastructure and R&D, with federal investments in major non-defense physical capital declining 20% over the period between 1980-2000 compared to 1960-1980.
Obama should start by restructuring the federal budget to include a "capital investment budget" -- separate from PAYGO and the annual appropriations process -- which would be used for long-term investments in physical capital, R&D activities, and possibly human capital (education). Currently, the federal government hardly distinguishes between short-term spending and long-term investment. But like any smart and responsible business or family, the federal government needs to make smart choices between short-term consumption -- which satisfies current operating expenses and social needs -- and long-term investments, which yield long-term economic benefits and increased productivity.
If Obama aims to successfully achieve a transformational presidency and launch a new progressive age, he must offer a new economic governance model that gives America a fresh start. Market fundamentalism is dying, but progressives haven't yet offered an economic philosophy to take its place. Obama should start by overhauling the federal budget system and offering a clear vision and narrative about the role of public investment in building new American prosperity -- and he should act quickly before the historic opportunity has passed.
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Just as Eben Esterhuizen was wrong about the new Obama economy, you are wrong about tax cuts. History shows that tax cuts stimulate the economy. Spending on pet projects does not. And don't fool yourself about the phony Bi-partisanship talk - Bi-partisian is when the bill is drafted with input from both parties, not written by Pelosi with no republican staff providing input during the drafting. Obama OWNS the stimiulus bill and no blaming Republicans is going to stick or protect him. If it works, great, if fails, while that is very bad, it will be totally owned by the democrats. You got it baby, now run with it.
BTW the stock market looks FORWARD not BACKWARD - and Obama's talking down the economy is causing our savings to evaporate. This is what we get from the democrats.
Mr. Norris,
In the light of your reasoning, what is your take on the Obama’s plan of helping homeowners?
In my view the government should recognize that banks had unfair advantage in manipulating the homeowners. Subsequently, the government should use its power to correct this flaw of the free market. However, it should do it not by limiting freedoms of banks in conducting their business (as proposed by Obama), but should do it by expanding freedoms of homeowners. It can be done by forcing banks to take the government loans to cover all the defaulting mortgage payments for the next six months.
This way, the government would stay as the guarantor of the constitutional freedom of enterprise. Details of this proposal are here, http://www.huffingtonpost.com/henryk-a-kowalczyk/the-simplest-plan-for-hel_b_167642.html . In this concept, the government does not spend a dime, and does not need any new bureaucracy.
In the light of your reasoning, which plan you see as a better one, that proposed by Obama, or the one proposed by me?
THIS, MAY BE OFF TOPIC, BUT I JUST SAW, THAT A HERSHEY PLANT WAS MOVING TO MEXICI, RIGHT NOW i HAVE HERSHEY PRODUCTS, BUT< I WON'T BE BUYING, ANYMORE
I love the people who say "well Obama should just do X, and that would fix it".
Like he has no problem getting anything through the senate. Like he can snap his fingers and pass a 1.5 TRILLION DOLLAR PACKAGE!
I am not arguing with the merits of a package like that, but even remotely pretending that could get through the senate is ignoring reality.
While I hate that it was watered down and much less effective than it should have been, I sincerely doubt that he could have gotten much more through. It is real easy to throw stones when you can simply ignore political reality.
Facts of life
1. Landing a crashing economy is not easy.
2. People use to riding in the wagon are going to have to get out and push or be left behind.
3. We can't worry about what's going on in other countries wagons until we get ours under control.
#3 is invalid
The US empire's "wagon" is linked to so many others
We have to do something about that!
Here's what we know for sure ... if free trade stopped every american would have a job making stuff currently made somewhere else.
Now I'm already hearing the arguments ... specialization is good ... there is a comparative advantage to specialization then trade ... production possibilities are higher ... markets are better if left to karma or laissez faire or whatever.
I know them all. You'll hear them from now until forever. The fact is economist underestimated the cost of disruptions to a society when they peddled this garbage. It was a great theory. It didn't work.
What I'm saying as blunt as possible is this ... if you want to put americans to work ... let americans make the products america needs.
Well said, Teryn. Your "$2 billion+ economic contraction" (shortfall) & "$500 billion (actual stimulus) building & payout projects", & "$300billion dubious taxcuts" numbers echo Paul Krugman's (excellent) earlier columns.
For overall discussion of modern "ECONOMIC PHILOSOPHY" Thom Hartmann is best I've heard. Now Hartmann (like Randi Rhodes) can go off-topic as the drop of a hat, but he is one of the best at rebutting the Right-Wing 'tax cuts for wealthy/trickle-down" insanity, i.e. CONCENTRATION OF WEALTHY & POWER in an autocracy... DICTATORSHIP agenda.
Author Michael Lind also discusses how "free market economics" has been used as a COVER for the autocratic kleptocracy in America for centuries, in particular slave states & their society built entirely on a foundation of slave labor.
http://www.amazon.com/Made-Texas-Southern-Takeover-American/dp/0465041213
Congressman Denis Kucinich also head & shoulders above the vast majority of Congressional & Senate 'experts' on financial & economic affairs, even though, of course, the RightWing press/media/corporate propaganda machine has succeeded in portraying Kucinich as a "far out lefty socialist".
http://kucinich.house.gov/
HuffPost would do well to get a "best of" compilation of Hartmann's 3hrs daily radio show each week, especially his long-range economic and financial stimulus discussions - as
Thom often says, "WWII was the biggest JOBS CREATION program in world history"!
PS: Only reason Americans know who Harry Truman is, is because Truman ran the Senate's WWII ___"WAR PROFITEERING COMMITTEE"___ so well, President Roosevelt INSISTED Truman be VP in 1944.
Obama doesn't need an economic philosophy. He needs to understand all influential economic philosophies, and in particular he needs to understand what's wrong with them. Having an economic philosophy, and not understanding its limitations, is a big part of what got us into this mess.
He looks to me as though he's doing basically everything right, so far.
"He looks to me as though he's doing basically everything right, so far"
Dumping money into the same system without changing the rules is not right.
BTW, what is right about rewarding stupid people who bought houses they couldn't afford? 90% of people aren't bums.
Dumping money into the same system without changing the rules is not right. But there are some changes to the rules already, and more on the way.
What is right about rewarding stupid people who bought houses they couldn't afford? Same thing that's right about "rewarding" stupid people who smoke in bed: their houses don't catch yours on fire. Not everything is about reward and punishment. The incentives do need to be fixed, but putting out the metaphorical fire comes first.
The economic philosophy that would best serve our nation must combine a number of elements. It must be bottom-up, pragmatic rather than ideological, and prepared to deal with a collapse in the monetary system. Assuring the people that their communities will not lack basic necessities is the key to minimizing the violence that has attended every previous American crash.
Today's pundits should leave to next-century economic historians naming or coining the appropriate philosophical label to describe the free-form policy that the Administration chooses.
Here is another thought about Obama’s mortgage bailout plan. It is so small, and helps so few people, it isn’t really a bail out at all. It doesn’t help those with mortgages over $625,000, a second home, investment properties, and those who have no mortgages (20% of the US total). Those who do qualify will have to run a gauntlet of qualifications and paperwork. No wonder the market for mortgage backed securities completely shut down! The plan does enable Obama to satisfy the left wing of the Democratic Party crying out for some government relief of their constituents, like Nancy Pelosi. It also makes a nice headline.
It's difficult to form an ideology when you consider ideology a negative. You see where pragmatism for the sake of pragmatism gets you. Obama needs to pretend he has a pair, quit hiding behind this meaningless bipartisanship goal, and tell us what he actually believes in. Do you or don't you support our wars of aggression? Do you or don't you believe in Friedman economics? You want to be pragmatic to what end? I wasted my vote on this master of equivocation. I disagreed with Bush on everything but at least knew where he stood. Barack loves to talk, but he never commits. Good article, but it probably ain't gonna happen.
Unfortunately, Obama does have an economic philosophy: it's Reaganomics, with a bit of tweaking when things go badly, when the system needs propping up with bailouts from the underclass.
He has no grand vision, and government is not going to come to the rescue with smart, intelligent investments into the 21st century.
We will continue to be driven by the whims of Wall Street and the rich tycoons who put their money into its hands instead of a real, tangible economy.
He does have a philosophy:
Government can fix the economy
He doesn't realize that Government is a referee however in that they set the rules and regulate the game . . . Government doesn't create wealth, they can only redistribute it.
How many people know that there are only 3 ways for Government to have money to spend and all of them take the money out of the private industry (only way to grow an economy)?
Print more - makes yours worth less
Borrow more - rack up debt
Tax more - take more
Wrong, so completely wrong. Pathetic.
Actually, it's true :)
hey VK....... The Vikings, in their QUEST for LOOT and PLUNDER, were BOTH a "private" industry... and a quasi-governmental entity, individual Viking warships part of the larger Danish, Norwegian, & Swede invasion(s) of England, Ireland, France, and other vulnerable coastal communities.
The Viking reign of terror, loot, rape & plunder lasted roughly 300 years, ending about 1100s, the famous English battle of Hastings deciding the English crown of course in 1066.
All three of the major contestants to the English throne - Harold, King of the Anglo-Saxons, Harald Hadrada, King of Norway, and William, Duke of Normandy - were either "Vikings" themselves (Harald), or descendents of Vikings ("Normandy" being a French contraction for "North Men", i.e. Vikings who settled in Normandy), or descendents of similar warlike, migrant Germanic tribes (Anles, Saxons, Jutes) who settled in England after collapse of Roman empire.
Harold of course defeated Harald & his Viking warriors at Battle of Stamford bridge mere days before losing his life to William's Norman invaders at Hastings.
http://www.eyewitnesstohistory.com/bayeux.htm
"Conservatives" jump back & forth across the line of "private property" (& "private enterprise") with "state socialism" all the time... never allowing credit for the fact that when you have a band or armada of warriors acting at behest of a king or conqueror, it is a "government" GOVERNMENTAL entity.
Ex cellent source: "Saxons, Vikings, & Celts: Genetic Roots of Britain & Ireland"
http://www.amazon.com/Saxons-Vikings-Celts-Genetic-Britain/dp/0393062686
"The Vikings, in their QUEST for LOOT and PLUNDER"
No, Viking Quest is from HBO's Entourage and it fits well that I live in Minnesota . . . their quest is never to win a Super Bowl.
See Teryn Norris's Profile
VikingQuest -- The evidence is stacked against you on this one. Public investments were largely responsible for the creation of the railroads, highways, airplanes, microchips, the internet, biotechnology, the list goes on. The government has a critical role to play in making long-term investments in technology and infrastructure.
Viking Quest is closer to the truth.
All the government investments you list were made with money taken from individuals and private industry, as VikingQuest explains.
What is your evidence that the private industry would do it worse? The government had been involved in many infrastructure investments. However, does it mean that this was the best way to do it? All I know indicates that private industry is more efficient. If you know otherwise, let me know.
BTW, if you compare my proposal of helping homeowners, http://www.huffingtonpost.com/henryk-a-kowalczyk/the-simplest-plan-for-hel_b_167642.html , to the one presented by the President Obama, you would notice that in my proposal the government acts as referee; as VikingQuest suggests. In the Obama’s proposal, the government becomes a player.
By deciding to be a player not a referee, Obama – in this instance – opted to be a socialist.
Yes, I'm afraid the Republicans just took his overture as a sign of weakness, and now think he should seek their approval for every action.
Have you been off-planet lately? Gotta stop getting your news from the Daily Kos.
Try to view this in simpler terms – when your household budget is in trouble, you can take two approaches: You can cut your spending, or you can take whatever money or credit you have left and go buy lottery tickets and hope like hell! the Republicans wanted to cut spending and Obama wanted the lottery option… but since “we won and we get to do what we want!” and very soon Obama, Harry Reid, Nancy Pelosi and Tim “Turbo Tax” Geitner will tell us that “they just need to buy a few more tickets cause they just know there is a winning number out there” worse than junkies begging for a fix!
Keep chanting “Crisis” that is some message of “Hope”
Try to view this in simple terms. This country has been run into the ground. It has finally reached the point that we are down to our last dollar and we need to spend it very wisely if we are to have any chance of recovering.
Economists across the political divide agree that we need deficit spending if we are to avoid a world-wide depression. There are ideological differences about how the money should be spent, but there is no real question that needs to be spent. If we cut spending now we will soon have 20% unemployment, a shrinking economy that has no chance of outgrowing its debt, and a crumbling social infrastructure that we cannot afford to maintain.
It is not a matterof political ideology. Republican intransigence is more about trying to limit deficit spending under anyone but themselves than it is about anything else. The Republicans want the Dems to fail. They still haven't understood the consequences.
Get it?
As someone who is 59 and was laid off in March of last year, I don't see the government trying to put people to work as 'buying a lottery ticket.' There are people, presumably you are in that camp, that say we should just 'wait it out.' The Food Banks can't keep up, there are more people begging on the streets in the major cities than I've ever seen and our government should just sit it out? Or more tax cuts of course - which for those with no income (my unemployment ran out long ago) isn't much of a deal. So where are your solutions? Cut spending? More children without school lunches, no food stamps? No new school text books, no plugging up leaking roofs in school buildings, no bridge and road repairs? We all get the problems. Where's your solution. And to your point, my household budget is in trouble. Do I cocoon and only look for jobs when it isn't too far so I don't spend much on gas? Cut off my internet and cell phone so that I'm really out of the loop? No, I've started a marketing company with some friends and have developed an e-mail newsletter and various ideas to go to companies with to help them increase sales. Did it mean I needed to invest some money I don't really have, yes. No job coming my way any time soon!
Centralized economic planning is outdated and does not work.
One word....Ludwig von Mises
It is on the internet, free reading about the free market,
http://www.mises.org/books/socialism/contents.aspx
Before arguing for socialistic measures, please explain where Ludwig von Mises made an error in his reasoning.
And do it in 250 words or less. Let's start with the first two quotes I find more or less at random.
Von Mises wrote, "The only certain fact about Russian affairs under the Soviet regime with regard to which all people agree is: that the standard of living of the Russian masses is much lower than that of the masses in the country which is universally considered as the paragon of capitalism, the United States of America. If we were to regard the Soviet regime as an experiment, we would have to say that the experiment has clearly demonstrated the superiority of capitalism and the inferiority of socialism."
But our prosperity has been based on third-world resources extracted with third-world labor at slave wages for the labor and no payment for the resources. Being better than the USSR at that doesn't prove anything about our internal economics.
Von Mises wrote, "Since ownership is not a fact independent of the will and action of man, it is impossible to see how it could have begun except with the appropriation of ownerless goods." But ownership didn't spring into being fully formed. Cultures don't work that way. Ownership evolved from previous customs regarding the control and consumption of goods. Goods didn't go from having no owner to having an owner; they went from having a quasi-owner to having a quasi-owner that was a little closer to being an owner.
I was not arguing for socialistic measures....I was promoting Von Mises.
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