Larry Summers is out, and President Barack Obama now faces a critical decision. He can focus on policy, naming a replacement who wants to ease the economic strains on American households, or he can focus on politics, naming a candidate who appeases the corporate executive class and their backers in the Republican Party. The choice should be obvious. On the economy, good policy is also good politics.
The Obama administration has known for a very long time that it needs to do more about the disintegrating U.S. jobs outlook, but has shied away from taking strong action due to political considerations. Voters are worried about the deficit, the administration is taking heat from cry-baby hedge fund managers for being "anti-business" and besides, Republican obstructionism makes it nearly impossible to pass anything. Better to claim credit for the president's modest economic gains than to wage an uphill battle for economic security.
This pattern of political calculation goes all the way back to the negotiations surrounding Obama's economic stimulus package back in February of 2009. Obama adviser Christina Romer suggested that a package of $1.4 trillion would be needed to significantly bring down unemployment, a figure that ultimately proved to be based on overly optimistic assumptions. But fears of a Republican backlash from a dollar figure ultimately watered down the package to $600 billion -- the administration even included standard annual tax-code fixes in the deal to create the illusion of a larger $787 billion plan.
Summers himself was no angel in this process. He was a chief architect of the too-small-stimulus. But since mid-2009, he has been advocating for further action to create jobs, and by all indications, he has been ignored for political reasons. It is a very strange scenario in which one of the economists most (justifiably) vilified by progressives has actually been one of the more progressive economic voices within a Democratic administration.
But what has this political hedgeing won for Obama? A few days of decent headlines in Politico, followed by years of economic misery. That economic misery has taken a greater toll on the president's popularity than any actual policy he has adopted. The fact that unemployment remains near 10 percent after nearly two years generates a lot of resentment. Voters do not want to empower policymakers who tolerate such economic calamities. Ultimately, the Obama administration's focus on short-term political wins has resulted not only in bad policy, but in political ruin.
So in replacing Summers, Obama needs to pick somebody who gets the policy right. Over time, the right policy will result in the right politics -- bringing down the unemployment rate, fostering economic growth and battling Wall Street excess will strengthen the economy, make households happier, and satisfy voters. The right Summers replacement would be an economist who understands the need for further government spending to create jobs, who recognizes that record-low interest rates make the deficit a secondary consideration, and who understands that Wall Street predation is taking a serious toll on household wealth.
Attempting to appease either the corporate executive class or the Republican establishment would be a fool's errand. The economic platform advocated by House Minority Leader John Boehner, R-Ohio, last month was a recipe for economic ruin on every front, from jobs to the deficit. Summers is probably the most conservative economist you can find in the Democratic Party, and Boehner called for his head anyway.
But trying to appease Wall Street or corporate CEOs is even crazier. As Salon's Andrew Leonard emphasizes, of all the political calculations Obama could make, trying to appease the corporate executive class is probably the worst. The entire anti-business-Obama meme is, at best, a joke. Wall Street doesn't like the fact that Obama has pushed for modest new restraints on its risk-taking, even thought that risk-taking wrecked both Wall Street banks and the broader economy. Billionaire hedge-fund managers don't like the idea that they might lose their tax privileges and be subject to the same rates everybody else pays. Wall Street's political demands are much like its thirst for bonuses: limitless.
Naming a Summers replacement who focuses on cutting corporate taxes and reducing the deficit by slashing jobs funding will be counterproductive on two fronts. First, it will spur economic misery. Second, that economic misery will generate political unrest. Voters will not respond to a president who advances a policy agenda that actively harms them.
So who should Obama name to take Summers' place? Joseph Stiglitz. His intellectual qualifications cannot be impugned -- he is a Nobel Prize-winner whose academic work is revered on both the left and right. But his policy acumen is equally proven -- he has been chief economist for the World Bank, and Chairman of President Bill Clinton's Council of Economic Advisers.
And his policy record during the Clinton years is absolutely superlative. Stiglitz aggressively fought Treasury Secretary Robert Rubin's efforts to deregulate Wall Street -- efforts that paved the way for the Great Financial Crash of 2008. Stiglitz also fought Rubin by pushing for job-creation rather than deficit reduction. Rubin appeared to win that battle for a while, but once it became clear that the job growth that took place under Rubin's deficit attack was purely the result of an unsustainable bubble, Stiglitz emerged as the victor.
So that's Obama's choice. He can try to appease his political adversaries, and end up losing political points come 2012, or he can appoint somebody who gets the policy right, and reap the political benefits of sound policy come re-election time. Stiglitz is the right man for the job.