The American economy is in crisis, with wild swings in equities markets, abysmal consumer confidence, persistently high unemployment and a collapsed housing market. Rather than facing the challenges of the present, the nation's leadership class is wedded to a set of policy prescriptions developed in another age, before the financial meltdown of 2008 and the Great Recession eviscerated the purchasing power of American consumers and highlighted the instabilities inherent in relying on financial innovation and other non-productive sectors for economic growth.
While some media outlets have painted the anti-debt crusade as a plot by Tea Party freshmen, the fiscal austerity movement has bi-partisan roots that predate the current Congress.
With leadership from Grover Norquist and his Americans for Tax Reform, the austerity frame has shaped conservative political rhetoric for a generation. In the run-up to the 2008 Presidential election, a variant of the frame, manufactured by Democratic-leaning think-tanks like Robert Rubin's Hamilton Project and influence peddlers with cross-party connections like Blackstone Group's Pete Peterson, took root in the Obama camp.
As far back as April, 2006, key Obama advisers had developed the talking points that still guide the president's approach to economic policy. Obama's austerity campaign began at the launch event for a Hamilton Project paper co-signed by campaign advisers Robert Rubin, Roger Altman, Peter Orszag and Jason Bordoff -- the latter two of whom would later join the administration staff.
Then-Senator Obama introduced the white paper, entitled "An Economic Strategy to Advance Opportunity, Prosperity and Growth," which served as a trial balloon for rhetorical lines designed to convince Americans that social security and health care cuts were inevitable and that deficit-cutting was the number one economic priority.
As the economy burns, the bi-partisan consensus on fiscal austerity has prevented the Beltway class from developing the diagnostic tools needed to grasp the systemic dynamics of the current malaise and to place job creation and demand stimulus, rather than austerity, at the forefront.
The analytical shortcomings of the Obama administration and the Republican Congress stem from a common phenomenon: capture by a set of ideologues with close ties to particular industry sectors whose dogmas prevent a real reckoning with the depth of the crisis in the American economy.
In the case of the president, emissaries of high finance -- many of them retreads from Rubin's Clinton-era Treasury -- have driven the policy apparatus from the get go. Even with the departure of Lawrence Summers, the current list of Rubin proteges with influential roles in the administration includes Treasury Secretary Geithner, Deputy National Security Adviser Michael Froman, Deputy NEC Director Jason Furman and Gary Gensler, chairman of Commodity Futures Trading Commission, among many others.
Apart from a temporary hiatus in the aftermath of the panic, the past three directors of the Hamilton Project have all helped to solidify the "soft austerity" (one that includes some tax increases as well as social cuts) position among Beltway elites in the Obama age: Orszag as Obama's OMB Director; Jason Furman, who remains one of the president's top economic advisers; and Douglas Elmendorf, who as Boehner's current director of the Congressional Budget Office illustrates the commonality in intellectual orientation, both in its origin and current expression.
With the rapid rise of the far right in 2010 Congressional elections, funded by a tight network of energy-sector elites led by the Koch brothers, the movement for fiscal austerity and cutbacks moved from staid think-tank conference rooms to small-town America, where it gained a rabidity and fervor never before seen and propelled a radical right-wing populist movement entirely detached from the realities of the historical moment.
With the shock accompanying the massive de-leveraging of institutional and consumer debt; the collapse of the housing bubble; the reduction in global consumer wealth; and the evidence that the nation is slipping into another recession in the near-term, a new analytical paradigm is needed, and quickly.
A pre-condition of developing effective prescriptions for the ailing American economy is an open and honest assessment of what ails it. The financial crisis should have engendered awareness about the broader failures of financialization as a mode of development. Beginning in the early 1980s, the finance sector stepped in to fill the void left by the collapse of American manufacturing. With a rapid growth trajectory based on innovative products derived from mortgage and consumer debt, as well profits gained from financing the off-shoring of what little manufacturing production remained stateside, finance became king. But when the bubble burst in 2008, the feeble reality of the American economy was revealed.
In the only analogous moment this past century -- the Great Depression -- many captains of industry, pushed by a militant mass movement, were more open to policies that boosted consumer capacity, wages and social benefits . While one flank of business elites opposed the New Deal vociferously from its inception -- allegedly going so far as to organize a White House Coup in 1933 and angling successfully for a balanced budget in 1936 -- other business leaders formed the core of FDR's two Brain Trusts, which generated the panoply of New Deal programs the centerpiece of which -- Social Security -- is now eyed for reductions.
Corporate leaders in Roosevelt's first Brain Trust included Wall Street titan Bernard Baruch, banker James Warburg and George Peek, CEO of John Deere and the Moline Plow Company, who pushed for farm price supports. Roosevelt's Business Advisory Council, led by George Swope of General Electric, was at the center of planning for the Social Security Act.
New Deal business leaders were no more or less motivated by charity than the current crop. Their New Deal complicity was engendered by a clearer and more pragmatic analysis of capitalist tensions in need of mitigation. With American consumers depleted by the cataclysmic finales of the debt and real estate bubbles, rising costs for essential goods like health care and transportation and wage stagnation, there is no credible way to reignite demand by reducing taxes and expenditures.
An effective demand-stimulus program would include investments in sustainability sectors needed to position the U.S. for an age of energy scarcity, global warming and food instability, including a comprehensive effort to improve the energy efficiency of existing homes and businesses; updates to passenger and freight intra- and inter-urban train systems; and incentives to jump-start the nation's lagging renewable energy industries.
A program designed to reinvigorate demand would face challenges unknown in the 1930s. With productive capacity reduced to nil by decades of deindustrialization and capital flight, the proverbial engines of growth appear more imagined than real. Many of the very industries that were the drivers of growth in the last epoch -- finance, real estate, retail -- are the sources of the malaise.
The deep roots of today's crisis are familiar to observers of the Great Depression: tensions inherent in a system that requires ever-increasing rates of consumption and debt finance but fails to provide the means for consumers to sustain the purchases and payments needed for stability. Only time will tell whether the powers that be in politics and the corporate world will put aside their articles of free market faith in the interest of providing a much-needed boost to middle and lower-income consumers, thereby saving the system that serves them.