09/20/2008 05:12 am ET Updated May 25, 2011

Obama And The End Of Reaganomics

Part III Obama and the Economic Trap

Adapted from: Obama's Challenge: America's Economic Crisis and the Power of a Transformative Presidency (Chelsea Green)

Before he could cure the Great Depression, Franklin Roosevelt had to overturn prevailing views, including his own, about government's role in the economy. When Roosevelt began, he was in favor of a balanced budget, against federal deposit insurance, even against serious public works spending. But events quickly pushed him to become more radical, and to bring the country and the Congress with him -- or to fail. The people liked what they got. FDR was re-elected in 1936 by the greatest majority ever.

Our nation's future will depend on whether we get that caliber of leader in January 2009. For the next president will face the most challenging economic conditions since those that greeted Roosevelt in March 1933.

These include: a ravaged financial system, collapsing housing markets, declining consumer purchasing power, rising inflation, a weakening dollar, and increasing deficits. These acute problems come on top of a chronic, thirty-year trend of income stagnation for most Americans and concentrated gains at the top.

Banks are out about a trillion dollars because of the implosion of financial bubbles. The system has been spared collapse only because the Federal Reserve and the Treasury have pumped in cheap money, and bailed out firms that have no government guarantee in order to save the entire system.

This strategy has its limits. With a weak dollar and rising inflation, the Fed can't keep lowering interest rates. And the government can't nationalize the entire economy.

In this economic crisis, the new president will also face an undertow of conventional wisdom -- the pervasive idea that deficits are a huge problem; and that markets thrive without government intervention.

But economic recovery will require significantly higher public spending to compensate for weakened private demand. Long term public investment will also be needed to invest in high quality jobs; produce energy independence based on renewable and sustainable sources; and reverse the 30-year disinvestment in basic public infrastructure.

Some revenues can come from repealing the Bush tax cuts and ending a needless and wasteful war. But temporarily the deficit will have to rise, too.

And financial re-regulation is overdue. We can't throw money at credit markets without tightening standards, or the pattern of bubble-and-bail will just continue.

All this requires nothing less than a transformation of ideology, policy, and public attitudes. And that, in turn, will take rare presidential leadership.

Great leaders grow in office. In March 1933, Franklin Roosevelt was not the Roosevelt we now remember. But conditions transformed Roosevelt, and he in turn transformed the country. Something in his character allowed him to rise to the occasion -- to energize demands among the people for transforming change. He helped create expectations that he had to meet.

And when Lyndon Johnson succeeded the murdered John Kennedy in November 1963, the civil rights bill was considered dead, hopelessly blocked by conservative southern committee chairmen in Congress. But when Johnson signed the landmark Civil Rights Act of 1964 the following July, the same 88th Congress had enacted it.

The difference was Johnson's leadership in turning the civil rights struggle into a national morality play about the meaning of America, which animated activists on the ground, shifted public opinion, and allowed Johnson to overcome legislative blockage.

Even Lincoln had to transform popular sentiment in the North before the Civil War could become not just a military conflict to save the Union but a moral struggle to free the slaves. Each of these presidents gained confidence as a leader by raising hopes and expectations in the people, then achieving change that had been deemed impossible.

For twenty of the past twenty-eight years, the occupant of the White House was a conservative Republican, and the idea that government should keep hands off the economy conformed to Republican ideology. For eight of those years, the incumbent was a centrist Democrat. Except for a brief and failed effort to secure universal health insurance in 1993, the Clinton administration's main preoccupations were fiscal. Small wonder that by 2008, the proposition that government could serve as a counterweight to the insecurities of a market economy had lost credibility. Indeed, I have heard accounts from several leaders of focus groups that downwardly mobile voters, when asked whether they believed that government might improve their lot, break into laughter.

Absent government remediation, citizens have become increasingly skeptical about government's capacity to achieve much of anything -- a conclusion carefully nurtured by conservative policies and ideology, and incidentally reinforced by conservative incompetence and corruption in the management of the government. When George W. Bush contends that you can't trust government, his own administration provides the exclamation point. And too many Democrats have reinforced these assumptions rather than contest them.

With economic ills largely depoliticized, Democrats did not play to their strong suit. Leading Democrats could not quite decide whether to champion popular frustrations with bold remedies, or to become Republican-lite. Presidential candidates Kerry, Gore, Dukakis, and Mondale failed to inspire. Clinton, the exception, won election in a three-way race with just 43 percent of the vote and then repeated much of the Republican story about government being the problem.

Obama, at his best, portends something different. Obama's greatest challenge is to reverse the ideological assumptions of the past three decades -- and then to use affirmative government to deliver not just economic recovery but a just and balanced economy, and a revitalized democracy.

In sum, America's 44th president will either be a transforming one; or the crisis he inherits will destroy his hopes -- and ours.

Robert Kuttner's new book is Obama's Challenge: America's Economic Crisis and the Power of a Transformative Presidency. (Chelsea Green Publishers.) He is co-editor of The American Prospect and a senior fellow at Demos. He'll be covering the election, convention, and the economic situation at