By Marshall Auerback, portfolio strategist and hedge fund manager. Cross posted frome New Deal 2.0
President Obama can solve the economy’s problems and win back his base, but he has to get with the program first.
For once, let’s praise President Obama (marginally), not bury him. As Bo Cutter has already argued, in the aftermath of the elections, the president probably did the best he could do on taxes. Ideally, the issue shouldn’t have even been something to haggle over in the first place had the Democrats (including the president) dealt with it before the midterms. Had the Party leadership shown an ounce of backbone, our political profiles in courage could have bargained for something much more significant in exchange for keeping the Bush tax cuts. But they didn’t, and the GOP ruthlessly played their own hand to perfection in the electoral aftermath. One has to admit to a grudging sense of admiration for the Right’s relentlessness as the Obama administration bargains for crumbs on the table, calls that dinner, and then expects cheers from its supporters for the resultant compromise.
That said, the president’s petulant rant directed at his base was pathetic and misconceived in the extreme. The “No Drama Obama” guise clearly does not extend to his now frustrated supporters. Obama still genuinely does not have a clue as to why he has lost the trust of so many progressives. Many would have been prepared to cut him some slack if he had given them anything over the past two years, rather than a perpetuation of Rubinomics — an economically regressive blend of crony capitalism and deficit reduction fetishism.
Reviving the old canard about the public option in health care, as he did earlier this week, just reminds people of the paucity of his vision and his corresponding weaknesses as president. Obama loves cutting deals, claiming that he is “getting things done for the American people”, even when the actual substance of his legislative efforts come to virtually nothing (as in the case of both financial regulation and health care). His presidency is all about form and presentation over substance.
That said, the anger of the president’s base is somewhat misdirected right now. The real problem is that the repeal of the Bush tax cuts at the upper end wouldn’t have solved income inequality, which legitimately vexes many. Any good accountant worth his salt can always find a clever tax avoidance strategy for the super wealthy. The tax system’s very complexity facilitates this, that complexity being a product of a code that has become yet another political plaything in the hands of Washington’s K Street lobbyists. To deal with income inequality, you need something more radical. You need reforms such as caps on executive pay and probably a system that simplifies the tax structure (to avoid creative tax avoidance), along with a broad base and a few basic, low rates to ensure a modicum of compliance.
Additionally, the notion that these tax cut extensions will “add” $700 billion to the deficit is nonsensical. One cannot predict the impact of government spending decisions absent a broader economic context. Applying a static revenue analysis to the deficit embraces deficit hawks’ logic, who make comparable claims when they argue that cutting government spending absent any consideration of the economy’s underlying condition will automatically reduce the budget shortfall as a percentage of GDP.
Ultimately, the president (and what’s left of his rapidly imploding party) needs to get off this deficit fixation. It muddles the Keynesian message to say that we don’t need fiscal austerity in the midst of a serious recession — except we urgently need to reduce the dangerous deficit by taxing the rich.
The whole focus on the deficit itself is profoundly misconceived. One of the state’s most important elements of public purpose is to maximize employment. Once the private sector has made its spending and saving decisions based on its expectations for the future, the government has to render them consistent with the objective of full employment. It can’t do this if it continues to focus on bogus questions of “affordability” and “national insolvency”.
By falling into the trap of appearing to be obsessed with punishing the rich, the Democrats muddy their message and look reactive. Instead of fulminating about a tax deal that effectively prevents more government spending from being REMOVED from the economy (rather than actually adding more to it in real terms), the party should be offering a plan to grow the economy in a more equitable way. Instead of offering reforms that serve to preserve the interests of big financial companies, the president and his party should focus on devising and implementing government programs that directly sustain employment and restore states’ finances.
To make matters worse, the Obama administration has been far too preoccupied with “paying for” additional spending through tax hikes or spending cuts elsewhere. It does not appear to be willing to let the fiscal position of the federal budget grow as needed to meet current challenges. All sorts of bad policy decisions have flowed from that wrongheaded paradigm.
Fortunately, when announcing the tax deal with the GOP, the president for once omitted discussion of the longer-term deficit issues. But he has long been one of the main culprits here in fomenting deficit hysteria because he fails to understand that fundamentally, taxes are not about “raising revenues” to “fund” our government, but instead act as the brakes and accelerators for the economy as whole.
As my friend Michael Lind wrote to me in a recent email exchange, America’s progressives have forgotten that the focus of mid-century social democracy was on abundance through a mixed industrial economy, with redistribution as an afterthought. The right has a bogus plan for economic growth, the left has — what? Weatherizing homes for fuel conservation? Wind farms and solar panels?
Since the time of the Clinton administration, the Democrats have focused on “safeguarding the solvency” of entitlement programs, while neglecting to come up with a growth model that would do away with silly discussions about how these programs are allegedly “bankrupting” the country. In the specific case of Social Security, the party has fallen into the trap of looking at the “financial”, as opposed to real, constraints of the program. (The former are in reality trivial, as their resolution would require only relatively simple adjustments in accounting procedures, instead of raising taxes now or lowering benefits in the near future, or even running budget surpluses.) The way the deficit commission was set up by this very president virtually ensured a wrongheaded focus.
The real issue in regard to entitlements such as Social Security relates to the real provisioning for retirees with sufficient quantities of resources in the future. This can only be resolved by increasing productive capacity in the future, thus ensuring that a sufficient share of resources will be transferred to the elderly. These can be achieved by increasing the rate of private and public investment, together with revisions in taxation, at the time the baby boom generation is well into retirement.
Nobody in the Democratic Party, President Obama included, is thinking along these lines. Instead, the philosophic void left by the abandonment of the New Deal and the Great Society has been filled by neo-liberalism and Wall Street-centric policies. The president himself has championed these philosophies ever since he got his party’s nomination in 2008,and promptly began stuffing his team with failed Clintonite retreads. There is a reason why the Dow Jones rose almost 600 points the day that Lawrence Summers and Tim Geithner were appointed to his economic team. The markets knew that Santa Claus was coming to town. That is the real reason for the unhappiness of his party’s base. That’s not the kind of change his supporters were looking for. Nothing the president has done since his inauguration marked a decisive break from the past failed policies embodied by these figures.
At the end of the day, neither the president nor his advisers understand that a budget outcome is only effectively unsustainable if it pushes nominal aggregate demand beyond the capacity of the economy to absorb that spending in real terms (that is, beyond the capacity to increase real output). The financial “funding problems” that obsess his Treasury team are more apparent than real. When growth resumes, the budget’s automatic stabilizers will go to work and eat into the deficit, and the US will cut back stimulus spending to further reduce the deficit. Private domestic saving will stabilize as their balance sheets are restored to some semblance of sustainability following the debt binge. The net public spending required to support that saving and maintain growth will also stabilize.
A sovereign government’s budget is never unsustainable in narrow financial terms. It can run whatever deficit it chooses from the perspective of financial viability. As my colleagues Tom Ferguson and Robert Johnson have argued, private oligopolies in health and defense spending, along with the possibility of another banking crisis, are the real threats to the deficit, not entitlements or marginal changes to the tax system.
The neo-liberal era has been associated with the erosion of working conditions and rising inequality in outcomes far beyond anything that could remotely be justified by disparate individual or sectoral productivity trends. The president doesn’t understand this. His base is legitimately peeved. He continues to champion a system that has generated a massive redistribution of national income away from workers and productive sectors. Rather than tinkering around the edges of a profoundly corrupt tax system, the president has to embrace a completely different growth model going forward. This has to be the focus of what’s left of his time in the White House, especially if Obama wants to extend it beyond 2012. Do this, and the president will find that his “sanctimonious”, “whiney” base might actually become enthusiastic about him again.