Obama's victory speech inspired confidence and raised
expectations. His victory was historic not just because
it had brought a coloured man to the White House for
the first time in US history. It also signaled that
the more than three-decade old neo-conservative turn
in economic policy making in the US is discredited and
challenged. In more ways than one, Obama’s later campaign
made clear that a change from that policy was required,
raising expectations that the President-elect will seek
to redirect capitalism in new directions. The question
on everyone’s mind, at home and abroad, is: Will Obama
ensure that the Golden Age of 20th century capitalism,
the high growth, welfare-statist years of the 1950s
and 1960s is not the exception that it seems to be,
by launching a new era of creditable growth, higher
employment and lower inequality?
That question is based on an obvious interpretation
of Obama’s comfortable mandate. As has been repeatedly
noted, the political tide turned decisively in his favour
because of the financial crisis and the popular anger
against a private sector that engineered the crisis
and an administration that supported and rewarded these
private sector entities and individuals. The victims
of that anger directed against the Bush administration
were the Republicans and McCain. Obama did not fail
to use the evidence that the Bush administration had
helped precipitate this crisis through partisan policies,
which favoured Wall Street vis-à-vis Main Street,
the rich as opposed to the poor and middle classes and
the banks and financial firms rather than homeowners
facing foreclosure. Not surprisingly, economic circumstances
and that campaign have increased expectations that he
would turn the economy around rather quickly. It is
his ability to address the crisis and trigger a recovery
that would ensure that he can protect the high popularity
ratings he now commands.
The contours of the crisis are now well known. It has
questioned the solvency of many financial institutions
including some banks, necessitating a $700 billion-plus
bail-out, which includes a bank recapitalization financed
with tax payer’s money. The restructuring of the financial
sector is expected to result in a loss of a further
70,000 jobs in the US alone, on top of the 150,000 jobs
estimated to have been lost in the financial sector
worldwide. This is already triggering a massive slow
down in the retail market, the services sector and real
estate in the financial centres of the world. The financial
crisis has also led to a contraction of credit, not
because of a lack of liquidity which the Federal Reserve
has injected in sufficient quantities, but because of
uncertainties surrounding the ability of counterparties
to meet future commitments on any credit provided. A
consequence was the curtailment of debt-financed consumption
and investment, which were already affected adversely
by the wealth-erosion ensured by the collapse of house
and stock prices. The resulting recession, has taken
the unemployment rate to 6.5 per cent with job losses
in September and October alone exceeding half a million.
This in turn, is expected to intensify the recession
even further, and the resulting downward spiral is seen
as threatening a depression comparable with the 1930s.
The implication of all this is obvious. Support for
the private sector through lower interest rates, financial
bail outs and the like are unlikely to stop the downward
spiral, because of insolvency and the collapse of business
confidence. Nor would tax cuts spur demand, because
they may be used to bolster savings and compensate for
the erosion of paper wealth and home equity. It is necessary
for the government to also intervene with expenditures
in forms varying from an unemployment dole and prevention
of housing foreclosures to large scale infrastructural
investments. It is another matter that Obama can seek
to combine his commitment to combat climate change and
promote sustainable technologies with the need to expand
demand through a fiscal stimulus.
These circumstances have encouraged comparison with
the situation when Franklin Roosevelt took office in
1932 in the middle of the Great Depression. Roosevelt
with his New Deal and much else showed that he was not
going to be cowed down by the prevailing conservatism.
He declared his commitment to intensified bank regulation,
insurance of smaller bank deposits, public works programmes
and Social Security. This meant that he sought to stall
the downturn, by substantially increasing regulation
of the financial sector and providing a fiscal stimulus
to the economy. However, capitalism in crisis is not
easily saved. Whether, it was, as some argue, the fact
that Roosevelt did not go far enough in terms of the
money he committed to the fiscal stimulus, or because
when the damage is severe even state intervention cannot
easily repair a system driven by private initiative,
FDR’s initiatives did not deliver the expected expansionary
results and unemployment was high even at the end of
his first term. By all accounts it was the Second World
War that delivered the recovery from the Depression.
This has lessons for Obama, defined by circumstances.
The so-called lame-duck, Bush administration has already
chosen to drain the Federal Reserve and the Treasury
to save an economy it has helped damage. The programme
to restructure troubled assets, which is slated to absorb
$700 billion of tax payers’ money, is only a part of
the rescue commitment. And this occurs after the Bush
team had widened the fiscal deficit to finance its misadventures
in Iraq and Afghanistan and to cover its tax concessions
for the wealthy. According one estimate, when the financial
rescue is added on, the US budget deficit could more
than double next year to almost $1 trillion. This would
not only make it difficult for Obama to deliver on his
promises to allocate sums between $60 billion and $110
billion for universalising health insurance and $150
billion to alternative energy, but also to find the
much larger sums needed for a fiscal stimulus that may
prevent a recurrence of the FDR rupture between rhetoric
and reality. He will have to fight much opposition to
even try this option, to find out whether it works or
not. Unfortunately for him, he cannot easily conjure
up a war. He has as his legacy not just an economic
crisis but a United States that is weary of war, even
if in isolated theatres across the world. And his call
for change had more than a hint that he would substitute
diplomacy for war.
Yet comparisons with the Roosevelt era are rife. To
quote Clive Crook of the Financial Times (November 7,
2008): "Is Mr Obama an FDR for the new century?
A president has many ways of ruining his reputation,
and this is a different world, yet the idea looks plausible.
Like Roosevelt, Mr Obama inherits a crisis not of his
making. Like Roosevelt, he is brimming with energy to
get things done. Like Roosevelt – happy days are here
again – he has given the country a jolt of optimism
just by turning up. FDR understood that his greatest
strength was not being Hoover; he emphasised (and exaggerated)
the differences. Mr Obama gets it and does not have
to try so hard. Could he be more different from George
Thus, the historic election of the first black President
in the US in the middle of a crisis that is acknowledged
to be the closest to Great Depression, is indeed seen
as one more Roosevelt moment. The question is: will
and can Obama rise to the occasion, not just by emulating
FDR, but by going beyond him. Obama made clear his intentions
in his very first press conference after his election
as President. "We are facing the greatest economic
challenge of our lifetime, and we’re going to have to
act swiftly to resolve it,” he reportedly said. “I’m
going to confront this economic crisis head-on by taking
all necessary steps to ease the credit crisis, help
hard-working families and restore growth and prosperity."
If Rahm Emanuel, appointed the next chief of staff by
Obama is to be believed, the President-elect is serious.
His team would put in place a comprehensive programme
of social and economic reform, treating the "“financial
meltdown as an historic opportunity to deliver the large-scale
investments that Democrats had promised for years."
Even before he takes office Obama is expected to push
for immediate assistance to an automobile industry that
is near bankrupt.
Thus, there is a hint that the Obama team would use
the FDR moment to make a break. But there are indications
to the contrary as well. To start with, his choice of
advisers. If still-speculative reports are to be believed,
the likes of Lawrence Summers, Robert Rubin and Paul
Volcker are to be leading members of his economic team.
As Mark Ames notes in The Nation (November 10, 2008),
Summers, the most-favoured candidate for Treasury Secretary,
was brought to Washington in 1982 by his then dissertation
advisor Martin Feldstein, "to serve on Ronald Reagan's
Council of Economic Advisors. Those first years in the
Reagan administration were crucial in the right-wing
war against New Deal regulation of the banking system
and financial markets-a war that Reagan's team won,
and that we're all paying for today." As for Volcker,
we cannot forget that as Chair of the Federal Reserve
he sought at the end of the 1970s to deal with inflation
by raising interest rates sharply – the "Volcker
shock" – resulting in the devastation of a number
of developing countries exposed to external debt.
Candidates like these do not inspire the confidence
that they will be willing to try what needs to be tried.
While circumstances may force them to wear borrowed
Keynesian hats, they would balk at spending that is
not financed out of additional taxes. But they would
oppose taxes on the rich on the grounds that it would
erode confidence. Obama may use the fact that world
governments are looking to the US for new leadership
to combat a global crisis that originated in the US.
He can also use the fact that some like China have chosen
to put a huge $586 billion into the global kitty aimed
at financing a fiscal stimulus. Moreover, financial
commitments by governments in the United Kingdom and
Europe to prop up their financial sectors makes clear
that they too see the need for pro-active state policy.
These factors make it possible for the incoming Presidency
to lead a globally coordinated Keynesian-type stimulus
that has more chance of working than many other plans
that are on offer.
However, global Keynesianism without a global economy
and global government presumes the existence of national
economic policy space, so that trade diversion, capital
flows and currency movements do not undermine the effort.
With uneven development being an abiding and visible
feature of capitalism, not all regions can successfully
reflate while being fully integrated with more developed
centres. Differences in inflation rates would have implications
for exports and imports that would affect capital flows,
currency values and interest rates, leading to very
different growth and distribution effects. A reversal
of globalization may therefore be a requirement for
successfully combating the current crisis. That reversal
can come in a "competitive" environment that
revives memories of global war or it can come in a cooperative
environment in which all countries realize that "coordinated"
protectionism, however limited, is the best option.
This, however, does involve a degree of painful restructuring
of capacities and structures created during the globalization
There are bound to be vested interests opposing such
restructuring. The fear is they may be part of the Obama
team. But the situation calls for global leadership
of a kind that the US is currently least well placed
to deliver. That makes Obama’s mission even more difficult.
But then, till quite recently few suspected he would
be in the seat where he can face such difficulties.
Being in that seat he has the power to overcome them.
And the enthusiasm and the tide that brought him to
power may take him further. The message is, "Yes
he still can."