Back to What Obama Must Do A Letter to the new president. What Obama must do.
http://www.truthout.org:80/011709Z Dear Mr. President: Like FDR three-quarters of a century ago, you're taking charge at a moment when all the old certainties have vanished, all the conventional wisdom been proved wrong. We're not living in a world you or anyone else expected to see. Many presidents have to deal with crises, but very few have been forced to deal from Day One with a crisis on the scale America now faces. So, what should you do? In this letter I won't try to offer advice about everything. For the most part I'll stick to economics, or matters that bear on economics. I'll also focus on things I think you can or should achieve in your first year in office. The extent to which your administration succeeds or fails will depend, to a large extent, on what happens in the first year - and above all, on whether you manage to get a grip on the current economic crisis. The Economic Crisis How bad is the economic outlook? Worse than almost anyone imagined. The economic growth of the Bush years, such as it was, was fueled by an explosion of private debt; now credit markets are in disarray, businesses and consumers are pulling back and the economy is in free- fall. What we're facing, in essence, is a yawning job gap. The U.S. economy needs to add more than a million jobs a year just to keep up with a growing population. Even before the crisis, job growth under Bush averaged only 800,000 a year - and over the past year, instead of gaining a million-plus jobs, we lost 2 million. Today we're continuing to lose jobs at the rate of a half million a month. There's nothing in either the data or the underlying situation to suggest that the plunge in employment will slow anytime soon, which means that by late this year we could be 10 million or more jobs short of where we should be. This, in turn, would mean an unemployment rate of more than nine percent. Add in those who aren't counted in the standard rate because they've given up looking for work, plus those forced to take part-time jobs when they want to work full-time, and we're probably looking at a real-world unemployment rate of around 15 percent - more than 20 million Americans frustrated in their efforts to find work. The human cost of a slump that severe would be enormous. The Center on Budget and Policy Priorities, a nonpartisan research group that analyzes government programs, recently estimated the effects of a rise in the unemployment rate to nine percent - a worst-case scenario that now seems all too likely. So what will happen if unemployment rises to nine percent or more? As many as 10 million middle-class Americans would be pushed into poverty, and another 6 million would be pushed into "deep poverty," the severe deprivation that happens when your income is less than half the poverty level. Many of the Americans losing their jobs would lose their health insurance too, worsening the already grim state of U.S. health care and crowding emergency rooms with those who have nowhere else to go. Meanwhile, millions more Americans would lose their homes. State and local governments, deprived of much of their revenue, would have to cut back on even the most essential services. If things continue on their current trajectory, Mr. President, we will soon be facing a great national catastrophe. And it's your job - a job no other president has had to do since World War II - to head off that catastrophe. Wait a second, you may say. Didn't other presidents also face troubled economies? Yes, they did - but when it came to economic policy, your predecessors weren't actually running the show. For the past half century the Federal Reserve - a more or less independent institution, run by technocrats and deliberately designed to be independent of whoever happens to occupy the White House - has been taking care of day-to-day, and even year-to-year, economic management. Your fellow presidents were just along for the ride. Remember the economic boom of 1984, which let Ronald Reagan run on the slogan "It's morning again in America"? Well, Reagan had absolutely nothing to do with that boom. It was, instead, the work of Paul Volcker, whom Jimmy Carter appointed as chairman of the Federal Reserve Board in 1979 (and who's now the head of your economic advisory panel). First Volcker broke the back of inflation, at the cost of a recession that probably doomed Carter's re-election chances in 1980. Then Volcker engineered an economic bounce-back. In effect, Reagan dressed up in a flight suit and pretended to be a hotshot economic pilot, but Volcker was the guy who actually flew the plane and landed it safely. You, on the other hand, have to pull this plane out of its nose dive yourself, because the Fed has lost its mojo. Compare the situation right now with the one back in the 1980s, when Volcker turned the economy around. All the Fed had to do back then was print a bunch of dollars (OK, it actually credited the money to the accounts of private banks, but it amounts to the same thing) and then use those dollars to buy up U.S. government debt. This drove interest rates down: When Volcker decided that the economy needed a pick-me-up, he was quickly able to drive the interest rate on Treasury bills from 13 percent down to eight percent. Lower interest rates on government debt, in turn, quickly drove down rates on mortgages and business borrowing. People started spending again, and within a few months the economy had gone from slump to boom. Economists call this process - from the Fed's decision to print more money to the resulting pickup in spending, jobs and incomes - the "monetary transmission mechanism." And in the 1980s that mechanism worked just fine. This time, however, the transmission mechanism is broken. First of all, while the Fed can still print money, it can't drive interest rates down. Why? Because those interest rates are already about as low as they can go. As I write this letter, the interest rate on Treasury bills is 0.005 percent - that is, zero. And you can't push rates lower than that. Now, you might think that zero interest rates would lead to an orgy of borrowing. But while the U.S. government can borrow money for free, the rest of us can't. Fear rules the financial markets, so over the past year and a half, as the interest rates on government debt have plunged, the interest rates that Main Street has to pay have mostly gone up. In particular, many businesses are paying much higher interest rates now than they were a year and a half ago, before the Fed started cutting. And they're lucky compared to the many businesses that can't get credit at all. Besides, even if more people could borrow, would they really want to spend? There's a glut of unsold homes on the market, so there's very little incentive to build more houses, no matter how low mortgage rates go. The same goes for business investment: With office buildings standing empty, shopping malls begging for tenants and factories sitting idle, who wants to spend on new capacity? And with workers everywhere worried about job security, people trying to save a few dollars may stampede into stores that offer deep discounts, but not many people want to buy the big-ticket items, like cars, that normally fuel an economic recovery. So as I said, the Fed has lost its mojo. Ben Bernanke and his colleagues are trying everything they can think of to unfreeze the credit markets - the alphabet soup of new "lending facilities," with acronyms nobody can remember, is growing by the hour. Any day now, the joke goes, everyone will have a Visa card bearing the Fed logo. But at best, all this activity only serves to limit the damage. There's no realistic prospect that the Fed can pull the economy out of its nose dive. So it's up to you. Rescuing the Economy The last president to face a similar mess was Franklin Delano Roosevelt, and you can learn a lot from his example. That doesn't mean, however, that you should do everything FDR did. On the contrary, you have to take care to emulate his successes, but avoid repeating his mistakes. About those successes: The way FDR dealt with his own era's financial mess offers a very good model. Then, as now, the government had to deploy taxpayer money in order to rescue the financial system. In particular, the Reconstruction Finance Corporation initially played a role similar to that of the Bush administration's Troubled Assets Relief Program (the $700 billion program everyone knows about). Like the TARP, the RFC bulked up the cash position of troubled banks by using public funds to buy up stock in those banks. There was, however, a big difference between FDR's approach to taxpayer-subsidized financial rescue and that of the Bush administration: Namely, FDR wasn't shy about demanding that the public's money be used to serve the public good. By 1935 the U.S. government owned about a third of the banking system, and the Roosevelt administration used that ownership stake to insist that banks actually help the economy, pressuring them to lend out the money they were getting from Washington. Beyond that, the New Deal went out and lent a lot of money directly to businesses, to home buyers and to people who already owned homes, helping them restructure their mortgages so they could stay in their houses. Can you do anything like that today? Yes, you can. The Bush administration may have refused to attach any strings to the aid it has provided to financial firms, but you can change all that. If banks need federal funds to survive, provide them - but demand that the banks do their part by lending those funds out to the rest of the economy. Provide more help to homeowners. Use Fannie Mae and Freddie Mac, the home-lending agencies, to pass the government's low borrowing costs on to qualified home buyers. (Fannie and Freddie were seized by federal regulators in September, but the Bush administration, bizarrely, has kept their borrowing costs high by refusing to declare that their bonds are backed by the full faith and credit of the taxpayer.) Conservatives will accuse you of nationalizing the financial system, and some will call you a Marxist. (It happens to me all the time.) And the truth is that you will, in a way, be engaging in temporary nationalization. But that's OK: In the long run we don't want the government running financial institutions, but for now we need to do whatever it takes to get credit flowing again. All of this will help - but not enough. By all means you should try to fix the problems of banks and other financial institutions. But to pull the economy out of its slide, you need to go beyond funneling money to banks and other financial institutions. You need to give the real economy of work and wages a boost. In other words, you have to get job creation right - which FDR never did. This may sound like a strange thing to say. After all, what we remember from the 1930s is the Works Progress Administration, which at its peak employed millions of Americans building roads, schools and dams. But the New Deal's job-creation programs, while they certainly helped, were neither big enough nor sustained enough to end the Great Depression. When the economy is deeply depressed, you have to put normal concerns about budget deficits aside; FDR never managed to do that. As a result, he was too cautious: The boost he gave the economy between 1933 and 1936 was enough to get unemployment down, but not back to pre-Depression levels. And in 1937 he let the deficit worriers get to him: Even though the economy was still weak, he let himself be talked into slashing spending while raising taxes --~--~---------~--~----~------------~-------~--~----~ Thanks for being part of "PoliticalForum" at Google Groups. 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