My apologies to T. S. Eliot, but September, not April, is the cruelest month. Before 9/11/2001, there was 9/11/1973, when Gen. Pinochet toppled the Allende government in Chile and ushered in a 17-year reign of terror. More recently, on 9/15/2008, Lehman Brothers went bust and torpedoed the global economy, turning what had been a Wall Street crisis into a near-death experience for the global financial system.
Two years later, the global economy remains very fragile. The signs of recovery that desperate policymakers claimed to have detected late in 2009 and early this year have proven to be mirages. In Europe, four million people are unemployed and the austerity programs imposed on highly indebted countries such as Greece, Spain, Italy, and Ireland will add hundreds of thousands more to the dole. Germany is an exception to the dismal rule.
Although technically the United States isn't in recession, recovery is a distant prospect in the world's biggest economy, which contracted by 2.9 percent in 2009. This is the message of the anemic second-quarter GDP growth rate of 1.6 percent and a real unemployment above the 9.6 percent official rate if one factors in those who have given up looking for work. Firms continue to refrain from investing, banks continue not to lend, and consumers continue to refuse to spend. And the absence of a new stimulus program, as the impact of the $787 billion Washington injected into the economy in 2009 peters out, virtually ensures that the much-feared double-dip recession will become a reality.
That the American consumer does not spend has implications not only for the U.S. economy, but for the global economy. The debt-fuelled spending of Americans was the motor of the pre-crisis globalized economy, and nobody else has stepped in to replace them since the crisis began. Consumer spending in China, fuelled by a government stimulus of $585 billion, has temporarily reversed contractionary trends in that country and East Asia. It has also had some impact in Africa and Latin America. But it has not been strong enough to pull the United States and Europe from stagnation. Moreover, in the absence of a new stimulus package in China, a relapse into low growth, stagnation, or recession is very real in East Asia.
To Cut or to Stimulate
Meanwhile, the debate in western policy circles has divided into two camps. One group sees the threat of government default as a bigger problem than stagnation and refuses to countenance any more stimulus spending. The other thinks stagnation is the greater threat and demands more stimulus to counter it. At the G20 meeting in Toronto in June, the two sides collided. Germany's Angela Merkel advocated tightening, pointing to the threat of a default by Germany's debt-laden satellite economies in southern Europe, particularly Greece. President Obama, on the other hand, facing an intractably high unemployment rate, wanted to continue expansionary policies, though he lacked the political clout to sustain them.
To the pro-spending people, the anti-deficit people don't have much of an argument. At a time when deflation is the big threat, fear of government spending stoking inflation is misplaced. The idea of burdening future generations with debt is odd since the best way to benefit tomorrow's citizens is to ensure that they inherit healthy, growing economies. Deficit spending now is the means to achieve this growth. Moreover, government default is not a real threat for countries that borrow in currencies they control, like the United States, since, as a last option, they can repay their debts simply by having their central bank print more money.
Perhaps the most vocal pro-stimulus advocate is Paul Krugman, the Nobel laureate, who has become the bête noire of many on the right. For Krugman, the problem was that the original stimulus was not big enough. Yet how big is the extra stimulus needed, and what other anti-stagnation measures can the government take? On these questions Krugman betrays some unease, perhaps realizing that traditional Keynesianism has its limits: "Nobody can be sure how well these measures would work, but it's better to try something that might not work than to make excuses while workers suffer." The stark alternative to more aggressive deficit spending is "permanent stagnation and high unemployment," says Krugman.
Krugman may have reason on his side, but reason has taken a backseat to ideology, interests, and politics. Despite high rates of unemployment, the anti-big government, anti-deficit forces have the initiative in three key Western countries: in Britain, where the Conservatives won on a platform of reducing government; in Germany, where the image of spendthrift Greeks and Spaniards financed with loans from hardworking Germans became the powerful horse Merkel's party rode to maintain power; and in the United States.
The Obama Debacle
The anti-deficit perspective has gained ascendancy in the United States despite high unemployment for a number of reasons for this. First of all, the anti-deficit stand appeals to the anti-big government sentiments of the American middle class. Second, Wall Street has opportunistically embraced anti-deficit policies to derail Washington's efforts to regulate it. Big government is the problem, it screams, not the big banks. Third and not to be underestimated is the reemergence of the ideological influence of doctrinaire neoliberals, including those who, as Martin Wolf puts it, "believe a deep slump would purge past excesses, and so lead to healthier economies and societies." Fourth, the anti-spending economics has a mass base, the tea party movement. In contrast, the stimulus position is advocated by progressive intellectuals without a base or whose potential base has become disillusioned with Obama.
Still, the triumph of the hawks was not foreordained. According to Anatole Kaletsky, the economic commentator of the Times of London and someone not exactly sympathetic to the progressive point of view, the ascendancy of the anti-deficit forces stems from a major tactical mistake on the part of Obama coupled with the progressives' failure to offer a convincing narrative for the crisis. The blunder was Obama's taking responsibility for the crisis in a gesture of bipartisanship, in contrast to Ronald Reagan and Margaret Thatcher, who "refused to take any blame for the economic hardships." Reagan and Thatcher devoted "the early years of their government to convincing voters that economic disaster was entirely the responsibility of previous left-wing governments, militant unions, and liberal progressive elites."
But even more problematic, says Kaletsky, was the Obama narrative, which was a contradictory one that put the blame on greedy bankers while maintaining that the banks were too big to fail. "With banks recovering from the crisis more profitably and quickly than voters had been led to expect," he argues in his book Capitalism 4.0, "politicians of all parties have been branded by public sentiment as stooges of the very bankers they tried to blame." Indeed, the Democrats' finance reform package that recently passed in Congress can only reinforce this public perception of their being coopted or intimidated by the very people they denounce. It lacks provisions with teeth : a Glass-Steagall type of provision preventing commercial banks from doubling as investment banks; the banning of trading in derivatives, which Warren Buffett called "weapons of mass destruction;" a global financial transactions tax or Tobin Tax; and a strong lid on executive pay, bonuses, and stock options.
For Kaletsky, Obama should have portrayed the economic crisis as one created "by the polarized and oversimplified philosophy of market fundamentalism, not by bankers' and regulators' personality flaws. By offering such a systemic account of the crisis, politicians could capture the public imagination with a post-crisis narrative than the lynching of greedy bankers - and ultimately more dramatic." But with aides like Treasury Secretary Tim Geithner and National Economic Council Director Larry Summers, neither of whom had broken completely with neoliberalism, such a systemic account was simply not in the cards.
Toward a Progressive Strategy
The right wing has the momentum now and will probably win big in the U.S. elections in November. They will tie Obama and the Democrats so firmly to the crisis that people will forget it exploded during the reign of market fundamentalist George Bush. But with their primeval market economics, the fiscal hawks and tea partiers are unlikely to provide an alternative to what they have caricatured as Obama's "socialism." Allowing the economy to implode in order to be ideologically correct will invite an even greater repudiation from an economically insecure population.
But progressives should not take comfort from the dead end offered by tea party economics. They should try to understand what has led to the failure of Obama's pallid Keynesianism. Beyond the tactical mistake of taking responsibility for the crisis and the failure to advance an aggressive anti-neoliberal narrative to explain it, the central problem that has plagued Obama and his team is their failure to offer an inspiring alternative to neoliberalism.
The technical elements of a progressive solution to the crisis have been thrashed out by Keynesian and other progressive economists: a much bigger stimulus, tighter regulation of the banks, loose monetary policies, higher taxes on the rich, rebuilding the national infrastructure, an industrial policy promoting green industries, controls on speculative capital flows, controls on outward bound foreign investment, a global currency, and a new global central bank.
The Obama administration has tried to enact some of these measures. But owing to its eagerness for bipartisanship, the ties of some of its prominent people to the economic elites, and the failure of key technocrats like Summers and Geithner to break with the neoliberal paradigm, it failed to present them as elements of a broader program of social reform aimed at democratizing control and management of the economy.
For progressives, the lesson to be derived from the stalling of Obamanomics is that technocratic management is not enough. Keynesian moves must be part of a broader vision and program. This strategy must have three key thrusts: democratic decision-making at all levels of the economy, from the enterprise to macroeconomic planning; second, greater equality in the distribution of wealth and income to make up for lower growth rates dictated by economic and environmental constraints; and third, a more cooperative, as opposed to competitive ethic, in production, distribution, and consumption.
Moreover, such a program cannot simply be dished out from above by a technocratic elite, as has been the fashion in this administration, one of whose greatest mistakes was to allow the mass movement that brought it to power to wither away. The people must be enlisted in the construction of the new economy, and here progressives have a lot to learn from the Tea Party movement that they must inevitably compete against in a life-and-death struggle for grassroots America.
Nature Abhors a Vacuum
Krugman predicts that the likely electoral results in November "will paralyze policy for years to come." But nature abhors a vacuum, and the common failure of both market fundamentalists and technocratic Keynesians so far to address the fears of the unemployed, the about-to-be unemployed, and the vast numbers of economically insecure people will most likely produce social forces that would tackle their fears and problems head-on.
A failure of the left to innovatively fill this space will inevitably spawn a reinvigorated right with fewer apprehensions about state intervention, one that could combine technocratic Keynesian initiatives with a populist but reactionary social and cultural program.There is a term for such a regime: fascist. As Roger Bootle, author of The Trouble with Markets, reminds us, millions of Germans were disillusioned with the free market and capitalism during the Great Depression. But with the failure of the left to provide a viable alternative, they became vulnerable to the rhetoric of a party that, once it came to power, combined Keynesian pump-priming measures that brought unemployment down to 3 percent with a devastating counterrevolutionary social and cultural program.
Fascism in the United States? It's not as far-fetched as you might think.