A Presidency in Peril: Warnings from Robert Kuttner
TPMCafé, May 4, 2010
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Like most progressives, Robert Kuttner had great hopes following President Obama's election in 2008. However, Kuttner also has been around long enough to realize the risk that President Obama might not live up to his potential in bringing about progressive change. His new book, A Presidency in Peril, documents how the Obama Administration has been falling short.
The basic story is both straightforward and depressing. President Obama surrounded himself with advisers that were close to Wall Street and business in general. This undoubtedly reflected his disposition; he had always been a political moderate. However, it was also partly determined by his political backers. Wall Street's generosity with campaign contributions was an essential part of his rise to the top of the Democratic field in the presidential primaries. This guaranteed that Obama would pursue a cautious business-friendly path.
Much of the book focuses on the response to the economic crisis, in particular the bank bailouts and the stimulus. In both cases Obama took a centrist path that that largely protected the interests of the wealthy. This is most clear in the case of the bank bailout. In the closing weeks of the presidential campaign Obama took time out to push for the TARP, a huge wad of money for the banks that came largely without strings. After TARP, the bailouts continued, with Citigroup and Bank of America nursed back to life thanks to the generosity of the taxpayers.
By contrast, the government could have taken a hard line, temporarily taking over insolvent banks, including these giants. This would have wiped out shareholders. It also would have meant giving bondholders a haircut, and sending the top executives packing. While this route was derisively termed "nationalization," including by some top Obama officials, the point was not to have the government own the banks. Rather the point was to do a quick clean-up operation that would involve selling the banks, possibly in smaller pieces, back to the private sector as soon as possible.
The Obama Administration has boasted that its path prevented a second Great Depression and has allowed for most of the bailout money to be repaid. Of course, avoiding a second Great Depression is a rather low bar (this spectre was an invention of the Wall Street crew - it was never a serious possibility) and repaying the bailout money is essentially meaningless.
By telling private markets that it would support Citigroup and Bank of America in spite of their insolvent state, the government was giving these corporations a gift of enormous value. (Imagine that the federal government announced that it would guarantee all the debts of a corner lemonade stand. The lemonade stand could make billions from this guarantee.) Their profits are really just a portion of the dividend they received from this fairly explicit government guarantee. In other words, we gave them the money they used to repay us.
Kuttner points out that the stimulus was woefully unambitious and inadequate. The amount that they requested from Congress was only a bit more than half as large as Obama's top economists felt was necessary. Of course, they ended up with even less as Congress pared back the request. The result is that the unemployment rate is still close to 10 percent and is not projected to return to near full employment until 2016.
Kuttner also attacks the administration's strategy on health care. He argues that there were major failings of both timing and approach. On timing he argued that Obama would have been better off waiting until he established a record of accomplishment to give him the standing to press his case. On approach, he criticizes Obama's chief of staff Rahm Emanuel for taking an approach that involved cutting deals with the major business interests at the onset. This limited the opportunity for cost savings and therefore meant that the resulting health care plans would still be expensive for middle-income families.
In the wake of the bill's passage (after the book went into print), a bit more generosity might be appropriate here. The bill will extend coverage to 30 million people who did not have it. And it will give the rest of us real insurance, since we will still be able to get coverage if a serious illness causes us to lose our jobs and our insurance. But, Kuttner is absolutely right that the bill does not come close to fixing the health care system. We will have to go back and discipline the drug industry, the insurance industry, the hospital lobby and the other bad guys in the medical-industrial complex or we will end up with a health care bill that bankrupts the government and the country.
Kuttner's book does not give much cause for optimism. We are sitting in the middle of the worst downturn since the Great Depression listening to Robert Rubin lecture us about the need to cut Medicare and Social Security. Given that Rubin earned more than $100 million from the mortgage games that sank Citigroup, and set the economy on a glide path to disaster as Treasury Secretary, there is something seriously wrong with this picture.
However, we have real populist anger that will not go away as long as the economy is being run for the benefit of Wall Street. We also have the benefit of the Internet, which makes it impossible for the elites to shut out populist arguments in the way they did 20 years ago. This is not much to go up against the near infinite money commanded by the Wall Street crew and their lackeys, but it's a start. It also sometimes helps to be right.
Dean Baker is a macroeconomist and co-director of the Center for Economic and Policy Research in Washington, DC. He previously worked as a senior economist at the Economic Policy Institute and an assistant professor at Bucknell University.