While the President Promotes U.S. Interests Abroad, His Opponents Deny Reality at Home

While the President Promotes U.S. Interests Abroad, His Opponents Deny Reality at Home

November 11, 2010

Most of Washington is stuck “in what we call the reality-based community . . . people who believe that solutions emerge from your judicious study of discernible reality. That’s not the way the world really works anymore. . . . When we act, we create our own reality.”  Karl Rove, 2004.

Rove’s famous comments came to mind this week as President Obama and his political rivals launched new policy offensives. Hop-scotching across Asia, the President nudged the center of U.S. foreign policy towards international economic interests and concerns. From Delhi and Jakarta to Seoul and Tokyo, he has focused on the predominant economic realities that inform the decision-making of our major allies and competitors. In the process, he has begun to recast our critical relationships around issues that allow the United States to draw on its greatest advantages, a market four times larger than China’s, and our capacity to develop the advanced technologies and business methods driving modernization across the world.

Back in Washington, congressional Republicans launched their own offensive, trumpeting their plans to use their majority in the House of Representatives and expanded numbers in the Senate. But their agenda seems to draw less on the hard realities that drove most of those who went to the polls two weeks ago — jobs and incomes — than on the full-throated ranting of the more extreme elements in their political base. As if saying so will make it so, they are uniting around non-negotiable demands to repeal health care reform, cut taxes for high-income people, and slash domestic spending in unspecified ways.

These dueling offensives recall the 1990s even more than the Bush era. Bill Clinton came to office on the heels of the collapse of global communism, and so happily refocused American foreign policy on international economic matters. Barack Obama was less fortunate, with two wars and worldwide economic turmoil dominating his early foreign policies. But less than two years later, the Iraq conflict is winding down, the Afghan war has a new course, and global markets are more stable. So for now, he can concentrate on the economic concerns — currency values, trade barriers, debt, and worldwide demand — that once again are central factors in our real relations with other nations. And as in the 1990s, real movement on these international issues can help build a foundation for the progress on jobs and incomes at home that dominates the President’s domestic agenda.

Appropriately, the President chose the world’s most economically-consequential region, Asia, to quietly launch his new foreign-policy offensive. His agenda began with new commercial openings and investment arrangements with India and with Indonesia, two of the world’s fastest-growing and most protected large markets. Next, he turned to the G-20 summit in Seoul, where he fended off Chinese criticism of our monetary stimulus and called for measures to address the global imbalances that set the stage for the 2008 global meltdown. He will wind it up in Japan, the world’s third largest economy, where he will lead discussions on currency, trade and economic growth at the Asia Pacific Economic Cooperation forum. Whatever the outcomes of all of these meetings and agreements, the President is subtly shifting the focus of American influence to the real matters that drive our relationships with most other countries.

Back home, economic reality for many of the President’s opponents — John Boehner is a lonely exception — is being redefined by the likes of Glenn Beck and Rush Limbaugh. Somehow, hundreds of billions of dollars will be cut from the budget without touching the defense programs and entitlement benefits which account for most spending. Next, all of the Bush tax cuts must be extended forever, even in the face of the GOP’s sky-is-falling rhetoric on the deficits. And any compromise on the tax cuts in the lame duck session, before they expire on December 31st, is off-the-table — despite GOP attacks on the President for allegedly fostering “economic uncertainty.”  Prominent Republicans this week also attacked the Federal Reserve’s “quantitative easing” program to support growth, as if the prescription for jobs and incomes in a weak economy is to end monetary as well as fiscal stimulus. Ironically, this last offensive echoes China’s position that the new Fed policy will make U.S. exports “unfairly competitive.”

These implacable opponents’ latest gambit involves the debt ceiling, which will come up in the early months of next year. Some Republicans in both the House and Senate now threaten to block this normal procedure on the principal that’s already too high for their comfort, while others propose to let it go through only if the President agrees to $300 billion in budget savings — again without specifying any real cuts they would support. This one is dangerous even as just a threat, since any serious suggestion that the United States might find itself legally unable to pay the interest on its’ Treasury notes and bonds would sharply drive up interest rates. In the real world, that would cut off the fragile recovery and possibly send the entire world economy into a tailspin.

Politics always involves a good deal of posturing and shenanigans. But these escapades, at this moment, have real consequences, not least of all for millions of struggling Americans who apparently hope that divided government will restore their jobs. By definition, divided government can produce the results that voters want only through reasonable compromise. And much as when Newt Gingrich and his fantasy-fueled followers took power, if the radicals leading the offensive this time continue to deny that fact, they too will find themselves bested by a reality-based president.

The Mid-Term Elections and the Failure, Yet Again, of Trickle-Down Economics

November 3, 2010

This week’s seismic shift in the Congress will not change the problems facing its members and the President. This is the third consecutive election to bring large losses for the party in power, all for the same reason. For a decade, neither party has been able to deliver the rising incomes and economic security that matter most for average Americans. For all of the stark differences between the Bush and Obama presidencies, these economic results and the political outcomes that have followed are less surprising than one might think. That’s because the Obama administration, despite its rhetoric and efforts, finds itself backed into a version of the same, failed trickle-down economic model that its predecessor embraced openly.

Yes, the last two years of Democratic dominance produced small gains in jobs, especially compared to the massive job losses at the close of Bush’s term, and modest gains in incomes compared to stagnating wages under the Republicans. Like his predecessor, however, Obama now presides over an economy that continues to produce much greater gains for those at the top. While most Americans are struggling, corporate profits are up sharply, and the stock market has recovered all of the ground it lost in the financial crisis and its aftermath. Perhaps most galling, Wall Street is preparing to hand out another round of mega-bonuses, dismissing the fact that they were the ones who brought down the economy for everyone else, and that the average people who bailed them out aren’t sharing in their private boom.

Most Americans accept, at least intuitively, that the financial bailout ultimately saved everyone from a much worse economic fate. But the public’s anger tells us that voters also sense that Wall Street’s rapid return to good times wasn’t accidental. They’re right: Once again, Washington made the restoration of big profits for Wall Street the lynchpin for a broader recovery. The key was the administration’s decision, once further stimulus to directly support average people seemed to be off-limits, to embrace the indirect approach of massive, ongoing monetary stimulus. Its principal element was open access at the Fed for big finance to borrow funds at near-zero interest rates, which the administration’s economic team hoped would jumpstart business investment and large consumer loans.

In practice, Wall Street didn’t use much of more than $1 trillion in nearly-free money to expand business lending. With consumer spending sidelined by high unemployment and the still-falling housing market, demand for business loans remained slow. Moreover, once the big financial institutions were safely bailed out, they used their unlimited and nearly-free funds from the Fed to buy U.S. and foreign government securities and other safe instruments, generating the large profits that now fund their bonuses.

This trickle-down approach has been further amplified by the Fed’s “quantitative easing” program. That’s their latest effort — the second time in two years — to get the trickle going by buying up to $1 trillion in nearly any long-term assets that Wall Street wants to unload. It hasn’t worked yet: Last week, the report on third quarter GDP showed that most of the tepid, 2.0 percent growth came from inventory buildup, while final sales slumped. So long as the trickle doesn’t reach most Americans, the Fed’s efforts won’t work politically either.

In fact, there were alternatives — and there still are. A more effective approach, for both the short and long terms, would link immediate new spending and tax reductions for most Americans with long-term entitlement changes to control deficits down the line. Given the scale of the economy’s current troubles, this is an opportunity for the administration to think big — for example, a multi-year payroll tax holiday and new light rail systems for the nation’s 30 largest metropolitan areas; new research initiatives on the scale of the moon shot for green fuels and technologies and medical breakthroughs; or free tuition at public colleges for students from families earning less than $120,000, an approach now in place at Harvard and other elite universities.

Perhaps most important, the economy needs a federal loan program for families with mortgages in trouble to help stabilize housing prices by keeping foreclosure rates in check. Such a measure could short-circuit much of the “negative wealth effect” from falling housing prices, which continues to hold down consumer spending and, with it, business investment. Yet, when one loudmouth on cable TV ignited a rightwing cry against direct federal assistance to keep people in their homes, who among the Democrats had the gumption to refute him?

What approaches can we expect from the Republicans who will run the House of Representatives? Their leading proposition is to extend the Bush tax cuts, on the view that you don’t raise taxes in a weak economy — and they’re basically right. Of course, they also want to cut current spending, which would slow the economy more than restoring the Clinton-era tax rates for high-income people. The truth is, most Republicans are all talk on the deficit. Apart from Paul Ryan and his handful of true-believers, the GOP is probably no more willing today to pull back current pending for any sizable group or interest than they were under George W. Bush, when federal spending grew at the fastest rate since LBJ.

Yet, there may be opportunities to agree on something beyond the expected, temporary extension of the Bush tax cuts. President Obama can begin by going beyond trickle-down and pressing for major initiatives to directly help average Americans, including payroll tax relief and mortgage loans, linked to long-term spending reforms for the entitlement programs. If the Republicans refuse, that’s a debate the President should welcome as he prepares his run for reelection.