Picking a new head for the National Economic Council is an important moment for the President's rapidly realigning White House staff. It is an opportunity to do two very critical things at once going into the President's crucial final full year before the re-election campaign gets into full swing. The first of these is the most urgent project of this next year: finding some way in this badly damaged economy to start seriously generating some new jobs. The second mission is possibly even more important to the President's re-election and long term political health and legacy: restoring the balance in the Democratic coalition.
Ever since William Jennings Bryan's Cross of Gold speech at the 1896 Democratic convention, after which the populists merged their movement and their party with the Democrats, the political party I am proud to call mine has on economic issues been an uncomfortable coalition of those working-class populists and urban business leaders. Woodrow Wilson was the first Democratic President to govern with this uncomfortable coalition, and he chose fairly evenly between the two. FDR and Truman were more clearly on the populist side, JFK was more in the middle between the two, and LBJ went more with the populists, but all of those Presidents had significant business figures as part of their advisers and political coalition. Carter and Clinton both leaned much more heavily toward the business (increasingly Wall Street) wing of the party but both had more populist progressive advisers as well. Having smart guys like Joe Stiglitz and Bob Reich on the same side as me during those White House policy fights didn't mean we won half the time, but us progressives inside won a few rounds at least.
Flip to the transition period in late 2008. As the economy was on the verge of crashing around us, the President-elect decided to make his bet overwhelmingly with the Wall Street-oriented side of the party, the folks who were proteges and aligned ideologically with Bob Rubin. There were a couple of exceptions (Volcker and Jared Bernstein) but they were relegated to relatively minor positions. I had the sense at the time that Obama felt that he needed to have people who understood the financial sector and industry players really well, and that in a time of crisis he was looking for a team that wouldn't be too torn apart ideologically to make clear quick recommendations. But whatever the reasons, what had become the wing of economic thinkers with a sizable edge in the Clinton years became virtually the only view Obama has heard since he became President. With Tim Geithner's mentor and ideological twin Larry Summers leaving the NEC, now is the time to restore a measure of balance to the President's economic.
The biggest reason that is so important is because of the jobs issue. The macroeconomic Wall Street-oriented guys like Geithner and Summers have never been focused on the specifics of how you produce jobs in the short term- it is just not how they think. Macroeconomists think in terms whether the GDP is going up or down, whether finance is flowing and the banks are healthy. They tend to think, as administration officials used to say ad nauseum until someone in the political team finally got them to stop, that jobs are a lagging indicator that will come back around someday, after the banks get more financially comfortable and start lending again. The problem is that the shock to this economy from the damage done by the financial crisis has made classical macroeconomics a dead-end street. Banks are more comfortable but they are still not lending money because (a) there are a lot of toxic assets still on the books, (b) no one thinks main street businesses will be making money anytime soon, and (c) the Wall Street banks think they can still make more money in speculative trading than in boring investment.
The old economic models are broken, and a little entrepreneurial populism is exactly what is needed right now: someone with fresh ideas re how to spur manufacturing, how to jump-start new industries and companies. You need someone to provide a balance to Geithner's classical macroeconomic thinking, someone who wants to invest in middle class jobs not somewhere in the future when the economy has healed itself a lot more, but now. Right now. The President needs to face the fact that there aren't a lot of creative new ideas coming from the financial macroeconomists and Rubin proteges.
Here's what is also true on the political side: whatever happens, there are few economic thinkers anywhere that believe prosperity and big job gains are right around the corner. We are very likely to still have an economy in the doldrums in the fall of 2012. If Obama stays with the an economic team all drawn from the same crowd as he has now, and they all keep advising him to do the same things he has been trying all along, no one is going to give him any political credit two years from now. He has to be seen as FDR was in 1936: things were still bad, but he was willing to keep trying and trying and trying some more on new ideas to spur the economy, and at least some working class folks- Social Security recipients, WPA workers, etc- had a little bit of money to spend. If Obama brings in a new economic team with some new middle-class jobs-oriented ideas, it will help him immeasurably in terms of keeping voters' patience. The other politically crucial thing it will do is that it will unite his party. The populists in the Democratic coalition- labor, poor people, working class women, immigrant laborers- want to feel like their President is on their side, that he is taking chances and trying new things that will help them economically.
There are a lot of good candidates from the progressive populist wing of the party. A former Senator like Byron Dorgan or Don Riegle or Jon Corzine (in spite of being a former Goldman Sachs guy, Corzine is a serious economist populist). A former labor guy like the brilliant Ron Bloom, who is already in the administration. Lots of good economic writers and thinkers as well. But I know the administration wants to check either the former CEO box or the woman box in terms of their symbolic hirings, so let me throw one choice into the ring that fits one of those two boxes: Leo Hindery. I'll admit some bias, as he is a friend of mine. But the economist I respect as much as any other, Rob Johnson (who would also be a great candidate but doesn't want it), said to me the other day that he thought Leo was the best candidate he could possibly think of, and I have to agree with him. One of the most successful CEOs in the country over the last couple of decades, a great manager, a longtime writer on issues of manufacturing and trade, he would be hard for business leaders to say he wasn't qualified. But Leo is a tried and true populist, a close friend of the labor movement in spite of being a retired CEO. He has great political relationships on Capitol Hill, and a good working relationship with new White House COS Pete Rouse. The only political downside, if you can call it that, is that he has been a critic of White House economic policy, but I think hiring him would show that Obama was open to new ideas.
Leo is not the only good candidate, but hiring him or someone like him, someone who will restore balance to the President's economic team and political coalition, and someone who will walk in the door with a raft of fresh ideas that Geithner and Summers haven't been thinking about, would go a long way in getting the President ready to take on the economic challenges of the next two years. The bottom line for me isn't a particular candidate, it is that the President understands that he, his party and governing coalition, and our country need an NEC head who is not tied to traditional Wall Street-oriented ideas about the economy, or someone from corporate America that isn't bothered by the outsourcing of jobs and the trade deficit. We need an NEC chair who has a track record of caring passionately about manufacturing jobs, our crumbling infrastructure, our trade deficit, and new approaches to creating good paying jobs for middle and working class Americans. Having someone like that to run the NEC to balance Geithner's macroeconomic financial sector orientation at Treasury is crucial to rebuilding our economy, and to rebuilding confidence in this administration that they care about the middle class who has lost so much in the last ten years.
Update: This post was written yesterday before I had the chance to look at the stunning NYTimes story in this morning's paper. Entitled "Cheap Debt for Corporations Fails to Spur Economy", it summarizes better than anything I could write why the classical macro-economic model embraced by the Bob Rubin wing of the Democratic Party is not working in the deeply damaged economy of 2010. The article describes how one major corporation after another is borrowing "vast sums of money for next to nothing- simply because they can", but instead of using that borrowing to invest and create jobs, they are using it to (a) stockpile cash against worries of future weakness in the economy; (b) invest in new technology that allows them to "be more efficient and cut jobs"; (c) lower their next year's tax bill; (d) buy long term bonds (in one case mentioned, a 100 year bond); and (e) finance new mergers and acquisitions.
In case you are keeping track at home, none of those 5 things creates jobs or benefits workers.
The old economic model is fundamentally broken, torn apart by the incredibly deep damage done to this economy by the last decade of erosion of middle class buying power, and the Bush recession and financial market collapse of 2008. We need an NEC head who will bring fresh ideas and a different economic model to the administration.
With the health care fight finally resolved (you notice I didn't use the word "over"- the passage of this bill is only the first step in a long-term battle for a better health care system in America, so nothing is really over), everyone is turning their attention to the economy. As well they should.
In spite of certain establishment economists and pundits (and unfortunately a few administration officials who are politically tone deaf), saying that the recession is over and everything is back on track economically, the simple fact is that while we are no longer dangling over the precipice of another Great Depression, the economy is still broken in major ways. The official unemployment rate still hovers around 10%, and when you add in those who have given up looking for work, those who are underemployed and marginally employed but want fulltime work, the number of people needing full-time jobs is closer to 20%. Wages are still not going up, as even many of those who have jobs have had to take lower wage jobs to get by. Foreclosures are still happening at dangerously high rates, home values are not coming back anywhere near fast enough (or at all in some neighborhoods), and way too many homeowners are still dangerously close to being underwater. Business and personal bankruptcies are still way too high.
Now I know that the economy is officially "growing" again. The GDP is up, the Dow Jones is up, corporate profits are up. If you are an establishment economist, a trust fund baby, or a Wall Street financier, the economy feels like it's just humming along. For the vast majority of Americans, the noise they are hearing is less that of a hum and more of a car wreck. That's why voters react so poorly to Democratic politicians when they say things about how the economy is looking up.
The twin pillars to building a healthy economy are producing good jobs in big numbers, and fixing the badly broken financial system. These are not separate spheres, by the way- the two things are joined at the hip. Washington legislative policy wonks tend to divide everything into different bills they are working on, and DC coalitions follow that approach as well. But if we don't start creating decent-paying jobs, the foreclosure problems will keep getting bigger and housing prices won't recover. If we don't fix the financial sector, an economy where the finance sector is focused on gambling and bubbles rather than in actual investments that will create jobs will continue dragging us down, and endangering us in the future. With so much of America's wealth concentrated in six mega-banks, and those banks investing in little that's creating jobs, we are not going to create real private sector job growth.
Let me point you to three fascinating things worth reading that have come out over the last few days, because I think they all point to central economic issues as we go forward. The first is an important, news-breaking piece in Politico that Elizabeth Warren came out with yesterday morning. Citing a memo from the American Bankers Association from a 2006 fight against more oversight that makes the exact opposite arguments they are making now, Warren makes the absolutely central point that special interests like the American Bankers Association are hypocrites to the core. The special interests that are making out like bandits at the expense of the rest of us don't have any consistent philosophy except me first and only, and members of Congress and the administration should thus given their arguments the respect they deserve: which is to say virtually none.
The second is Sen. Ted Kaufman's brilliant speech on Chris Dodd's weak and disappointing financial reform bill. Sen. Kaufman's essential point is that Dodd is just moving the regulatory fixes around rather than doing what really needs to be done: break up the big banks. If these financial behemoths are not cut down in size, and walls are not built between the gambling financiers and the boring old bankers who loan money to invest in small businesses, the financial system will remain in danger and jobs will be far less likely to be created. Kaufman makes the argument that if you don't make real structural changes in the size, powers, and roles of the mega-banks, that you haven't changed anything important re how the banking system works. He is 100% on target. If having regulators was all that was needed to clean up the banking system, we never would have landed in the mess we did in the financial collapse. You have to change the power relationships as well- banks need to be smaller, and the trading side of the banking industry should not infect the more traditional loan and investment side of the banking industry.
Finally, I want to point you to a really thoughtful new commentary in Huffington Post by Leo Hindery. His frame on the political dynamic right now is intriguing: that Republicans are in fact the disloyal opposition, so violently opposed to Obama that they have gotten into bed with the fomenters of open and potentially violent revolution; in their place as the loyal opposition are those of us progressive populists who want Obama to take on the banks and far more aggressively create more jobs. Leo's point is that there is a growing group of people who are loyal to Obama in the sense that we very much want him to succeed, we want to help him, and certainly support him in opposition to a tea party/Glenn Beck-aligned Republican Party; but that we are in a sense in opposition as well, believing we need dramatically more progressive economic policies.
We live in a remarkable moment. We just passed a universal health care bill, something the progressive movement has been fighting for about a century or so. But we are still faced with a broken economy- a badly warped and dangerous financial sector, and a massive lack of good jobs- and we need for bolder thinking that we are getting on how to fix it. Whether or not you call us the loyal opposition, it is time for progressives to demand more- on creating jobs and fixing the banking system- in terms of fixing the economy.
Political prognisticators inside the Beltway like to talk about all the reasons Obama's approval ratings are dropping, and what the results of the Massachusetts Senate race and other recent campaigns might mean. Is Obama communicating well enough about the key issues? Did Martha Coakley run a good campaign? Is Obama For America failing? Will David Plouffe's coming back shake things up? Was health care reform sold properly? Will Obama's budget freeze help him politically (even though it's truly terrible policy)?
You know, they are all interesting questions, and those of us who write and talk about politics for a living love to talk about them. But at the end of the day, nothing drives voters' opinion about politicians like jobs and the economy. As long as we are stuck with high unemployment and wages stuck in neutral or worse, voters are going to be angry at incumbent politicians. And the truth is that this economy has been far harder on working people than most of the inside the Beltway pundits even realize, so that anger is far bigger than the DC establishment realizes.
My friend Leo Hindery, a businessman in NYC, has taken it upon himself to look closely at the unemployment numbers, and has done some important analysis as to the actual level of misery in the jobs sector. Leo has started looking at the unemployment reports each time they come out, and factoring in things like people too discouraged to look for work, people working part time when they want and need full time jobs, and people in the shortest term jobs with no security or attachment to their place of work. The way Leo figures it, if you look at all the available data to come up with the real rate of unemployment and underemployment, it's currently 19.1% instead of 10.0%. Given that at the height of the Great Depression in 1933, unemployment was 25.3%, that 19.1 number is pretty damn scary. And that's with a "stronger than expected recovery", as one newspaper article said yesterday.
As important as health care reform is, as interesting to us political junkies as the latest communications tactics or staff shake-ups are by the White House, it is this crushing level of unemployment that is driving the President's approval numbers and the entire Democratic Party's political fortunes down. This level of misery is unprecedented in the years since the Great Depression, and until we begin to make serious progress, all else we do politically won't matter much.
That's why this latest move by the President, this freeze on domestic discretionary spending, is a fool's errand. The White House is saying they will exempt jobs programs and health care spending, which I am relieved to hear, but getting a short term political boost for sounding tough on the deficit in the State of the Union doesn't do much for your long term political fortunes while almost 20% of Americans are looking for work. Policy-wise, it is still a terrible idea even if you exempt jobs and health care because it is domestic discretionary spending in all kinds of areas that would help create more new jobs. The thing that is so frustrating about this proposal is that there are plenty of things that could be done to both cut the deficit and produce new jobs, and this proposal goes the wrong direction in both regards. To cut the deficit, there are literally scores of corporate tax loopholes that you could close, scores of specific cuts in wasteful defense spending, big cuts in agribusiness subsidies benefiting only the richest corporate farms, and programs to recover money from wealthy tax cheats that could all raise more than the budget savings you are going to get from this freeze in it's first year. The other way to lower the budget deficit over the next ten years is to actually create new jobs, so that instead of being on welfare and unemployment benefits, those people are working and paying taxes. And you can create jobs in a variety of ways, not just by new spending. For example, America could enact the same kinds of buying-in-country programs that every other industrialized nation in the world has, and you can award big new contracts to American firms rather than foreign ones.
Let me go on a slight detour here, and talk about one related jobs issue that I should do full disclosure on. This policy debate has even driven a progressive like me into the arms of a big business, Boeing. Over the last few months, I began reading about the controversy over whether the Department of Defense should award a new contract to build tankers to a European company, Airbus, or to Boeing, which would design and manufacture everything here in the US (Airbus says they would create some jobs in Alabama if they get the contract, but most of the work would be done in Europe). I got so mad about the idea that our government might award Airbus this contract that I actually got in touch with old friends who work at Boeing, and now I've taken a consulting contract with them, the first time in 14 years I have taken on a corporate client. I probably disagree with Boeing on much of what they lobby the government for, but they have 45,000 members of my old union (the Machinists), and personally, I'd like them to have more. To have Airbus get this contract when 19.1% of Americans are looking for work would be an outrage, so on this one, I'm actually working with a big business (and yes, it's an odd feeling.) But here's the bottom line, and it couldn't be more basic: the simplest way to create more jobs in America is for the American government to award contracts to American firms.
The jobs issue trumps everything for our party and our country over the next few years. If we don't start producing jobs ASAP, any chances of cutting the deficit will go up in smoke, along with any chance of Democrats winning elections in 2010 and 2012. Instead of doing phony and counterproductive things like this freeze on domestic spending, Obama ought to be focused like a laser beam on actually creating American jobs.
There is a Senate Banking Subcommittee hearing today on the US as a global competitor, and my old friend Leo Hindery is giving testimony that you can read in the extended entry. I don't agree with every single point in it, but taken as a whole it is a powerful argument for a fundamentally different kind of jobs and manufacturing strategy than we are pursuing right now. Leo accurately drives home the point that every other industrialized country, including China, has an industrial policy, a manufacturing strategy, and their own version of a buy domestic policy. With an effective unemployment rate of 19% (the officially unemployed, plus those too discouraged to work and the under-employed), and manufacturing jobs continuing to be decimated, we are not going to climb out of this deep recession without getting people working again in good jobs.
A couple of especially scary things from Leo's testimony:
-a quarter of the nation's remaining manufacturing companies are now deemed severely at risk. That means that manufacturing jobs, which traditionally are not only better paying but have a bigger multiplier effect in the economy and reduce our critically important balance of payments deficit with foreign countries, could shrink far lower from it's current abysmally low 8.7% of American jobs.
-a high level Obama administration economic adviser is quoted as saying that America's export future resides in exporting "consulting and legal services, software, movies, and medicine." If that's the view of how we are going to get out of our balance of payments mess, we really are in deep trouble.
The last time our economy faced this kind of deep and enduring economic challenge, in the Great Depression, FDR understood that the only way to climb out of the pit we were in was to fundamentally re-align the way the federal government's economic policies worked, to invest in a truly bottom-up economic strategy that involved the government creating jobs and putting income into the hands of the poor, so that they would spend that money and make the economy grow again. That is what it is going to take this time. We need jobs. And then we need more jobs. And then we need more jobs. Oh, and I think we'll need more than just consultant jobs and lawyers- we will need construction jobs and road building jobs and green energy jobs and factory jobs.
The trickle down strategy of making sure the big banks are healthy so that they will lend money to everyone else? Guess what, it is not working. What we need to try now is investing in good jobs for regular people.
I have been in the battling-the-rich-and-powerful-on-behalf-of-the-poor-and-middle- income business for a very long time now (almost 30 years), and it can get pretty discouraging at times. For one thing, in some news that I am sure will be shattering to you, the rich and powerful have a lot more money. And they have seemed to have a lot more political friends over that era than do the poor and the middle income folks combined.
But hope rises anew from time to time, and there are encouraging signs. The most obvious one, of course, is that we have a President and both houses of Congress led by center-left politicians who will be with the poor and middle income quite a bit more than their predecessors in the Bush White House and the Republican led Congress - not always, of course, but more than the last set of politicians. But my hopes are rising for a lot less visible reasons than that.
More on what those reasons on in the extended entry.
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