New Statesman - One man, one message

If Barack Obama is to save his presidency, he must speak up and persuade Americans that his policies are designed to make the market work for them

The debt blow-up in Dubai, coming as Barack Obama and his colleagues in the White House were preparing to gobble down their Thanksgiving turkeys, provided another untimely reminder that the global financial crisis has not yet been consigned to history. Despite a resumption of economic growth, unemployment in the US is hovering above 10 per cent, and the administration is facing calls for a second stimulus package to boost job creation. Meanwhile, other elements of the president's domestic agenda, including health reform - on which Obama has staked much - a shake-up of financial regulation and proposals to tackle global warming, are mired in Congress.

According to the latest Gallup poll, the Republicans have taken a handy lead over the Democrats, and the president's personal approval rating has fallen below 50 per cent. Of recent Oval Office occupants, only Gerald Ford and Bill Clinton have had their popularity sink so rapidly. Barely a year after his historic election triumph, it is too early to write off Obama as a one-term president. Clinton's early setbacks were much more serious, and he bounced back. But the former Illinois senator faces a dangerous pincer movement: Conservative Republicans accuse him of covertly promoting "socialism" and liberal Democrats charge him with temporising and lacking a coherent philosophy. Vocal defenders of Obama's policies are thin on the ground. If the US economy enters a "double dip" recession, or even if it continues to expand modestly, but not rapidly enough to reduce unemployment, next year's midterm elections could well prove disastrous for the White House.

Inheriting an economy that was in virtual free fall, Obama was always going to face big challenges, but by failing to provide a coherent narrative for his presidency he has not helped himself. Contrary to what the critics say, his domestic agenda does reflect a consistent and far-reaching world-view - not socialism, but a moderate reformism based on the proposition that free markets sometimes fail, and that governments can fix them by employing taxes, subsidies, regulations and other policy tools. Although they haven't impressed the left, the White House's policy proposals amount to the most significant effort on the part of a Democratic president to shift the United States in a progressive direction since the 1960s.

But rather than spelling out its reformist philosophy and seeking to elevate the policy debate into a broad discussion about where free-market economics reaches its limits, the White House is fighting each policy battle individually - presenting one set of arguments for health-care reform, another for financial regulation, and a third for the stimulus package. At times, Obama sounds like a populist critic of Wall Street and the health-care industry; at others, he resorts to bromides about the power and creativity of private enterprise. Often, this cognitive dissonance is evident in the same speech. Speaking in downtown Manhattan in September, he declared: "We will not go back to the days of reckless behaviour and unchecked excess . . . at the heart of this crisis, where too many were motivated only by the appetite for quick kills and bloated bonuses."A few minutes later, he added: "I have always been a strong believer in the power of the free market. I believe that jobs are best created not by government, but by businesses and entrepreneurs willing to take a risk on a good idea . . . For we know that it is the dynamism of our people that has been the source of America's progress and prosperity."

Market failure

These statements are not necessarily contradictory, but the only way to render them consistent is to get into detailed arguments about why certain markets malfunction and others do not. In short, it is necessary to embrace publicly the economics of market failure, which is hardly a new concept. More than 200 years ago, Adam Smith warned about the dangers of unregulated banks and recommended strict financial regulation. In the early years of the 20th century, the Cambridge economist Arthur Cecil Pigou pointed to the ubiquity of negative economic spillovers, such as pollution, which the free market fails to address. And during the 1950s, Francis Bator and John Kenneth Galbraith warned that free enterprise would fail to provide many socially valuable goods and services, including parks, transportation infrastructure, and education and health care for the poor.

In 2001, the University of California Berkeley's George Akerlof, Stanford's Michael Spence and Columbia's Joseph Stiglitz won the Nobel Prize for their research into the many causes of market failure, which include misaligned incentives, information problems and herd behaviour. The common ingredient is that, for whatever reason, the market doesn't provide appropriate signals to those who participate in it. In health care, the profit motive encourages insurers to exclude sick people from coverage; on Wall Street, badly designed compensation packages encourage CEOs and traders to take too many risks; in the energy industry, economic self-interest encourages power stations and other big polluters to burn cheap coal and other fossil fuels. Mass unemployment is an economy-wide market failure that results from a shortage of private-sector demand.

The administration's policies are designed to tackle each of these failures: subsidies to help individuals afford health insurance; higher capital requirements to curb excessive risk-taking; traded emission permits to restrict greenhouse-gas production; tax cuts and increased government spending to boost demand. It is legitimate to argue that this tinkering won't work, but to say that it has no intellectual foundation, or is based on an enmity to the market system, is simply wrong. The administration is seeking to make private enterprise work more efficiently, not replace it. Yet, for some reason, Obama rarely ties together the elements of his agenda and spells out their common heritage.

By failing to occupy the intellectual high ground, he has presented his Republican foes with more than ample room to manoeuvre. He has allowed them to reinterpret the financial crisis of 2007-2008 as another instance of government failure, rather than the monumental market failure it was. During the summer, he sat by quietly while they depicted his plan to provide tens of millions of Americans with private health insurance as an attempted government takeover. And, lately, he has allowed them to describe the 2008 stimulus package as ineffective, even though it has, almost surely, helped avert a much worse economic outcome.

Opinion polls confirm that the Republicans' Orwellian tactics are working. Many Americans are now angrier about the bank bailouts than they are about the reckless behaviour that made an expensive government rescue necessary. A recent Rasmussen survey says most of them oppose the Democrats' health-care reform plan. And, according to an ABC News poll, more than 60 per cent believe that the stimulus package hasn't helped the economy.

Stress tests

The administration's missteps in marketing its response to the financial crisis, which has been much more successful than many critics on the left and right anticipated, is particularly glaring. This time last year, the international banking system appeared to be on the verge of collapse, and some highly respected economists were comparing the global economic situation to the early 1930s. Today, the banks have been stabilised, most of the developed economies are expanding, albeit slowly, and world stock markets have staged a big relief rally. Between 9 March and 25 November, the Dow Jones Industrial Average climbed 63 per cent. Naturally, the debt standstill in Dubai could yet turn out to be our version of the May 1931 collapse of Austria's Credit Anstalt, which triggered further turmoil around the world. But, as of now, such an outcome seems unlikely.

Most of the credit for averting another Great Depression should go to central bankers, particularly those at the Federal Reserve and the European Central Bank, who fulfilled their allotted roles as lenders of last resort far more effectively than their predecessors in the 1930s did; but the Obama administration also played a significant role. By sticking with the Bush administration's unpopular bank bailout, and supplementing it with a series of stress tests, which many commentators dismissed as a sham, it helped restore confidence in the financial system. And by introducing a $787bn stimulus, it administered the conventional Keynesian medicine for a shortfall in demand. After contracting for five of the previous six quarters, US gross domestic product began to expand in the three months from July to September.

The main reason that Obama gets so little credit for this turnaround, which has been sustained into the current quarter, is the rise in joblessness. (If you factor in workers who have dropped out of the labour force, the US unemployment rate is above 15 per cent.) However, the president's failure to articulate an overall economic philosophy in the face of attacks from both sides of the political divide has undoubtedly added to his political problems, as well as provoking considerable speculation about its genesis.

One theory is that Obama simply isn't very interested in economics. He would not be the first president to find it tedious. (During one White House financial briefing, George Bush Sr reportedly fell asleep.) Another theory is that, by picking Lawrence Summers of Harvard to serve as his top economic adviser, Obama shut off the option of leading an intellectual counter-revolution. (As US treasury secretary during the 1990s, Summers was closely associated with financial deregulation, including the ultimate repeal of the Depression-era Glass-Steagall Act.)

There might be something in these explanations, but neither can be the whole story. During last year's campaign, Obama skilfully played the role of economic populist, linking the policy mistakes of the Bush era to the lobbying power of corporate money. Since then, rather than going all out to maintain this outsider status, he has allowed himself to be portrayed as a friend and rescuer of the financial establishment. Even now, if he wished to change course, he could replace Summers and the treasury secretary, Timothy Geithner. But of such a manpower shift there is no sign.

The most convincing explanation for Obama's rhetorical caution is that he and his political advisers are terrified of being branded as extremists. Having come to power promising to bridge the partisan divide, they are now chronically dependent on the support of two or three moderate Republican senators, to whom the phrase "market failure" may sound too negative, or too extreme. (Even though, in fact, economic reformism is an optimistic and avowedly centrist creed. Where some left-wingers would dismiss Wall Street and Big Pharma as innately evil, the subscriber to the "market failure" view would say that the problem lies with poor incentives, or self-defeating competition, both of which the government can correct - at least in theory.)

From the immediate perspective of getting bills through Congress, the political calculus of the White House has a definite logic. However, it is not obvious that it is working as intended, and, in the meantime, it is greatly diminishing the scope of Obama's presidency.

And yet, even though he faces stiff opposition, he also has a rare opportunity. In many ways, the political environment in which he is operating resembles the one that Margaret Thatcher and Ronald Reagan successfully exploited in the late 1970s, when they embraced the free-market nostrums of Milton Friedman. Then, as now, the old economic doctrines had been discredited, and people were eager for an alternative.

Thatcher and Reagan demonstrated that the essence of reformist politics is taking apparently outlandish ideas and making them seem mainstream. By publicly championing the concept of market failure, Obama could do the same thing. To be sure, building a strategy around a critique of something that many Americans hold dear would present a challenge, but the White House message-shapers could surely do it. They could, for example, take the basic idea, flip it around, and stress the positive. "Making Markets Work For You" - that sounds like a reasonably attractive slogan, does it not? It also happens to encapsulate what Obama is trying to do.

John Cassidy is a staff writer at the New Yorker. His new book, "How Markets Fail: the Logic of Economic Calamities" (Allen Lane, £25), is reviewed this week.

4 comments from readers

writeon
03 December 2009 at 07:25

The thing is, Obama's policies are not designed to make the market work for the American people, that would require massive, structural reform of the system, and that is definitely not what he's interested in, even if he had the power. On the contrary, his policies are designed, as per usual, to make the American people work for the market.

papigosh
06 December 2009 at 19:49

US VOTERS ARE NOT THE MOST DISCERNING

Whether we like it or not, Obama is ultimately accountable only to the US voters.

And from their voting history, including ensuring a two-term for one George W Bush on the back of being a 'war leader' even in the face of illegitimacy, it would be a grave-yard walk, if he Obama embarks on whole sale reform of the system even if he had the power.

Yes, the US need urgent reform for her 'sustainability and leadership' in the committee of nations but the voters are yet to understand that this can only be achieved at a price.

The level of public understanding of issues that affect them has to be less pedestrian and dictated by the triumvirate of the evagelicals, the Murdoch press and the Rush Limbaughs and Glenn Becks of that world.

Did you see how they marshalled their opposition to health care reform? This triumvirate has vowed to derail any policy including those that will benefit their OWN BASE IF IT EMANATES FROM BARACK OBAMA.

It is neither the candour nor the coherence of Obama's policies that is the problem here and i dare say the level of understanding of the US VOTERS IS THE MAIN ISSUE. NO DISRESPECT INTENDED as same is applicable in the BRITISH ISLE.

writeon
07 December 2009 at 21:02

What US voters think, or the way they vote, doesn't, given the political structure of the United States, matter too much. It's not like they have real choice, is it? They are allowed to choose between two parties, in reality. Two twin parties that have sat on the American political system for nearly two centuries, is that a record?

People often talk about voting for the lesser of two evils, yet, surely one is still voting for 'evil' isn't that the important thing?

Democracy in the United States is a mirror image of the underlying archetecture of society at large, and that is grotesque inequalities of wealth and power, which are then reflected in the political system. It's a system where there is no real choice. It'¨s a system which is extraordinarily costly to take part in, therefore a part of the poor, or working people, doesn't exist. The system is designed to exclude approximately half the electorate, so one can 'win' the presidential race with 'false majority'.

The US political system is a 'product' and it is 'owned' lock, stock, and barrel, like the rest of society. Democracy has become a hollow and empty ritual, which is rapidly losing legitimacy, despite the miracle of Obama, who is a brand created by the Chicago Democratic machine. The system is broken and cannot be repared.

menglish
08 December 2009 at 08:05

As one of those American citizens who needs to understand...

Barack Obama knew from the beginning that he was facing extremely stiff scrutiny and some rather harsh critics. He knew that anything he did that might be perceived as a mistake was going to be torn to ribbons by his detractors. He also knew that no matter how specific you get in explaining something, there are always going to be naysayers, and the more you limit yourself by specificity, the less flexibility you have to reach your goals.

That said, I did NOT vote for George W. Bush, in either election, and I think that the stupidest move I've ever heard of by a politician in the name of 'fixing' the national economy was the bank bailouts of last year.

Obama tried to moderate the sheer idiocy of the last one, but if the US Government actually wanted to stabilize the economy, then rather than bailing out the banks, they'd force them to take responsibility for all the loans they've made, and then the Federal government, if they were going to give ANYONE money to relieve the pressure of bad debts, should simply forgive Federal loans to private individuals. For that matter, make public Universities free, for undergraduate degrees. Both of these things would benefit the economy in the long term, by reducing the amount of personal debt incurred by the working public. This,in turn, would allow that working public to do things like PAY their mortgages, rather than default, which bolsters the stability of the banks, and encourages competition in the market, creating a more dynamic business market, which in turn both stimulates overall growth and forces the correction of the artificially created 'deficit economy' of the current economic model.

Also, by supporting the citizens, the federal government would force the banks to correct their own debts in order to remain in business. Free market is competitive, yeah? Well, in competition, success and failure are a matter of who does the job best.