The economic crisis that Obama rode to victory in 2008 also rode him down in the 2010 elections. Obama and his economic advisors badly “mismanaged the crisis.” While the Obama team seems to have learned little from its failure, we need to draw its lessons if we are to reduce the costly social consequences of that defeat.
Obama’s administration decided to handle the severe crisis inherited from Bush by following standard Keynesian economics. It undertook massive new spending. First it bailed out banks and other large corporations (AIG in insurance, GM in automobiles, etc.). Then it “stimulated” the economy by boosting spending on goods and services by all levels of government. Standard Keynesian practice also includes not taxing corporations and the richest 10% of US taxpayers to raise the money for all that new spending. Instead, the government borrows that money to cover the difference — the deficit — between tax receipts and increased spending. (Super Keynesians like Paul Krugman want more spending and thus bigger deficits.)
No doubt Obama’s team worried that large US corporations and the 10% richest individuals would react badly if they were taxed more to enable Washington to spend more. However much they contributed to the crisis and however much they benefit from government spending, corporations and the rich want others to pay for that spending. When have those two groups ever willingly behaved otherwise? They prefer lending to Washington over being taxed by Washington. So the Obama team spent more by borrowing more (much of it from the same corporations and rich people that it had not taxed).
Whenever governments run deficits by borrowing, corporations and the rich become concerned about a resulting problem: who will be taxed to pay the interest on the government’s borrowings and to pay back the lenders? To make sure it would not be them, corporations and the rich shifted a significant amount of their political and financial support to Republicans for the mid-term elections. That shift aimed to ensure that no future taxation of business and the rich would force them to pay for deficits. In a capitalist crisis, that’s how economic policy works when no organized opposition exists to prevent it.
As 2009 passed into 2010 and government deficits ballooned, the worries of corporate America and the rich deepened. They saw unemployment rise and stay around 10% and a flood of foreclosures eject millions from their homes. They saw Obama losing support from his electoral base as economic conditions kept deteriorating. They feared that he might be tempted (politically compelled) to regain his base’s support by taxing corporations and the rich rather than middle and poorer citizens. Then some Obama remarks blamed Wall Street for helping to cause the crisis and criticized the high executive salaries in corporations receiving government aid. In response, a significant portion of corporations and the rich decided to block Obama from moving any further in such directions.
The way to do that was clear: help Republicans. They reliably oppose taxes on corporations and the rich by blocking all tax increases. Corporations especially interested in preventing Obama from other efforts to recoup his base — such as regulating energy companies after the Gulf of Mexico disaster — helped the Tea Party’s total demonization of Obama and Washington. Media exposure for the Tea Party — its activities and candidates — became extraordinary and often quite favorable. Media attitudes toward Obama became much less sympathetic. Funds shifted to Republicans and lobbying against Obama’s legislative efforts ramped up.
Obama’s team ignored the classic flaw in Keynesian deficit spending policy: underestimating the political struggles over taxes. Middle and lower income individuals were desperate to ease the burdens of the recession on them, while corporations and the rich had no intention of accepting such burdens. As the crisis persisted (no drops in unemployment, foreclosures, job deterioration, etc.) and deficits soared, Obama’s base felt increasingly betrayed as very little improved for them. Meanwhile, corporations and the rich shifted support toward Republicans in significant numbers. By mid-2010, it was already too late for Obama. The six months before the November elections were, for many Democrats, like watching an approaching car wreck from inside the car yet powerless to stop it.
Had Obama pursued a different set of policies from the beginning, he might at least have had a chance to avoid the November 2010, electoral results. At the peak of his popularity and support early in 2009, he might have used them to blunt the resistance of corporations and the rich to pay for the increased spending needed to overcome the crisis (and thereby reduce or eliminate the deficits). Only a massive, popular mobilization could frighten (persuade) them that paying all sorts of taxes and other costs of government programs was preferable to risking a mass anger and opposition that might demand far more basic social change at the expense of corporations and the rich. After all, it was massive popular mobilization that enabled FDR to do some of that in the Great Depression of the 1930s. Nowadays, when no trade union upsurge nor sizeable socialist and communist parties exist to mobilize a left opposition, Obama himself would have had to help build one to avoid the defeat he suffered this November.
Obama missed his chance. His advisors, said to include “experts on the Great Depression,” misunderstand its political economy, consequently misadvised Obama, and thereby produced a political defeat. A new political formation able and willing to mobilize a majority around its interests is required. It could win a possible exit from the economic crisis by taxing corporations and the rich to enable increased government spending. That modest program would reduce or avoid deficits. Middle and lower income people would then face fewer or no cuts in public employment and services and no need for tax increases. With that program and with government spending focused on jobs and affordable housing, Obama might also have developed into a popular hero along the lines of FDR rather than become a shaky first-term President.
Richard D. Wolff is a Professor Emeritus at the University of Massachusetts in Amherst and also a Visiting Professor at the Graduate Program in International Affairs of the New School University in New York. He is the author of New Departures in Marxian Theory (Routledge, 2006) among many other publications. Check out Richard D. Wolff’s documentary film on the current economic crisis, Capitalism Hits the Fan, at www.capitalismhitsthefan.com. Visit Wolff’s Web site at www.rdwolff.com, and order a copy of his new book Capitalism Hits the Fan: The Global Economic Meltdown and What to Do about It.