[Pen-l] William Greider: Obama's Economic Plan Is Not Going to Save Us

[Louis Proyect <lnp3@xxxxxxxxx>]

http://www.thenation.com/doc/20090202/greider
Obama's Economic Plan Is Not Going to Save Us
By William Greider

The nation's fast-darkening circumstances define the essential dilemma 
of Barack Obama's presidency. His instinct is to govern by consensus, in 
the moderate middle ground of politics. Yet dire events are pushing the 
new president toward solutions more fundamental than those he had 
intended. The longer he resists taking more forceful action, the more 
likely it is that he will be overwhelmed by the gathering adversities.

Three large obstacles are blocking Obama's path. The first is one of 
scale: his nearly $800 billion recovery package sounds huge, but it is 
perhaps two or three times too small to produce a turnaround. The second 
is that the financial system--still dysfunctional despite the 
bailouts--requires much more than fiscal stimulus and bailout: the 
government must nationalize and supervise the banks to ensure that they 
carry out the lending and investing needed for recovery. This means 
liquidating some famous nameplates--led by Citigroup--that are spiraling 
toward insolvency. The third is that the crisis is global: the US 
economy cannot return to normal unless the unbalanced world trading 
system is simultaneously reformed. Globalization has vastly undermined 
US productive strength, as trade deficits have led the nation into 
deepening debtor dependence.

While Washington debates the terms of Obama's stimulus package, others 
see disappointment ahead. The Levy Economics Institute of Bard College, 
an outpost of Keynesian thinking, expresses its doubts in emotional 
language that professional economists seldom use. "The prospects for the 
US economy have become uniquely dreadful, if not frightening," Levy 
analysts reported. The institute's updated strategic analysis warns that 
the magnitude of negative forces--the virtual collapse of bank lending, 
private spending, consumer incomes and demand--"will make it impossible 
for US authorities to apply a fiscal and monetary stimulus large enough 
to return output and unemployment to tolerable levels within the next 
two years." Instead, the unemployment rate is likely to rise to 10 
percent by 2010. Obama's package amounts only to around 3 percent, 
annually, of GDP in a $13 trillion economy. Levy's analysis calculates 
that it would require federal deficits of 8 to 10 percent of GDP--$2 
trillion or more--to reverse the economic contraction. And yet, the 
institute observed, it is inconceivable that this level "could be 
tolerated for purely political reasons" or that the United States could 
sustain the rising indebtedness without terrifying our leading 
creditors, like China.

Stimulus alone by a single nation will not work, in other words, given 
the distorted economic system that Obama has inherited. The stern 
warning from the Levy analysts and other skeptical experts is that the 
United States has no choice but to undertake deeper systemic reforms 
right now, rather than wait for recovery. Will Obama have the nerve to 
tackle these fundamentals? To do so he would have to abandon some 
orthodox assumptions about free trade and private finance that he shares 
with his economic advisers.

The most obvious and immediate obstacle to systemic change is the 
dysfunctional financial system. It remains inert and hunkered down in 
self-protection, despite the vast billions in public money distributed 
so freely, no strings attached, in the last days of the Bush 
administration. We will learn soon enough whether Obama intends to start 
over with a more forceful approach. Obama and his advisers are eager to 
get another $350 billion in bailout funds, but they have remained silent 
on whether this will finance a government takeover of the system. 
Without such a move, the taxpayers will essentially be financing the 
slow death of failed institutions while getting nothing in return.

The most complex barrier to recovery is globalization and its negative 
impact on the economy. Given our grossly unbalanced trade, we have kept 
the system going by playing buyer of last resort--absorbing mountainous 
trade deficits and accumulating more than $5 trillion in capital debt to 
pay for swollen imports, while our domestic economy steadily loses jobs 
and production to other nations. Renewed consumer demand at home will 
automatically "leak" to rival economies and trading partners by boosting 
their exports to the US market--which subtracts directly from our GDP. 
This is the trap the lopsided trading system has created for recovery 
plans, and it cannot be escaped without fundamental reform.

To put it crudely, Obama's stimulus program might restart factories in 
China while leaving US unemployment painfully high. In fact, some 
leakage may occur via the very banks or industrial corporations that 
taxpayers have generously assisted. What prevents Citigroup and General 
Motors from using their fresh capital to enhance overseas operations 
rather than investing at home? The new administration will therefore 
have to rethink the terms of globalization before its domestic 
initiatives can succeed.

A global recovery compact would require extremely difficult diplomacy 
but could be possible because it is in everyone's self-interest. The 
United States could propose the outlines with one crucial condition: if 
the trading partners are unwilling to act jointly, Washington will have 
to proceed unilaterally. A grand bargain could start with US agreement 
to serve once again as the main engine that pulls the global economy out 
of the ditch. That is, the United States will have to continue as the 
buyer of last resort for the next few years, and China and other nations 
will have to bail us out with still more lending. In the short run, this 
would dig us into a deeper hole, but the United States could insist on a 
genuinely reformed system and mutually agreed return to balanced trade, 
once global recovery is under way.

Congress can enact the terms now--a ceiling on US trade deficits that 
will decline steadily to tolerable levels, as well as new rules for US 
multinational enterprises that redefine their obligations to the home 
economy. Unlike in other advanced nations, US companies get a free ride 
from their home government when they relocate production abroad. That 
has to change if the United States is to reverse its weakening world 
position. Tax penalties plus national economic policy can drive US 
multinationals to keep more of their value-added production at home. 
These measures can be enforced through the tax code and, if necessary, a 
general tariff that puts a cap on imports. Formulating these provisions 
now for application later, once the worst of the crisis is over, would 
give every player the time to adjust investment strategies gradually.

President Obama and his team may at first scorn the notion of saving the 
world while negotiating a bailout for the United States. They will be 
reluctant to talk about reforming the global system by threatening to 
invoke emergency tariffs. But we are in uncharted waters. Impossible 
ideas abruptly begin to seem plausible. Six months from now, if the 
Obama recovery does not materialize, the president may discover he has 
to reinvent himself.

William Greider has been a political journalist for more than 
thirty-five years. A former Rolling Stone and Washington Post editor, he 
is the author of the national bestsellers One World, Ready or Not, 
Secrets of the Temple, Who Will Tell The People, The Soul of Capitalism 
(Simon & Schuster) and--due out in February from Rodale--Come Home, 
America.
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