If the economy goes into a tailspin, which now seems to be a growing possibility, how would it influence the 2008 presidential campaign? And if the Democrats should be elected, how would a severe recession affect their ability to govern?
Until now, the economy has been an issue mainly to the extent that most Americans are not sharing in prosperity, and have felt vulnerable to unreliable jobs, wages, pensions, and health care. As Stan Greenberg, Robert Borosage, John Judis, and Ruy Teixeira have demonstrated in these pages [See TAP, July/August 2007], an increasing percentage of voters favors much more vigorous government action. The Democratic presidential field has been offering a mélange of policies to marginally improve the economic situation of regular Americans, while not making a fundamental break with the elite bipartisan consensus on deregulated financial markets and low public spending.
But this could be one of those historic moments when excesses in the financial economy spill over and damage the real economy, in turn requiring bolder government action.
Until July, consumer demand, economic growth, and the stock market had all been pumped up by low interest rates and plentiful foreign credit. The economy seemed buoyant despite stagnant wages, America's chronic trade imbalance, and the falling dollar. Private equity and hedge-fund deals provided a high-adrenaline use for the cheap credit, attracting a growing flood of money not just from rich individuals but also from pension funds and university endowments hungry for higher returns. The deployment of these funds pushed the private equity and hedge-fund operators into ever more dubious deals. By spring, however, the smart money had concluded that the financial economy was looking a lot like a bubble, and invited the rubes to buy in.
Now, the financial engineering has begun unwinding. In late July, a combination of worse-than-expected damage to mortgage markets from sub-prime lending, rising oil prices, a flight from the dollar, and a credit drought for speculative deals sent stock prices plunging. We've now had a decade-long speculative binge that paused only briefly for the dot-com crash of 2000–2001 and the scandals of Enron, WorldCom, et al.
So what to do if an economy based on heavy financial speculation and narrowly distributed prosperity triggers a deep recession?
Alas, little in the Democrats' current program is bold enough to cure a serious downturn triggered by financial excess. In a softening economy, many Democrats still commend budget balance. And the very week that hedge-fund reverses and other speculative tremors sent the stock market plummeting, senior Democrats dependent on hedge-fund donors, led by DSCC chief Chuck Schumer, backed away from taxing hedge-fund gains, much less regulating them.
In the short run, a faltering economy is a political windfall for Democrats: It happened on the Republican watch, as the fruit of Republican ideology -- too much deregulation and speculation; fiscal resources squandered on tax cuts for the rich and a needless war instead of invested in productive social outlays; and a version of globalization that served Wall Street rather than Main Street.
But were the Democrats to take office in 2009, presumably with enhanced congressional majorities, a shaky economy would quickly become theirs. Modest increases in children's health outlays, or in the minimum wage, won't fix what's broken. So will Democrats have the nerve to think big, either in the campaign or in office?
We keep learning, the hard way, that efficient capitalism doesn't regulate itself. We shouldn't have to choose between cheap credit with big risks, or tight money in order to discourage speculative excesses. That's why we once regulated financial markets. But will the Wall Street wing of today's Democratic Party allow the Democrats to harness capitalism for the public good? In the last century, it took a full blown depression for the party's progressive wing to become ascendant.
A serious recession would also require serious new social investment. We might begin by rebuilding decayed public infrastructure before more bridges collapse. The premise that we can't "afford" social outlay is nonsense. As Rep. Barney Frank of Massachusetts inimitably put it, "On September 10, 2001, we couldn't afford the Iraq War." This economy needs new constraints on the self-destructive tendencies of a market financial system, as well as major new social spending, and new guarantees for workers to organize unions. If this all sounds faintly familiar, you might call it a new deal. But if the Democrats win in 2008, only to cling to the old deal in 2009, Happy Days will not describe Election Day 2010.
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