By the time the general election campaign is in full swing, the economy is likely to be in much deeper trouble. Historically, one of the staples of political science research is that presidential elections are backward-looking referenda and that the party presiding over a recession in an election year is very likely to lose. Despite deepening economic troubles, however, this year things are more complicated.
For starters, George W. Bush is not running, so this election will not quite be a referendum—unless the Democrats effectively make it a referendum on 30 years of market fundamentalism promoted by the entire Republican Party. But there is a gap between what Democratic leaders have been proposing to date and what it will actually take to fix the economy. Events have somewhat emboldened Clinton and Obama—on health insurance, on the mortgage meltdown, and even on trade. However, this recession is different in its dynamics from every downturn since the Great Depression, and most Democrats have yet to grasp that.
This economic slide is driven by a massive credit contraction caused by structural damage to the financial system. It was entirely needless damage—an economic war of choice—caused by the ideology and practice of extreme deregulation. The damage is so severe that the usual medicines—low interest rates and modest deficit spending—are not sufficient to cure it.
The economic downswing is compounded by several other factors that make for a perfect storm. After more than a decade of America's escalating dependence on foreign borrowing to finance a structural trade imbalance, global financial markets are losing confidence in the dollar. Our friendly creditors in Asia and in the Persian Gulf are starting to use their dollar hoard to buy real stuff (and at fire-sale prices), not just U.S. Treasury bonds. And the cheap dollar only compounds the problem of rising inflation in sectors such as food and energy, limiting the Federal Reserve Board's room to maneuver with lower rates.
Most important, the current downturn intensifies forces that have been at work for three decades, a period when both parties turned away from the managed form of capitalism that produced the broadly shared postwar boom. That earlier era yielded not just high rates of growth but narrowing income gaps and increasing economic security for ordinary Americans. What vexes voters is not just the recession, which has barely begun to bite, but the 30 years of what CNN's Lou Dobbs calls the War on the Middle Class.
Thus the Democrats' task is to place the responsibility squarely where it belongs—on market-fundamentalist ideology and the related right-wing policies that have undercut mechanisms of security and opportunity—and to offer something dramatically better. This requires not just a repudiation of George W. Bush but a reversal of an entire philosophy of how to run an economy. That philosophy has now been revealed as a proven, practical failure both for working Americans and for the solvency of the system.
The necessary enterprise is a bold recovery program, not a better "stimulus"—a term that connotes government response to an ordinary business cycle, which this recession is emphatically not. Nor does a short-term injection of stimulus reverse the trajectory of the 30-year trend.
The first chapter in the unfolding saga of Democrats as champions of recovery was the rush to compromise with President Bush on the so-called stimulus package. It was not their finest moment.
Bush needed fast congressional action, but House Democrats held more of the cards. They could well have afforded to wait a few weeks and to have used that period to contrast Bush's proposed tax cuts—mostly for business and the affluent—with a far more dramatic and effective program for regular Americans, setting the stage for bigger things. But the House Democratic leadership was persuaded that the public wanted quick cooperation and that the usual media clichés about "partisan bickering" would have been even more damaging to Congress' standing than a quick capitulation to Bush.
In addition, the Democrats were (and still are) hobbled by the fiscal conservatives in their own ranks. In the negotiations with Speaker Nancy Pelosi, the House Blue Dog Caucus insisted that the overall size of the stimulus be held down. The Clintonian idea that the Democrats should first and foremost be the parsimony party still has substantial support. The Democrats actually entered the negotiations proposing a smaller stimulus number than the administration.
The Democrats also bought the centrist mantra, repeated endlessly by a chorus that included former Treasury Secretary Larry Summers, the Center on Budget and Policy Priorities, and countless others, that the stimulus should be "timely, targeted, and temporary." Why this tepid trilogy of weak T's? Democrats were fearful that the economic downturn, absent these caveats, would become an excuse for another round of permanent Republican tax cuts. So instead of looking toward the fall election and the real economic plight of the electorate, they kept looking over their shoulders at the Republicans.
The conventional wisdom among centrist economists is that stimulus bills are very risky. By the time they get through Congress, the recession is often over (hence, timely); Congress is tempted to turn them into Christmas-tree, special-interest bills (hence, targeted); and tax cuts, once enacted, tend to become permanent holes in the tax code (hence, temporary). This wisdom is accurate as far as it goes, but in a structural economic crisis, it doesn't go very far. So instead of coming out of the box with a recovery program that offered at least a down payment on reversing 30 years of economic insecurity, and beginning a serious effort to repair the financial crisis, Democrats yet again were enablers of President Bush.
They were rewarded with a photo op beside a hugely unpopular and failed president bringing Democrats to heel. In the larger context of the general election, Timely, Targeted, and Temporary signaled nothing so much as Think Small.
Even Senate Finance Committee Chairman Max Baucus, the most fiscally Republican of Democrats, called for a more robust package. The Senate Democrats ended up offering a bit more—an additional $40 billion over two years with extended unemployment benefits, more tax breaks for seniors, help on home-heating costs, and additional food-stamp aid. The Republican leadership usefully objected, setting up the beginning of some instructive contrasts rather than a bipartisan unity fest.
But the entire debate was conducted within far too narrow limits. Given where the economy is headed, a serious anti-recession package would begin by spending at least triple what Bush and the congressional Democrats embraced. One area they left out entirely was state and local government. Because every state but one is required to balance its budget, the economic effect of a recession on state spending is what economists call "pro-cyclical"—it intensifies the downturn instead of offsetting it. Sales, income, and property taxes begin falling. But instead of leaning against the economic winds, states with reduced revenues must reduce spending—on everything from aid to the poor to public works. An emergency revenue-sharing package would prevent cuts in state spending, at 100 cents on the dollar—and would tee up programs of job-creating infrastructure overhaul and green investment for 2009.
As we go to press, Democrats in Congress have begun talking about the stimulus as just a down payment on what's really needed. Beyond bigger countercyclical public spending, we need a strategy for reversing the calamity in the housing sector. Sen. Chris Dodd's proposal to revive and modernize the New Deal's Homeowner's Loan Corporation would actually prevent foreclosures, unlike the weak voluntary measures proposed by the administration. And then we need much stronger medicine to reverse 30 years of stagnant incomes and dwindling economic security.
This enterprise is not easy for a congressional party with a very slender majority in both chambers that is divided into progressives, moderate liberals, and fiscal hawks. Its normal job is to legislate, and its leadership is accustomed to pursuing compromises that can win Bush's signature. But for a presidential candidate, bolder economics is surely possible—and necessary.
In the general election Democrats must first hang the current financial collapse and its spillover effects around the necks of the Republicans and their market-fundamentalist ideology. Second, Democrats need to give themselves permission to think big. The need, both politically and substantively, is to persuade economically stressed voters once again that Democrats are truly the party of ordinary working Americans, and then—presumably beginning in 2009—to deliver.
The day after the House voted for its paltry $145 billion stimulus package, New York Times reporter Adam Nossiter quoted the iconic disillusioned, potentially Democratic voter, Buford Moss, a retired Union Carbide worker who lives in Columbia, Tennessee. "I wish there was somebody worth voting for," Moss told Nossiter. "The Democrats have left the working people." It is this perception that the 2008 campaign needs to change, and it will not be changed with feeble policies and boilerplate rhetoric.
Both Clinton and Obama began as minimalists compared to what's needed, though in different ways. With the exception of a health plan that would cover nearly everyone, Clinton's language and proposals have been characteristically incremental. Obama's rhetoric has been far more sweeping, but his actual policy proposals have been even more modest than Clinton's. Both candidates have taken their economic policy from experts who are centrists. Presumably, the rhetoric and the proposals will become bolder as the election year wears on, because economic circumstances will demand it.
What would it take not just to repair the damage to America's financial institutions but to fundamentally alter the 30-year trajectory of disappearing economic security? Government ultimately has five tools. Most obviously, government can tax, spend, and regulate. It can also teach and build constituencies. The great progressive presidents have used all five.
This is not the place to spell out an entire recovery program. The Prospect will be offering details throughout the election year. However, a few basics should be clear. Reversing the catastrophic damage to the financial system and its tendency to generate dangerous asset bubbles will require New Deal–scale re-regulation. Reversing the 30-year trajectory of increasing inequality and insecurity will require very substantial public spending. It's time for Democrats to stop flinching at both ideas, since these are the two core ways that government offsets the insecurity and inequality produced by markets. The "new economy" has not changed that dynamic but intensified it.
Repairing America's broken infrastructure will cost public money. Financing green energy and creating good jobs along the way will cost public money. Converting the low-wage jobs in the human service sector into good middle-class professional jobs will cost public money. Disconnecting health security and retirement securities from the vagaries of employment will cost public money. And improving the economic horizons of young Americans will require serious public outlays, too. (For some detailed policy ideas, see my piece in the upcoming issue, "An Economic Compact for the Young,")
And finding the revenue to finance that social outlay will require reviving progressive taxation. Reverting to the tax schedule of the pre-Bush code, but preserving the lower taxes on Americans with incomes under $200,000, could easily raise an additional $300 billion a year. Republicans are referring to this as the mother of all tax hikes; but because Bush's tax cuts were so heavily tilted upwards, well over 95 percent of Americans would get no tax increases and many could get additional cuts. Unless Democrats reclaim progressive taxation, they will be stymied with the rest of their agenda. It takes leadership and nerve to explain why services that Americans want and need must be financed based on taxpayers' ability to pay.
Tax-enforcement experts have generally agreed that an additional $300 billion a year can be collected from high-bracket partnerships and other subterfuges designed to illegally evade taxes. There is at least another $100 billion to be had from winding down the Iraq War. So the money can be obtained for the scale of outlay that America needs.
But before Democrats can find the resources, they must first find the political will. And that will require ending a 30-year pattern, going back to Jimmy Carter, of offering small-bore fixes to ordinary voters while tailoring fiscal and regulatory policies for Wall Street.
For the Democrats to win the votes and receive the mandate to carry out a bold recovery program once in office, the campaign needs to be treated as a series of teachable moments. If the usual campaign consultants prevail, there will be lots of poll-tested "messaging" around particular issues, aimed at particular constituencies. But the more important task is to wrap all these into one overarching message: Right-wing ideology and Republican policies have undermined both the working middle class and the very solvency of the U.S. financial system—and Democrats are offering more than token alternatives. This is the lesson of the sub-prime crisis, the projected $2 trillion decline in housing values that will weaken the personal balance sheets of middle-class Americans, the insecurity that Americans face on a variety of fronts ranging from their health insurance to their pensions to their jobs, and the rising costs of entry into the middle class.
This toxic right-wing reign did not begin with Bush, and it will not end with Bush unless a radically different view of economics and government is restored. The Republican nominee will endeavor to distance himself from Bush's failed presidency, but all of Bush's policies were made possible only because a Republican Congress voted in lockstep to cram through Bush's legislation and to confirm his appointees (both the competently radical ones and the corruptly incompetent ones). The campaign should be nothing so much as an ongoing education in these truths.
Both Obama and Clinton bring assets and liabilities to that exercise. For Obama, the task is to cruise as a unifying candidate somewhat above party—and use his eloquence to remind voters of all the ways that right-wing ideology failed them and the nation. Obama has been getting better at this. For Clinton, who begins as a highly divisive candidate, the challenge is to drive home the failure of Republican ideology and policy, without seeming even more divisive.
With the economy tanking, the Republicans, astonishingly, are still running on more tax cuts, more deregulation, more globalization. That ideology may have been plausible in 1980, before it had a full field test, but not today. With the exception of 1964 and 1936, it is hard to think of an election in which the ideological choices were more stark. When Bush ran in 2000, he posed as a moderate. By the time Bush's radical conservatism had been fully exposed in 2004, John Kerry failed to personify a credible progressive alternative. After 30 years of at lease partly succumbing to right-wing ideological fashion and the political influence of financial elites, the Democrats still have a way to go before credibly restoring their mantle as champions of people like Buford Moss.
It is still possible that the Democrats could coast into the presidency, on the sheer momentum of the Republicans' multiple failures. But how much more effective it would be if they used the campaign to define and claim a mandate that they will surely need in 2009 and beyond, if they are to repair the U.S. economy and their own great tradition as the party of the common American.