Paul Krugman and Robin Wells
In the spring of 2012 the Obama campaign decided to go after Mitt Romney’s record at Bain Capital, a private-equity firm that had specialized in taking over companies and extracting money for its investors—sometimes by promoting growth, but often at workers’ expense instead. Indeed, there were several cases in which Bain managed to profit even as it drove its takeover targets into bankruptcy.
So there was plenty of justification for an attack on Romney’s Bain record, and there were also clear political reasons to make that attack. For one thing, it had worked for Ted Kennedy, who used tales of workers injured by Bain to good effect against Romney in the 1994 Massachusetts Senate race. Also, to the extent that Romney had any real campaign theme to offer, it was his claim that as a successful businessman he could fix the economy where Obama had not. Pointing out both the many shadows in that business record and the extent to which what was good for Bain was definitely not good for America therefore made sense.
Yet as we were writing this review, two prominent Democratic politicians stepped up to undercut Obama’s message. First, Cory Booker, the mayor of Newark, described the attacks on private equity as “nauseating.” Then none other than Bill Clinton piped up to describe Romney’s record as “sterling,” adding, “I don’t think we ought to get into the position where we say ‘This is bad work. This is good work.’” (He later appeared with Obama and said that a Romney presidency would be “calamitous.”)
What was going on? The answer gets to the heart of the disappointments—political and economic—of the Obama years.
When Obama was elected in 2008, many progressives looked forward to a replay of the New Deal. The economic situation was, after all, strikingly similar. As in the 1930s, a runaway financial system had led first to excessive private debt, then financial crisis; the slump that followed (and that persists to this day), while not as severe as the Great Depression, bears an obvious family resemblance. So why shouldn’t policy and politics follow a similar script?
But while the economy now may bear a strong resemblance to that of the 1930s, the political scene does not, because neither the Democrats nor the Republicans are what once they were. Coming into the Obama presidency, much of the Democratic Party was close to, one might almost say captured by, the very financial interests that brought on the crisis; and as the Booker and Clinton incidents showed, some of the party still is. Meanwhile, Republicans have become extremists in a way they weren’t three generations ago; contrast the total opposition Obama has faced on economic issues with the fact that most Republicans in Congress voted for, not against, FDR’s crowning achievement, the Social Security Act of 1935.
These changes in America’s political parties explain both why there has been no second New Deal and why the policy response to the prolonged economic slump has been so inadequate. The partial capture of the Democratic Party by Wall Street and the distorting effect of that capture on policy are central themes of Noam Scheiber’s The Escape Artists: How Obama’s Team Fumbled the Recovery, an inside account of Obama’s economic team from the early days of the presidential transition to late 2011.
Scheiber starts with the influence Wall Street exerted over the assembly of that economic team. In its early stages, Scheiber tells us, Obama’s campaign relied for policy advice on “obscure academics, contrarian gadflies, and past-their-prime bureaucrats,” like Austan Goolsbee, a young economics professor from the University of Chicago, and Paul Volcker, the octogenarian though still vigorous former chairman of the Federal Reserve. But by September 2008, another economic group had formed and begun competing for influence, composed of “well-heeled insiders. Most [of them] had worked for former Clinton Treasury secretary Robert Rubin.” Rubin had been a partner at Goldman Sachs before joining the Clinton administration; after leaving, he became a director and counselor, and then chairman, of Citigroup.
Soon, the latecomers had completely superseded the early team. For example, the person charged with vetting potential economic hires was Jason Furman, a seasoned Washington economist who ran the Hamilton Project, a neoliberal think tank founded by Rubin and funded by Democratic-friendly financiers. Mike Froman, an aide to Rubin during his tenure as treasury secretary who then followed Rubin to Citigroup, was the personnel chief of Obama’s transition team. It was he who put forward Larry Summers and Tim Geithner as the leading candidates for treasury secretary.
Summers, the Harvard economist and former undersecretary of the treasury under Robert Rubin, who then succeeded him as treasury secretary, as well as being an adviser to a Wall Street hedge fund, would become Obama’s top economics aide as director of the National Economic Council. Geithner, who had been Summers’s lieutenant while at the Clinton Treasury and was later chairman of the Federal Reserve Bank of New York, had been one of three people who had acted to save the country’s biggest banks—on terms congenial to the banks—during the fall of 2008. As Scheiber writes, “By putting Mike Froman in charge of hiring, Obama was, in effect, choosing to staff his administration with insiders and establishmentarians.”
The dominance of Rubinites in the new administration shocked many progressives, since for many the Clinton-supported repeal of the Glass-Steagall Act, advocated by Robert Rubin but opposed by Paul Volcker, symbolized the extent to which the financial crisis of 2008 was hatched in the overly friendly relationship between the Clinton administration and Wall Street. It’s true that Glass-Steagall, a Great Depression–era law that forbade the mixing of securities trading and accepting FDIC-insured deposits under the same corporate roof, wouldn’t have prevented the 2008 implosion of Wall Street. Instead, it was extraordinarily high levels of leverage at investment banks like Lehman and Merrill Lynch, as well as the holding of huge portfolios of toxic subprime mortgages by deposit-taking banks like Bank of America, that were the fuel for the conflagration. But progressives were right to feel that Wall Street had been dangerously underregulated for too long and that the entire country was now paying the price.
Yet those concerns fell on deaf ears within the new administration. As Scheiber recounts, when one Democratic senator protested that the team headed by Geithner and Summers had been too sympathetic to Wall Street during the 1990s, Obama dismissed the concerns, stating that “he needed people he could count on in a crisis. Besides,…they had changed.”
Was it all some kind of conspiracy? No—as Scheiber explains, it was less purposeful and more complicated than that. Partly it was Obama’s need for experienced hands and immediate credibility in the middle of the worst financial crisis since the Great Depression. Partly it was due to Obama’s insouciance about political optics. But it’s also clear that Obama’s personality and temperament played the crucial part in aligning his fortunes with Rubinites; as Scheiber acutely observes, Obama and Geithner bonded over similar childhoods as ex-pats and an understated, self-deprecating style that avoided direct conflict. No doubt Obama’s all-star economic team gave him the “intellectual affirmation” that Scheiber notes “he craved.”
But while the team may have given Obama intellectual affirmation, it didn’t give him very good advice. In the end, Obama’s response to the financial crisis was both lopsided and inadequate: Wall Street received a lavish bailout, with remarkably few strings attached, while workers and homeowners were let down by radically underpowered plans for stimulus and debt relief.
True, not all members of the team got it wrong. We now know in particular that Christina Romer, the Berkeley professor appointed to head Obama’s Council of Economic Advisers, called from the beginning for a much larger economic stimulus than the administration ever proposed. But Romer was sidelined and it was Larry Summers—a person not shy about displaying his brilliance—who had Obama’s ear. In principle, that needn’t have made much difference; when wearing his academic hat, Summers espouses Keynesian economic views not noticeably different from Romer’s (or ours). But Summers, rather than passing on straight economic analysis, tried to show his political astuteness about what Congress would accept, and as a result underplayed the case for a bigger stimulus.
But it is Tim Geithner, Obama’s treasury secretary, who appears, even more than Obama, as the decider in this saga. In contrast to Summers, whom Scheiber portrays as a flexible, reformist Rubinite, willing to alter his views in the face of evidence, believing in particular that shareholders of bailed-out banks could and should pay more to taxpayers, Geithner is described as a doctrinaire Rubinite who viewed his primary task as one of restoring financial market confidence, which in his mind meant doing nothing that might upset Wall Street.
Thus, while a financial bailout was undoubtedly necessary, Geithner bucked Summers and even Obama by engineering a bailout in which taxpayers assumed all the risk but got nothing in return; in which Goldman Sachs’s speculative trades against AIG, which pushed AIG over the edge, were honored in full and paid from the government’s bailout of AIG; and in which the plan for regulating derivatives was, as one lobbyist said, “the plan [derivatives] dealers had come forward with.” There would, of course, be no discussion of blame, no hint that the bankers had done a bad thing by putting the economy in such a predicament. That would, after all, undermine confidence.
How did Geithner manage to dominate policy so completely? Partly it was his skill at inside politics; even when he couldn’t win an argument outright he would win by other means. Often he would simply wait people out; this was his tactic with Rahm Emanuel, knowing that Emanuel’s manic attention would eventually turn elsewhere. And crucially, Geithner was enabled by Obama’s unwillingness to break stalemates between his aides. So as public rage mounted over the bank bailout, David Axelrod, Robert Gibbs, and Rahm Emanuel turned to Geithner and pleaded with him to make bank shareholders pay some price for the government rescue of the banking sector. Geithner simply refused to yield, making the specious argument that banks had already paid a price by being forced to raise capital from the market. As Scheiber accurately points out, this ignored the fact that by backstopping the banks during their self-inflicted implosion, the US government effectively gave them an insurance policy worth billions of dollars. In the end, Geithner won.
If Geithner is the active designer of the Wall Street bailout, Obama is the passive enabler of Republican intransigence. Scheiber describes how, time and time again, Obama’s reflexive search for bipartisanship handed the advantage to the Republicans. Scheiber observes that “in Obama’s mind, ‘partisan’ equaled ‘parochial,’ or even ‘corrupt,’” leading to “making huge concessions before the [stimulus] negotiation had even started,” that Obama’s hunger for acceptance through bipartisanship was “deeply confused,” and, perhaps most damningly, that in contrast to Obama’s approach, “partisan muscle-flexing may very well serve the public interest, since there’s no other way to pass legislation.”
Timothy Geithner; drawing by John Springs
Obama’s innate centrism led him to adopt the preoccupation with the budget deficit of Geithner and Peter Orszag (his head of the Office of Management and Budget and another Rubin protégé) in opposition to vocal protests from both Summers and Romer that now was not the time to worry about deficits. As a result, Obama would never acknowledge that the original stimulus was not big enough, a position that left him boxed in when it became clear—as it already had by summer of 2010, if not earlier—that it had indeed been far too small.
The low point, in Scheiber’s account, was Obama’s inept handling of the 2010 negotiations over the extension of the Bush tax cuts. His own economics team, deeply concerned that “the president was AWOL” on the issue, undertook to resolve it on their own. It was Geithner and the former Clinton political hand Gene Sperling who extracted concessions from the Republicans on the final deal, while Obama still sought compromise. Another casualty of this period was any real progress on debt relief for homeowners. By the end of 2010, both Summers and Romer left Washington in frustration.
Scheiber’s book, then, is a dispiriting story both of how Wall Street’s influence on Democrats allowed it to escape paying any appropriate price for the mayhem it inflicted, while escaping effective regulation, and of how Obama failed to confront intransigent Republicans. But what made the Republicans so intransigent? That, in different ways, is the subject of two recent books: Thomas Frank’s Pity the Billionaire and Thomas Edsall’s The Age of Austerity.
Frank focuses on what is, as he says, “something unique in the history of American social movements: a mass conversion to free-market theory as a response to hard times.” It is indeed remarkable. After all, for three decades before the financial crisis American politics and policy had been increasingly dominated by laissez-faire ideology, by the belief that markets—and financial markets in particular—should be allowed to run free. Then came the inevitable crash. But far from demanding a return to stronger regulation, much of the American electorate turned to the view that the crisis was caused by too much government intervention, and rallied around politicians aiming to dive even deeper into the policies that led to crisis in the first place.
How did this happen? Frank’s answer is that it was the bailouts that did it. By doing things Geithner’s way—by bailing out the bankers without strings or blame—the Obama administration left an understandably angry American public with the correct sense that someone was getting away with something. And the right proved adept at exploiting that sense. The famous February 2009 rant by CNBC’s Rick Santelli that started the Tea Party movement was a denunciation of TARP, the big bank bailout passed in the waning days of the Bush administration (although a plurality of voters believe that it was passed under Obama). True, Santelli focused all his ire on a tiny piece of TARP, the planned aid for troubled homeowners (aid that mostly never materialized), not the much bigger aid for banks. But at least he was blaming someone, which the Obama administration was refusing to do.
And by the time Obama began, tentatively, to suggest that some bankers might have misbehaved a bit, it was too late. The entire Republican Party and much of the electorate had settled into a narrative in which the financial crisis of 2008—a crisis that followed fourteen years of hard-right Republican congressional dominance and eight years in which hard-line conservatives controlled all three branches of government—was caused by…too much government intervention to help the poor and, especially, the nonwhite. As Frank writes:
Back to the usual, all-purpose culprit: government…. The feds forced banks to hand out special loans to minority borrowers…and…the entire financial crisis was a consequence of government interference.
So the right has recast itself as the enemy of “Big Business,” not because it’s business but because it’s insufficiently capitalist. No better proof of the currency of that view, Frank points out, than a 2009 Forbes article by Paul Ryan, “Down with Big Business,” where he argues, “It’s up to the American people—innovators and entrepreneurs, small business owners…to take a stand.”
But why did the right do so much better a job than Obama and company of seizing the moment? We’ve already seen part of the answer: Democrats in general, and Obama in particular, were too close to Wall Street to deal effectively with a crisis that Wall Street had created. Frank also makes an important point: in the recent political climate, ignorance really has been strength. You might think that the hermetic intellectual universe the right has created for itself, a kind of alternative reality walled off from any evidence that might contradict faith in the wonders of free markets and the evils of government intervention, would be a liability for the GOP. And it does indeed wreak havoc with actual policymaking. In political terms, however, it has given Republicans unity and certainty where Democrats have been weak and divided.
Yet where does that Republican unity really come from? Frank doesn’t really explain this, but there’s a pretty good theory laid out in Thomas Edsall’s The Age of Austerity. Oddly, however, it’s not the theory Edsall himself expounds.
Edsall’s ostensible thesis, advanced at the book’s beginning, is that scarcity is at the root of our new political battles, that we’ve entered a new era of harsh politics because a shrinking economy and a ballooning budget deficit make it impossible to satisfy the two parties’ political needs at the same time:
The two major political parties are enmeshed in a death struggle to protect the benefits and goods that flow to their respective bases, each attempting to expropriate the resources of the other. A brutish future stands before us.
Yet most of the evidence Edsall advances for this thesis involves pointing to the consequences of the economic crisis—which isn’t at all a crisis of scarcity, but rather a crisis of bad financial and macroeconomic policy. Why, exactly, must there be a “death struggle” over resources when the US economy could, according to Congressional Budget Office estimates, be producing an extra $900 billion worth of goods and services right now if it would only put unemployed workers and other unused resources back to work? Why must there be a bitter struggle over the budget when the US government, while admittedly running large deficits, remains able to borrow at the lowest interest rates in history?
The truth is that the austerity Edsall emphasizes is more the result than the cause of our embittered politics. We have a depressed economy in large part because Republicans have blocked almost every Obama initiative designed to create jobs, even refusing to confirm Obama nominees to the board of the Federal Reserve. (MIT’s Peter Diamond, a Nobel laureate, was rejected as lacking sufficient qualifications.) We have a huge battle over deficits, not because deficits actually pose an immediate problem, but because conservatives have found deficit hysteria a useful way to attack social programs.
So where does the embittered politics come from? Edsall himself supplies much of the answer. Namely, what he portrays is a Republican Party that has been radicalized not by a struggle over resources—tax rates on the wealthy are lower than they have been in generations—but by fear of losing its political grip as the nation changes. The most striking part of The Age of Austerity, at least as we read it, was the chapter misleadingly titled “The Economics of Immigration.” The chapter doesn’t actually say much about the economics of immigration; what it does, instead, is document the extent to which immigrants and their children are, literally, changing the face of the American electorate.
As Edsall concedes, this changing face of the electorate has had the effect of radicalizing the GOP. “For whites with a conservative bent,” he writes—and isn’t that the very definition of the Republican base?—
the shift to a majority-minority nation [i.e., a nation in which minorities will make up the majority] will strengthen the already widely held view that programs benefiting the poor are transferring their taxpayer dollars to minority recipients, from first whites to blacks and now to “browns.”
And that’s the message of Rick Santelli’s rant, right there.
Now, the GOP could in principle have responded to these changes by trying to redefine itself away from being the party of white people. Instead, Edsall writes, the response has been to “gamble that the GOP can continue to win as a white party despite the growing strength of the minority vote.” And that means a strategy of radical, no-holds-barred confrontation over everything from immigration policy to taxes and, of course, economic stimulus, some part of which would be paid to minorities.
The immediate effect of this bitter confrontation has been to paralyze economic policy in the crisis. Obama might have had a window of opportunity in his first few months in office, but as Scheiber shows, that window was lost—and there has been little chance of effective action since. So the slump drags on. But as Thomas Mann and Norman Ornstein say in the title of their new book, It’s Even Worse Than It Looks.* They argue that Congress—and indeed the whole American political system—is close to complete institutional collapse. We have entered a new politics of “hostage taking,” they tell us, epitomized by but by no means limited to the 2011 fight over the debt ceiling. And they strongly suggest that the ongoing fiasco of macroeconomic policy may be only the beginning.
It’s a remarkable if depressing book, especially impressive given its provenance. Mann and Ornstein are deeply respected congressional scholars, and their book would seem on the surface to epitomize the kind of bipartisan effort Washington insiders claim to love: Mann is at the liberal Brookings Institution, Ornstein at the conservative American Enterprise Institute. Yet they reject the temptation to shade their conclusions in the name of “balance.” What the country faces, they write, isn’t a problem with partisanship in the abstract; it’s a problem with one party:
However awkward it may be for the traditional press and nonpartisan analysts to acknowledge, one of the two major parties, the Republican Party, has become an insurgent outlier—ideologically extreme; contemptuous of the inherited social and economic policy regime; scornful of compromise; unpersuaded by conventional understanding of facts, evidence, and science; and dismissive of the legitimacy of its political opposition. When one party moves this far from the center of American politics, it is extremely difficult to enact policies responsive to the country’s most pressing challenges.
And where, in all this, is the hope that was so widespread back in 2008? It is, frankly, hard to find. President Obama bears some of the blame for that; he chose to listen to the wrong people, and arguably missed his best chance to turn the economy around. (Just to be clear, this isn’t a suggestion that Mitt Romney would do better. On the contrary, Romney is deeply committed to the false Republican narrative about what ails our economy, and all indications are that if he wins, he will make a bad situation much, much worse.) But ultimately the deep problem isn’t about personalities or individual leadership, it’s about the nation as a whole. Something has gone very wrong with America, not just its economy, but its ability to function as a democratic nation. And it’s hard to see when or how that wrongness will get fixed.