U.S. and World Economy

The Obama Delusion

By Lynn Henderson

On Aug. 7th the New York Times printed a long article entitled “What Happened to Obama” by Drew Westen (a professor of psychology at Emory University), which was featured on the front page of the Sunday Review. The article is emblematic of the growing disillusionment among middle-class liberals and intellectuals, who have come to the sudden realization that Barack Obama is not who they thought he was. However the more fundamental question they shrink from is that American capitalism is not what they thought it was.

Professor Westen’s sympathies are certainly in the right direction. He eloquently describes and laments a present day American society in which “400 people control more of the wealth than 150 million of their fellow Americans.” Where, “the average middle-class family has seen its income stagnate over the last 30 years while the richest one percent has seen its income rise astronomically.” A society in which “we cut the fixed incomes of our parents and grandparents so hedge fund managers can keep their 15 percent tax rates” and where “only one side in negotiations between workers and their bosses is allowed representation.”

Westen recognizes that all of this combined with the reckless, unregulated activities of an ever more dominant and rapacious financial sector has plunged the U.S. and the entire world into a massive economic crisis. Like many, he saw the election of Barack Obama as a major turning point, capable of reversing these trends and rescuing the nation from the “Great Recession.” His article expresses his heartfelt and bitter disappointment with Obama’s performance and policies.

“When faced,” he writes, “with the greatest economic crisis, the greatest levels of economic inequality, and the greatest levels of corporate influence on politics since the Depression, Barack Obama stared into the eyes of history and chose to avert his gaze. Instead of indicting the people whose recklessness wrecked the economy he put them in charge of it.”

With the election of Obama, Westen thought American capitalism was getting the kind of president, “best exemplified,” as he writes, “by F.D.R. and his distant cousin, Teddy.” A president who would institute up-dated versions of the so-called “New Deal” and “Square Deal”—curbing the reckless financial sector and launching a massive stimulus program of social and infrastructure spending focused on reducing unemployment and reviving the economy.

But the hundreds of billions in government bailouts and “stimulus” already floated by the Bush and Obama administrations have had little effect in reversing the so-called “Great Recession.” This is particularly true in the key area of growing unemployment.

But more fundamentally, the idea that today’s escalating worldwide economic crisis can be reversed by replicating the policies and strategies of the Roosevelt New Deal years is a fantasy. Today the U.S. economy and the Obama administration stand in an entirely different place than the U.S. economy and the Roosevelt administration stood in the 1930s and 40s.

Seventy years ago, the United States was the largest creditor nation in the world. Today the United States is the largest debtor nation in the world. The Roosevelt deficit budgets and national debt reached unprecedented levels, which have never again been matched, but this debt was entirely held domestically. It was the U.S. economy and American citizens who bought the bonds that funded that unprecedented debt.

Today a large percent of U.S. treasuries have to be sold in the international market and are held by such countries as Japan, the Middle East oil nations and especially China. The United States has become utterly dependent on continued international purchases of these treasuries and the regular rollover of those already held. As the U.S. debt grows and the dollar becomes shakier, these nations become nervous and reluctant about continuing to fund the soaring U.S. debt. This can only end badly for U.S. and world capitalism.

At the end of WWII an expanding and completely dominant U.S. economy was able to pay down the huge federal debt (as a percentage of GNP more than one-and-one-half times larger than present U.S. debt) relatively quickly despite its unprecedented size. Today the American middleclass/working class rightly suspects that at best they will be impoverished for generations to come with paying off a debt that was primarily incurred to bail out predatory financial institutions. What has changed?

The “American Century”

The United States won WWII. It won WWII big. It won WWII not just against the Axis powers but against its allies as well. The war ushered in what U.S. capitalism triumphantly called “The American Century.” The usual laws of capitalist international competition were uniquely and temporarily in suspension. The dollar, freed from any monetary gold backing was transformed into what economists call a fiat currency, and enthroned as the reserve currency for the entire capitalist world, replacing the pound sterling. This gave the dollar and U.S. capitalism a uniquely advantageous position—the exorbitant privilege of paying its foreign bills in its own currency, which it could just print. This status lasted for decades. But not for a hundred years.

With the reemergence of intense international competition, the “American Century” came to an end. How has U.S. capitalism responded to this new global reality? In response to growing global competition in manufacturing, it shifted its profit making focus. It concluded that the quickest, biggest, and surest profits were now to be made not in the making and selling of products, but in the so-called financial sector. Between 1973 and 1985, the U.S. financial sector accounted for about 16 percent of domestic corporate profits. In the 1990s, it ranged from 21 percent to 30 percent. In this last decade, it soared to 41 percent of all U.S. domestic corporate profits.

Banking, real estate, mega insurance companies, and stock market speculation replaced industry and manufacturing at the center of the U.S. economy. Many economists refer to this as “casino capitalism.” Like a gambling casino, most of this financial activity generated no new wealth or real investment, but merely shifted existing wealth out of the hands of many into the hands of a few. At least casinos provide free drinks and entertainment.

Driving down wages

In response to the reemergence of global competition, U.S. capitalism also found it necessary to maintain profits by aggressively driving wages down. For at least 40 years now the American working class, or the media’s preferred euphemism, the American middle class, has been the target of an intense one-sided class war in which real wages and income have been relentlessly reduced. According to the most recent U.S. Bureau of Labor Statistics, real wages adjusted for inflation from 1970 to the present have fallen more than 12 percent.

While driving down wages can certainly boost profits in the short run, it introduced another problem. Economists calculate that approximately 70 percent of the U.S. economy is driven by consumer spending. If real wages have been falling over the last 40 years, how has the economy, at least until recently, continued to expand and profits continue to grow?

Over subsequent decades three strategies designed to offset the effect of falling real wages on consumer spending emerged. The first of these was the simple expedient of drastically increasing the total number of hours worked. Overtime was increased, leisure time was decreased. The single wage earner family was largely eliminated. More family members were put to work, working longer hours at more full and part-time jobs. However the number of extra hours an individual can work is limited, as is the number of additional family members that can be put to work. New additional steps had to be taken to offset the negative effect falling wages continued to have on consumer spending and the economy.

The next move was a massive expansion of consumer debt. The credit card industry was born. The banks issuing these cards made record profits and consumer debt soared to record levels. But it did mask the effects of falling wages and produced a significant if temporary boost in consumer spending.

As credit cards maxed out and the size of consumer credit card debt became unsupportable a final and particularly dangerous financial gimmick was floated. Consumers were encouraged, and driven by necessity, to take cash equity out of inflated house values. Second mortgages, third mortgages, adjustable rate mortgages, home equity loans, became the last desperate hope for keeping their heads above water—for meeting expenses and paying on credit card debt that was killing them with 20-plus percent interest rates. The banks made big bucks out of the credit card ploy but it was peanuts in comparison to what they were able to accomplish with the new mortgage schemes.

When the housing bubble burst, it triggered not just a crisis in the mortgage market but the collapse of a financial house of cards that had been building for decades. A house of cards built on the idea that you could on one hand increase profits by relentlessly driving wages down and on the other hand maintain consumer spending by driving people into ever-deeper debt. There is a term for this kind of operation—“Ponzi” scheme. In reality the entire U.S. economy over the last 40 years has operated as little more than a gigantic “Ponzi” scheme. Like all “Ponzi” schemes it was destined to eventually play itself out and collapse.

Roots of the crisis

The roots of this crisis are not correctable “political and policy” errors, but much more fundamental forces. An aging U.S. capitalist economy was inexorably and unavoidably forced to shift from industrial capitalism to finance capitalism to maintain its viability. Financial deregulation and the freedom to create new “exotic” financial instruments was not some blunder, but an absolute necessity if falling industrial profits were to be replaced and offset by rising financial sector profits. That necessity remains in place today. That is why there has not been, nor will there be, any real re-regulation of the finance and banking sectors. And the costs of shifting U.S. capitalism from an industrial model to a financial model and maintaining profits in the new global reality can only be met by further significantly reducing wages and living standards. Putting the structure in place to accomplish all this was, and continues to be, an entirely bipartisan operation.

Westen sees things quite differently. The deepening of the crisis and seeming inability to turn it around are correctable political and policy failures—but this has been side-tracked by the failings and limitations of Barack Obama. Obama’s failure to put in place correct “New Deal” type policies and solutions is traceable to “his lack of experience and a character defect,” “his deep-seated aversion to conflict,” and his “profound failure to understand bully dynamics.” Professor Westen even berates himself for not recognizing signs of Obama’s limitations prior to his election—we are told “he had a singularly unremarkable career as a law professor, publishing nothing in 12 years at the University of Chicago other than an autobiography.”

“When he wants to be,” Westen explains, “the president is a brilliant and moving speaker, but his stories always lack one element: the villain who caused the problem, who is always left out…” The “villain” is left out because the villain is capitalism, and Obama as president and head of the Democratic Party can be nothing less than a staunch defender of capitalism.

Westen’s suggestion of Franklin and Teddy Roosevelt as corrective role models for Obama and a solution to the escalating economic crisis is ironic. Even in the 1930s it wasn’t Roosevelt’s “New Deal” based on a government stimulus plan of social spending and infrastructure investment that got the U.S. out of the Great Depression. It was the truly massive government deficit spending for World War II in the late 1930s and early 1940s that ended the depression. And the characterization of Franklin Roosevelt as a “friend of labor” is a rewriting of history.

Teddy Roosevelt’s dishonestly crafted reputation, as a “trust buster” reformer, is even a further stretch. Theodore “Teddy” Roosevelt was one of the most racist, militaristic, imperial expansionist presidents in U.S. history.

Solution to worldwide crisis

Today we are facing a worldwide crisis of capitalism. This financial and political crisis is more fundamental and more sweeping than the 1929 crash and depression. Nowhere in today’s world does capitalism have the room to maneuver or the options that were available to F.D.R. and American capitalism in 1940. This crisis is destined to become ever deeper and more brutal and its only solution is a socialist solution.

Understandably, right now, such a solution is inconceivable to Westen and other middle-class liberals. Liberals and liberalism have never been an independent force in American society, especially when there was no radical organized left and militant trade union movement, which they could piggy-back on. Historically their primary role has been that of working to assure such movements remained in the confines of Democratic Party electoral politics.

Today, capitalism, with the U.S. in the lead, has created an unprecedented expansion of globalization. Never before has the entire world working class been under such widespread and simultaneous attack—encompassing advanced, emerging, and underdeveloped countries. Workers will have to resist this worldwide attack; they will have no other choice. That resistance has already begun although for the most part in an undirected and confused form. Any effective resistance is dependant on the emergence of a revolutionary socialist alternative. Where and how this develops (through the common market crisis, the middle-east democracy uprisings, or somewhere else) is hard to predict. But once it begins it will spread fast. Capitalist globalization will produce and require working class globalization.

Such a movement, with the power of the working class behind it, can and will win large numbers of middle-class liberals and intellectuals to a socialist alternative. Hopefully Drew Westen will be one of them.

—August 19, 2011