New Ground 122
January - February, 2009
Contents
New Ground
122.1 - 02.24.2009
A Note From the Editor
Today's Other America
Lobby Day to Abolish the Death Penalty
March 14 March Against the Wars
A Jobs
Program for the U.S.
by the Chicago Political Economy Group
This paper proposes a jobs program to
address both the chronic problems of unemployment and underemployment
in the U.S. economy and the debilitating economic and political
impacts of growing inequality in the U.S. The jobs program consists
of three parts. First, the reduction of unemployment and underemployment
by stimulating output, either under public or private auspices,
of infrastructure, or social investment, in areas such
as: transportation, education, health care, human services, and
parks. Second, to recognize and respond to the failure of the
private market to provide needed current public services,
which will include a massive upgrading of pay and working conditions
of these "human service" jobs by expanding public employment,
sharing the costs of an enhanced and expanded social safety net.
Third, to explicitly and as a matter of industrial policy,
target government investment and overall job growth towards the
industries of the future, particularly in the areas of energy,
agriculture, and other broadly defined "green" technologies.
The Failure of the Private Economy:
Jobs and Job Growth in the U.S.
In October 2008, 10.1 million workers
were unemployed, according to official statistics, for an unemployment
rate of 6.5%.1 However, the civilian labor force participation
rate for individuals 16 and over has been declining over the
past 7 years, falling from its post- 1948 peak of 67.1% in 1997-2000
to 66.0% in 2007.2 A slightly more than 1% decline
in labor force participation rates may not, at first, sound like
a lot. However, these data mean that, while the employed population
grew by 9.1 million during the 2001-2007 period, the age 16 and
over all population grew by 19.3 million.3 In short,
only 47% of the new age 16 and over population (as compared to
the 2007 labor force participation rate of 66%) was able to find
employment in these 7 years of "economic recovery."4
Projections for the 2006-2016 decade are not any more positive
with an expected growth in the civilian over 16 population of
30.2 million and a projected growth in the labor force of only
12.8 million. These numbers would result in a labor force participation
rate only somewhat larger than 50% in 2016.5
The overall numbers do not, however,
illuminate the experience of particular groups within the population.
For example, from 2001 to 2007 the white female labor force participation
rates declined by 0.4%, but the white male rate declined by 1.1%,
and black male and female rates by 1.7%.6
Why is participation in the paid labor
force important? In the US a job is the primary avenue by which
individuals receive income. It is also an important measure perhaps
the most important measure of self worth for most individuals.
And over successive generations, wealth accumulation will not
occur for the vast majority of people in the absence of income
from employment.
We could, of course, analyze still further
the limitations of the official unemployment rate, for example,
the failure to include discouraged workers who have given up
looking for work, the marginalization of the young, particularly
youth of color, etc. However, the point should be clear: left
to its own devices, the U.S. economy is currently unable to generate
sufficient new jobs to absorb our growing population, even using
official employment and unemployment statistics. If we include
the undocumented labor force, those working part time who want
full time employment, and discouraged workers who have dropped
out of the job search process, the gap between actual and full
employment is considerably greater. In addition, the economic
downturn that is currently in its early stages will only exacerbate
the problems of unemployment and underemployment.
A Political Program for Jobs Creation
The difficulty in providing jobs for
the U.S. population certainly does not arise from a lack of productive
work to be done. Whether in the updating of decaying infrastructure,
providing needed additional social services in health, education,
and human services, or developing forward-looking industries
in areas such as green technology, the gap between what the economy
does produce and what it could produce and use is significant.
We believe the best approach to addressing that gap is a job
creation plan.
The plan would have the goal of raising
national employment growth to 4 million new jobs a year for five
years. This rate is more than
twice the currently projected growth of national employment.7
If successful, this program would draw into the labor force some
12.5 million of those now unemployed or underemployed.8
The additional job growth would be concentrated in publicly funded
and organized enterprises, in the private economy, and in enterprises
established and run by employees. At the end of five years, the
federal government would be supporting some 17.5 million new
jobs.9
The jobs program would be oriented in
three directions. First, there is the need to produce an increased
amount of goods for social investment. This includes repairs
to the infrastructure. Transportation in its myriad forms would
be a significant component here highways, bridges, light rail,
regional airports. But the needs for repairing US infrastructure
go beyond any one sector such as transportation, e.g., many public
educational and health care facilities badly need rebuilding.
Parks, local, state and federal, have been under funded for some
time, forcing us to draw down the social capital of the 1930s.
Much of the work described under the rubric social consumption
may be organized under the auspices of private industry contracting
with the appropriate levels of government oversight with exceptions
for activities whose basic goals conflict with private profit
motives, such as park and land stewardship.
Second, there is a broad spectrum of
public employment that would be targeted to the areas
of health, including elder, care and education, including pre-school.
Public employment in these sectors would, of course, intersect
with and draw upon the construction work that is focused on producing
goods for social consumption. There is a real need for the services
that are encompassed in this facet of our jobs program. However,
there is an additional, political, task that we believe must
be accomplished: to rebuild public sector employment as a desirable
indeed preferred choice for accomplishing public goals. Thus
public sector employment must be a) well paid (see below), b)
accountable to those served, and c) transparent as to the quality
of services provided.
Third, the federal government, working
closely with the states, should develop an explicit, forward
looking, technology focused industrial policy. Our official
economic ideology is that such decision making on the part of
government is inferior to that of the private market on both
efficiency and cost grounds. There are, it seems to us, two major
flaws in this argument. First, it is clear that industrial policies
work. The evidence from Scandinavian counties (or the even current
economic policies of China) should leave no doubt as top effectiveness
of industrial policy across a wide range of industries and levels
of industrial development.
The second flaw in this argument is
that we have had a de facto industrial policy for at least the
past two decades, namely, the decision to develop the financial
sector as both an engine of growth and an export leader. While
there have certainly been some transitory economic gains from
this policy, the overall balance sheet is one of failure, resulting
in panic and bordering on disaster. As in the case of the Resolution
Trust Company take-over and financial support for failing Savings
and Loans or the Fed's (successful) effort to have the Saudis
rescue Citi in the 1990s, the finance sector is again at the
center of difficult economic times and again drawing massively
on the public purse in an attempt to avert a major economic crisis.
The results are not yet in.
Our preoccupation with building the
financial sector has resulted in an implicit acceptance of the
acceleration of deindustrialization. Manufacturing, a sector
that accounted for more of the GDP than finance in the 1970s,
is now a shrunken skeleton in such desperate straits that the
$25 billion in loans requested by what used to be called the
Big Three (GM, Ford and Chrysler) is seen as a mere bagatelle
when compared to the needs of the financial sector.
Energy, its sources, uses, and costs
should be at the core of our forward-looking industrial policy.
It is clear that, left to their own devices, the major private
sector energy companies have little incentive to shift our energy
consumption in a direction that is either more efficient or less
costly to the consumer. Just as was the case in the interstate
highway program of the 1950s, the space technology program of
the 1960s and 1970s, and the development of the internet, only
an entity charged with a public purpose can inaugurate the shift
away from fossil fuels. This shift will require investment in
technology, training of workers who will be working in the industries
that emerge from technological developments underwritten by government,
and, probably at least for some time, wage subsidies as these
industries move up the productivity curve.
What Kinds of Jobs Should Be Created
and What Should the Wages of a Jobs Program Participant Be?
We start from the proposition that the
jobs provided would be permanent jobs with a decent wage. We
define decent wage as an (inflation-indexed) minimum starting
pay of $18 an hour.10 Allowing for some reductions
in low wage private employment as wages rise for low wage jobs,
we project a goal of 3.5 million jobs fully funded from the federal
budget. At this level, the annual wage and salary cost for each
cohort would be about $128.5 billion.11 In addition,
there will be administrative costs. We estimate these at 5% of
the total program outlays, bringing the total per cohort to $135
billion.12 After five years, the jobs program would
draw about $675 billion annually.13 (About the same
amount as has been provided for the recent exclusive "bail
out" of the financial sector.)
Since many of the participants in the
jobs creation program would be youth and the hard-core unemployed,
an intrinsic part of the proposed jobs program would consist
of a major training program geared to preparing people to successfully
do the jobs being created. Although defenders of the current
order often misuse the lack of skills and "the right attitude"
as justifications, they are real problems. Trainees would be
considered as employed in trainee level jobs and would be paid
somewhere between the low wage cutoff ($11.11 per hour in 2006
dollars) and a decent wage. Once they satisfactorily completed
the training, they would be guaranteed jobs in the regular program.
Finally, all employment under the jobs
program would be subject to the provisions of the Employee Free
Choice Act. This provision would facilitate the creation of union
jobs, where the workers would form trade unions and workers associations
of their choosing. Working conditions and wages increases would
be determined through collective bargaining.
How Do We Pay for All This?
When we first started thinking about
the question of how to pay for this program, it seemed a major
impediment. After all, the program demands an increasing amount
of money over time as each additional cohort of 3,500,000 jobs
is added. Now, however, we understand that the money is there
it is just a question of political will. And maybe not even that:
to quote presidential candidate John McCain, if we need this
for the American people, the money will be found. Certainly that
has been the case for the small subset of the American people
who have overseen the current economic disaster.
We propose to finance our program from
sources that broadly require: a) a major redistribution of
income and wealth toward poorer households, b) substantial
taxes on financial services and carbon emitting production,
and cuts in defense spending that would support an economic
restructuring away from rentier activities and environmentally
unsustainable production and would reduce wasteful and destructive
military spending, and c) in addition, a direct use of necessary
money supply increases for public purposes that would reduce
current subsidies to the private financial sector for the quintessentially
public function of creating money. In addition to funding our
jobs program, these policies will guide the macro economy toward
greater equality of opportunity between households and toward
more productive and sustainable uses of resources.
These broad categories of revenue collection
can be broken down into the following sources, many of which
accomplish more than one of the three objectives above. Note
that we do not include income tax and inheritance tax increases
that have already been proposed for the funding of other programs,
such as health care and middle tax relief. Also note that, as
most of these funding sources result in effective taxes that
are disproportionately targeted toward high income earners, the
job creation potential of revenue raised through these programs
is likely to be greater than that captured by the traditional
balanced budget multiplier of one.14
- First, the ongoing misadventure in
Iraq has a current out-of-taxpayer-pocket cost of approximately
$100 billion/year since the 2003 invasion. One-half of that amount
would provide $50 billion for the jobs program we are proposing.
Taking an additional 5% of the total war budget of approximately
$1 trillion/year (all in including "intelligence,"
armaments, salaries, R&D, etc.) would provide another $50
billion.
- Second, an excess profits tax on the
major energy companies could conservatively raise an additional
$50 billion.15 This tax may be part of a broader "carbon
tax" that is offset by subsidies to low-income households
that need to, at least in the short-term, rely on carbon energy
sources.
- Thirdly, a 1% "Tobin Tax"
on financial transactions, which would also serve an important
regulatory purpose of reigning in the volume of financial speculation,
was estimated in 1996 to raise $13 billion a day or $3.25 trillion
annually.16 If the tax represses financial speculation
by 50% this would be cut in half. Moreover, this would have to
be an international tax so that the take for the U.S. government
would be limited to the U.S. share of financial transactions.
However, given the many-fold increase in the level of financial
transactions since 1996, a conservative estimate of $500 billion
annually for the U.S. does not seem unreasonable.
- Fourth, if necessary increases in the
money supply to accommodate an expanding economy were used to
fund jobs rather than pay down federal government debt, an additional
approximately $42 billion of "tax free" funding would
be available.17 Note that jobs financed from this
source would have a multiplier larger than one as no taxes would
be necessary to offset this spending.
- Lastly, a wealth tax of 0.5% on the
top 1% of households by wealth, those with more than $5.0 million
in assets, would generate another $75 billion/year.
As is evident above in our discussion
of pay levels under this jobs program, the $767 billion generated
by these five sources would more than cover the costs of the
program, though revenue from sources that would require significant
lead time for international agreement and implementation such
as the Tobin tax might have to be borrowed in the short-term
as has virtually all of the $700 billion allocated toward the
current financial bailout.
Closing Perspective
We start from the premise that any significant
attack on the growing poverty and social misery that is engulfing
the lower 40% income strata must be centered on providing a massive
increase in secure, decent paying jobs. Within such a program,
the focus must be on opening the labor market to the hard core
unemployed, who are particularly concentrated among youth of
color and those youth victimized by industrial collapse of the
rustbelt.
While we certainly support enhanced
welfare programs, transfer payments to the poor, and an increase
in minimum wage, we do not believe that the existing U.S. labor
market characteristics that reproduce and heighten inequality
can be overcome by these measures. Further, such policies all
too often pit against one another different sectors of low income
people to battle over who gets what benefits and who pays the
cost. Fort his reason, they tend to generate conflict between
the hard core unemployed and the working poor who together comprise
the low income strata.
A properly crafted jobs program must
aim at a fundamental restructuring of the labor market. It will
by design drive up wages of the existing low paid jobs, thus
uniting the interests of the hard core unemployed and the working
poor. It will mean a significant transfer of income share from
the wealthy and highly paid to low income strata. This transfer
will necessarily generate opposition, but the conflict will have
an upper versus lower class dynamic rather then a racial conflict
between different sectors of the lower class.
References and Technical Notes
1. BLS based on CPS estimates
of the number of seasonally adjusted unemployed, and the unemployment
rate, for October, 2008.
2. BLS based on CPS estimates
of seasonally adjusted annual labor force participation rates
out of 16 and over civilian population from 1948 to 2007.
3. BLS based on CPS estimates
of seasonally adjusted employment and civilian non-institutional
population.
4. BLS CES based estimates
from payroll surveys of non-farm employers suggest that non-farm
wage and salary jobs (rather than general employment growth)
from 2000 to 2007 was 5.8 million reflecting the fact that much
of the 9.1 million CPS net employment increase is estimated to
be based on self-employment or wage and salary work that is not
reported to Unemployment Insurance (the basis of the CES estimates).
Note that every employed person must have at least one job but
some may have more than one.
5. Calculated from (October
2008) BLS labor force and Census 16 and over population projection
to 2016. The estimated 2016 labor force participation rate is
based on the ratio of the 2016 estimated labor force (164.2 million)
divided by the total over 16 population estimate ( 328.7 million)
which equals 50.0%. As this includes institutional and military
population the comparable civilian non-institutional LFP would
be somewhat above 50% but still well below 66.0%.
6. BLS CPS estimates as above.
7. BLS projects employment
growth of 1.1% from 1996-2006 and 1.0% from 2006-2016. Employment
growth of 1.0% from 2007 total US employment of 146.1 million
would generate annual employment growth of about 1.5-1.6 million
from 2008 to 2013.
8. We assume that roughly
50 million of the 146.1 million employed in 2007 are in low wage
jobs whose wages will increase as a result of the jobs program.
We know that roughly half of the 146.1 million employed in 2007
are in jobs with wages below 18$ an hour (see footnote 10 below)
so we are assuming that approximately 2/3rds (50/73.1=68.4%)
of these below median wage jobs will be affected. If we assume
that their wages will rise on average about 50%, then using a
modest employer demand elasticity of 0.2 the jobs program will
result in a 10% employment loss. This will lead to a loss of
about 5 million in low wage employment over the five year period,
or an employment loss of approximately 1.0 million per year.
We also assume, based on BLS projections (see footnote 7 above),
unaided employment growth of about 1.5 million jobs per year
over the next five years. (Note that slower employment growth
as appears increasingly likely reinforces the need for our program.)
Under these assumptions, to reach our target employment growth
of 4 million per year, our program would have to increase employment
by 3.5 million per year as 1.5 +3.5 -1 =4.0. This implies that
over five years our program will be supporting increased employment
of 5 x 3.5 = 17.5 per year. Of these 3.5-1.0=2.5 million per
year, or 2.5 x 5 = 12.5 after five years, will be government
supported.
9. See footnote 8, op. cite.
10. This is equivalent to
the current (2008 Q3) median usual earnings of a full-time wage
and salary worker in current dollars of $720 a week see:
http://www.bls.gov/news.release/wkyeng.t01.htm.
For 52 weeks this translates into $37,440 or $18 x 2080.
11. A before tax income of
$37,440 is estimated to provide a net after tax income of $36,726
according to BLS estimates of 2006 taxes for a weighted average
of second and third quintile incomes from: http://www.bls.gov/cex/2006/Standard/quintile.pdf
. The (after tax) direct cost of 3.5 million jobs is therefore
3.5 million times $36,726 = $128.5 billion. These figures assume
that though this spending will be partially (see text below)
offset by tax increases, it's affect on net employment growth
will be captured by the traditional "balanced budget multiplier"
of one. This implies that any tax increases will draw down consumption
at the same rate as in the past. If as might be reasonably expected
much of the increase in taxes comes from savings of wealthy households
currently going into the financial sector, and if such savings
have relatively modest effects on real activity in the economy,
then the multiplier could be expected to be considerably higher
than 1.0, perhaps as high as 1.5. Such a multiplier would considerably
reduce the size of the program required to achieve the goal of
4 million new jobs per year. On the other hand, expenditures
financed by the reduction of military activity or other government
spending will have multipliers considerably below 1.0.
12. $128.5 billion x 1.05
= $135.0 billion.
13. The first year cost of
the program will be $135.0 billion. The second year 2 x $135.0=
$270.0 billion, and so forth. By the fifth year the cost will
be $135.0 x 5 = $674.8 billion. Thereafter the annual cost will
remain at this level.
14. See footnote 11, op.
cit.
15. As of April 2008 profits
for the five largest US oil companies are reported to have reached
$ 123 billion, see: http://www.redgreenandblue.org/2008/04/02/the-big-oil-company-scam/
16. See World Bank report:
http://www.worldbank.org/fandd/english/0696/articles/0130696.htm
17. The New York Federal
Reserve Bank reports that as of April 2008, the US "M1"
money supply was $1.4 trillion. Three percent of this is $ 42
billion. See: http://www.newyorkfed.org/aboutthefed/fedpoint/fed49.html
. Currently "high powered" M1 money supply is increased
primarily through Fed purchases of Treasury bills, or the retiring
of government debt. If this money was allocated toward jobs programs
government debt, not held by the Federal Reserve would not be
retired so that federal government interest payments to outside
parties would increase more rapidly. However, if economic growth
and federal tax collection grows at an equal or greater rate,
this should not lead to a significant additional federal budgetary
burden.
Editor's Note: The "Chicago
Political Economy Group" consists of progressive political
economists from academia, the public sector, and industry. For
more information, contact Joe Persky at 312.996.2687 or jpersky@uic.edu.
FDR,
Obama and Depression Economics - A Review
by Bill Barclay
The Defining Moment: FDR's
Hundred Days and the Triumph of Hope by Jonathan Alter (New York: Simon & Schuster,
2006)
Obama's Challenge: America's
Economic Crisis and the Power of a Transformative Presidency by Robert Kuttner (White River Junction,
Vt.: Chelsea Green Publishing, 2008).
The Return of Depression
Economics and the Crisis of 2008
by Paul Krugman (1999, rev. ed. New York: Norton, 2008).
"Liquidate labor, liquidate
stocks, liquidate the farmers, liquidate real estatepurge the
rottenness out of the system."
Andrew Mellon, Secretary of the Treasury, 1930
"We have a magneto [alternator] problem." John Maynard
Keynes, December 1930
"The central problem of depression
preventionhas been solved, for all practical purposes." Robert Lucas, University of Chicago economist
and Nobel Prize winner, 2003
Even before Obama's presidency began
it became a cliché to note the similarities to the situation
facing Franklin Delano Roosevelt's presidency. In order to understand
what may or may not be possible politically at this time, it
is necessary to think clearly about both the underlying similarities
and the very real differences between the two presidential moments.
Although very different in focus and intent, these three books
are quite useful to this task.
Jonathan Alter's account of FDR's rise
to the presidency and the accomplishments of his first 100 days
in office is history written from the perspective of a journalist.
FDR's sense of drama emerges clearly (for example his decision
to come to Chicago from New York, becoming both the first nominee
to fly and the first to accept the nomination in person) as does
his realization that "action and action now" was the
imperative of the times. Paul Krugman uses the financial crisis
of 2008 to update his earlier book on depression economics, carrying
forward the implications of that work to the problems we, and
Obama, face. Krugmen is particularly good on failure of most
economists to examine the implications of the series of economic
crises that developed during late 1980s and through the 1990s,
including Japan's "lost decade," the collapse of the
Asian Tigers and the failure of the Long Term Capital Management
hedge fund. Robert Kuttner's approach to the Obama presidency
urges the use of the presidential podium to challenge prevailing
myths about how the economy works and what the role of government
can and should be. He argues that failure to do so would be to
miss the opportunity of a transformational presidency that Obama's
election offers.
The Underlying Similarities
As was the case for FDR, Obama enters
the presidency facing the most severe economic in more than a
generation. More importantly, however, the underlying dynamics
of the crises are largely identical: the economic problem today,
as in the 1930s, lies on the demand side. As Paul Krugman's The
Return of Depression Economics and the Crisis of 2008
clearly delineates, this situation is a sharp change from
the preoccupations of economists for the last several decades
where the focus has been largely on the supply side. The assumption
has been that un- and under-employed resources, whether of labor
or capital, could always be overcome if wages and/or prices simply
fall quickly enough. The possibility of an economy existing in
an equilibrium state with unused resources has again seemed to
the mainstream of economic analysis almost unthinkable. As Krugman
notes, this conclusion is a little surprising given the long
recession of Japan in the 1990s. Of course Keynes would have
had no trouble recognizing the existence of this "magneto
problem." He understood that, like a stalled automobile,
the alternator of the 1930s economies was not generating the
necessary power for a restart. In the past several decades, however,
most economists have neglected the analysis of demand shortfall,
that is when private spending is insufficient to utilize available
resources. After all, they reasoned, surely policy makers such
as central bankers know how to handle such situations?
The similarity of the economic crises
informs the most important policy similarity between FDR and
Obama: the necessity of using the federal budget as a means to
get the alternator working again, to restart the car. One of
the most striking aspects of current policy debate is the rapid
acceptance of the idea that we need to discard, at least in the
short run, a concern with budget deficits. In fact the Republican
house leader, Representative John Boehner of Ohio, has been reduced
to using his website to fish for economists opposed to and willing
to argue against the need for a stimulus. And not just any stimulus,
a very large one, amounting to perhaps as mush as 5% to 6% of
GDP, or $700 to $850 billion. This desperation should not be
taken to suggest, however, that there will not be a fight, and
I think a very large one, over the actual Obama proposal that
emerges.
How this fight over the stimulus unfolds
and who gains and loses politically is another parallel between
Obama and FDR. Jonathan Alter, in The Defining Moment,
stresses the extent to which FDR's first 100 days redefined what
it means to be a president and what we expect from the office.
Presidents are to be communicators and legislators in chief,
not just administrators. On June 16, 1933 FDR signed both Glass-Steagall
and the National Recovery Act (NRA), completing a remarkable
100 days of action. Glass-Steagall created the Federal Deposit
Insurance Corporation (the FDIC was opposed by FDR as too expensive).
The NRA, in addition to providing for large scale spending on
public works also included the first federal minimum wage. In
Obama's Challenge, Kuttner explores the uses to which
President Obama could and should put the unique podium offered
to any incoming U.S. president especially one facing a three
pronged economic crisis (financial panic, international imbalances,
and recession).
Obama must challenge the reigning ideology
that (i) sacrifices all to budgetary correctness (balanced budgets
are the sine quo non of fiscal probity), (ii) believes
the fiscal budget is bare (bold social programs must be put on
hold to await better times), (iii) holds that argues private
markets are always better at allocating resources than governments,
and (iv) assumes that governmental action is inherently incompetent.
In short, if Obama is to be another FDR and to succeed with his
legislative agenda, he will have to use teachable moments to
change our conception of the role and this, the first president
to recognize and understand the potential of new communications
technology, taking advantage of radio's intimacy with his Fireside
chats that always began with the words "My Friends."
Obama is perhaps the first Democratic president since FDR to
have both the oratorical capability and political opportunity
to repeat this process.
The similarities between the crises
faced by FDR and Obama define the broad outlines of what may
be possible for Obama, but the differences are of at least equal
importance. There are, I think, three that are worth noting:
(i) the different timing, of both the development of the crisis
and the pace of events that face Obama compared to those that
faced FDR; (ii) the very different composition of the U.S. working
population today compared to the 1930s; and (iii) the different
industrial structure of the U.S. economy and thus its very different
role in the world economy.
Timing and the Pace of Events
When the Democratic Party met in Chicago
during July 1932 to nominate a candidate for president, over
45% of the 1.5 million Chicagoans employed two years earlier
were looking for work. By the November 1932 election, national
unemployment was over 20% and non-farm unemployment was more
than 30%. During the four months between FDR's election and March
1933 inauguration, more than 34 states declared bank "moratoriums"
(FDR euphemized this into "bank holidays" in the first
days of his presidency) including Michigan where, by March 1933,
there were no functioning banks. By mid-1933, 1 in 10 home owners
were in or facing foreclosure. These building pressures for change
fueled FDR's 57%/40% margin in the 1932 election and the victory
of 317 Democrats (plus 5 Farmer-Labor) members to the house.
He also had 59 Democratic and 1 Farmer-Labor senators in a 96
person body.
With the benefit of hindsight, we know
that this was the nadir of the (first?) Great Depression. At
the time, of course, that was much less clear. FDR faced the
same situation as Obama today - that the U.S. has only one president
at a time - and it was Hoover, not him. As a result, FDR spent
most of the four months between the election and inauguration
dodging Hoover's overtures to join in endorsing economic policies,
partly because he did not want to get drawn into an agreement
he might later need to repudiate and partly because he simply
did not know what should be done. He had, after all, run on a
balanced budget campaign platform, attacking Hoover for "reckless
and extravagant spending" because he had increased federal
outlays by more than 50%. At one point before his inauguration,
FDR simply went off on a 12-day cruise on millionaire Vincent
Astor's yacht. This cruise was before the never-be-out-of-touch
days of blackberries, instant messaging, etc., so the decision-making
process of the incoming administration slowed significantly.
We can not say when the nadir of the
current crisis will occur. It is very unlikely, however, that
we have yet reached that point where there is nowhere to go but
up. Job losses in November exceeded 500,000, higher than in any
previous month, and house prices continued their precipitous
decline. In addition, despite his protestations that Bush remains
president, Obama lacks the luxury of ignoring events even in
the much shorter period between election and inauguration. He
has had to respond not just to these preexisting problems but
to the new ones such as the potential collapse of the Big Three
automakers. Obama will have working majorities in the House and
Senate but not those enjoyed by FDR in his first two terms. This
is one reason I believe that the fight over the stimulus package
will be both intense and important, perhaps even decisive, for
establishing the political dynamics of Obama's presidency. It
also means that the challenge posed by Kuttner - for Obama to
use his power to create a transformative presidency - is so demanding.
There is already one aspect of Obama's
approach to this challenge that is reminiscent of FDR, the emphasis
on doing something, anything, to get the economy moving again.
In his inaugural address FDR called for "action and action
now" with the unspecified nature of the action to be (later)
filled in by him. To use a word that keeps cropping up in discussions
about Obama's approach to policy, FDR was a pragmatist. After
all, no one knew what Keynesian economics was because it had
not been written. This is, of course, a significant difference
in the policy environment for Obama. FDR did know, however, that
something had to be done. And if the first something did not
work, discard it and try again.
The Demographics of Labor
FDR created the Civilian Conservation
Corps(CCC) with little systematic thought - his initial idea
was to put 500,000 to work by midsummer (he later reduced this
to 250,000, a figure that was exceeded by almost 25,000 in the
first 4 months of a program that, during its nine-year existence
enrolled over 3,000,000). At the time the U.S. labor force was
primarily male and white but still more than 20% agricultural.
Only 22% of white women worked outside the home (forty percent
of non-white females were employed but these were overwhelmingly
- more than 60% - in "personal service," i.e. domestic
work). FDR reasoned that dams, roads, and similar projects would
take several months or even years to get off the ground while
hiring 250,000 men to clear trails, build cabins in national
parks, and plant trees could start immediately. He got his bill,
an amendment that prohibited discrimination, inserted by the
sole African-American member of Congress, Oscar De Priest from
Chicago. Of course, the CCC was only the first program to generate
employment. It largely targeted young males aged 16 - 25 while
later programs such as the Public Works Administration expanded
the reach of FDR's job creation efforts.
Obama's initial proposals for creating
2.5 - 3 million jobs are larger than FDR's but not all that large
in the context of 1.9 million jobs lost in 2008 alone. And, of
course, the overall labor force is more than three times what
it was in FDR's day. More importantly, there is the issue of
significantly increased labor force diversity. Infrastructure
projects will be heavy in construction employment, which means
primarily male workers. To have the same impact that FDR did,
the Obama program will need to include a significant focus on
social services, especially education and health care including
both early childhood and elder care. These occupations are heavily
female and non-white. Such a focus could help accelerate the
impact, because hiring new teachers and health care workers can
meet already existing needs while the longer term emergence of
infrastructure and green technology jobs can continue the redirection
of the economy.
The U.S. Economy and the World
Economic Crisis
Perhaps the most interesting and complex
question facing Obama is the extent to which the economy he seeks
to restart is fundamentally different than that over which FDR
established new regulatory powers. Although you can not step
into the same river twice, there is at least one intriguing similarity.
As in the 1930s, the financial system and the lack of confidence
therein are again at the heart of the crisis. FDR created a regulatory
structure that restored financial confidence and provided oversight
for the financial sector as it existed in his day. Sometimes
this happened even against his own wishes, as was the case for
the FDIC which was engineered by his Vice President Garner and
Republican Senator Arthur Vandenberg, inserting this amendment
into the Glass-Steagall Act and daring FDR to veto the bill.
In other instances, such as the 1933 and 1934 Securities Acts,
FDR was the prime mover.
Once again, there is a significant segment
of the finance industry that exists largely outside of the government's
regulatory reach. Worldwide, banks were the source of 3 of every
4 dollars of credit in the 1970s; by 2007 they accounted for
only 1 in 3 dollars. What has emerged to complement banks and
at the same time evade much of the regulation that restrains
bankers is described well by Krugman in his chapter entitled
"banking in the shadows." What we have today is a gallimaufry
of hedge funds, investment banks, and mortgage lenders, all of
which are involved in creating credit and securitizing and selling
the resulting debt. And again, as in the 1930s, the core problem
appears to be leverage.
In the 1934 Securities Act, FDR created
a new agency, the Securities and Exchange Commission, to oversee
Wall Street. In doing so, he established the principle that the
government had at least some responsibility to protect investors
from the machinations of financial sector actors. To successfully
reign in the shadow banking system Obama will not only have to
design policies that extend to any entity that creates credit.
He will also have to use the power of the president as communicator
to explain to the American people what happened, why it happened,
and why regulation - a governmental role that has been under
unrelenting ideological attack for several decades - is again
necessary.
There is one additional and very important
difference in the economy that Obama inherits when compared to
that of the 1930s. FDR gave relatively little attention to the
international dimensions of the 1930s crisis. In fact, he effectively
torpedoed a 1933 conference in London where European leaders
and representatives of his administration were exploring possible
coordinated action. FDR did not want to face the restraints of
the gold standard (while roundly attacked by economic orthodoxy,
he was praised as "magnificently right" by Keynes).
Ignoring the international ramifications of the current crisis
will not be possible for Obama. The U.S. export of securitized
debt, facilitated by AAA ratings, has spread the crisis well
beyond our own borders. Further, financing the significant government
programs for job creation, combating foreclosures, and funding
teetering financial institutions will require the ability to
sell U.S. government guaranteed debt in large quantities to countries
also suffering from the slowing of the world economy. China,
a major buyer of U.S. debt and a major exporter to the U.S.,
is unlikely to be persuaded to let its currency rise in value
against the dollar while simultaneously financing our recovery
through additional large scale purchases of treasury bonds. Unlike
the 1930s the U.S. today is the world's largest net debtor and
manufacturing importer; this is likely to impose policy restraints
that FDR did not face.
Conclusion
The presidential moment for Obama resembles
in broad economic outlines that faced by FDR. Both inherited
an economy constrained not by supply bottlenecks but by lack
of demand in the private sector. Obama, like FDR, will need to
use all the financial tools at his command to get the magneto
going and the economy restarted. Doing so will mean rejecting
much of the conventional economic wisdom. In Obama's case, it
also requires a willingness to think clearly about what can and
cannot be taken from the experience of the 1930s. This thinking
must be guided by recognition of the significant differences
in labor force composition between then and now as well as an
understanding of the new role and organization of the financial
sector in the U.S. economy. Finally, the linkages between the
U.S. economy and the world economy pose new and distinct policy
problems for an Obama presidency. As the Chinese say, "may
you live in interesting times." Or perhaps the Onion's
satirical post-election headline is most appro pro: "Black
Man Given Nation's Worst Job."
OPRFHS
YDS
by Natalie Greene
The Oak Park River Forest High School
chapter of Young Democratic Socialists didn't exactly start smoothly.
I had the idea in May and contacted David Duhalde, the then organizer
for YDS nationally. After sending me the application, he told
me I needed at least three people who pay dues to DSA to be considered
an official chapter. I opened a Facebook group and invited everyone
I knew - after assuring them several times that you didn't need
to be a socialist to join. I got a response of about twenty people,
which meant either there was more interest than I expected or
that some of my friends were willing to join any group that sent
an invitation their way.
As the summer passed, more and more
people I didn't know started to join the group. My American History
teacher from the previous year agreed to sponsor the group, and
I found another teacher who has been involved with the International
Socialist Organization for years. The latter has let us use her
classroom for meetings but prefers to keep her name off the records
because of her ideological differences. Once I felt that I had
a real chance of starting a dynamic group, I sent everyone a
message informing them of our first meeting, which I held at
the Oak Park public library. About eight people showed, almost
none of whom I knew as close friends. We decided that local issues
would be the most accessible and effective to tackle.
Then school started, and I quickly applied
for recognition and rights as a school club. The administrator
I dealt with directly told me that because of the nature and
name of the club, it was unlikely that we could be recognized.
I assured her that the club was non-partisan and we had no intention
of excluding anyone, but she said there was still red tape to
go through. The proposal for the club had to be taken to several
different board meetings and approved by more administrators,
which took about two months. Meanwhile, there was en election
and a referendum that I had hoped our chapter of YDS could help
pass, the Living Wage Ordinance. YDS still couldn't meet at school
because we hadn't been approved. Finally, at the end of November,
I got word that we could meet.
Our ability to use the school facilities
didn't mean that we were equal to all other school clubs. Our
status is officially 'non-school sponsored', meaning that the
teachers who oversee our meetings don't get paid extra as they
would for sponsoring another club. Also, we have no access to
funding.
But what I was worried about was not
money, it was student interest. I was afraid that the title of
the group would scare off students who just weren't informed.
I thought that people might mistake our group for some kind of
anarchist communist revolutionary cult. It turns out my fears
weren't totally unfounded. I've been putting our weekly Thursday
meetings in the morning announcements, and the regular members
of the group tell me that most students just laugh. We've had
meetings where three students come and meetings where twelve
come.
Right now we are working on getting
more people interested in the group so that it can keep going
next year after the seniors, including myself, leave for college.
Meanwhile we are working on gathering signatures to support the
Living Wage Ordinance. This passed 60-40% in Oak Park but is
still non-binding. We also have Tim Curtin, a United Electric
organizer and part of the recent sit-down strike at Republic
Windows, coming to speak to the group on January eighth. Hopefully,
the recent article about us in the school newspaper will make
more students aware of our real intentions: to educate ourselves
and others about labor issues in the world and do our part to
ensure that all workers are treated with respect and given the
rights they deserve.
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