Whose Mandate Will Shape Obama’s “Change”?
Radical Change Needs Pressure from Below
By Ismael Hossein-zadeh (10 December 2008)
[This article was also posted and re-posted on a number of Websites, including Online Journal, Counter Punch, and Payvand. A shorter version of the paper, titled “Will Grassroots or Elites Shape Obama’s Reform?,” was published in the Des Moines Register as an op-ed opinion piece on January 5, 2009.]
Abstract. Barack Obama was elected by majorities of both the grassroots and the ruling elites. His mandate thus comes both from below, or the left, and above, or the right. Both sides are anxiously echoing his winning slogan of “change.” The question, therefore, is no longer simply change (as the market meltdown has made change an urgent universal demand), but what kind of change? Whose mandates or interests will guide the course of the urgently needed change? The answer, in a nutshell, seems to be dependent on the outcome of the balance of power, or the outcome of the ongoing (though largely submerged) class struggle.
To say that President Obama will face daunting challenges is stating the obvious. What is less obvious, however, is that these challenges also represent opportunities for change in favor of peace and economic security for all.
The dire economic circumstances and the urgent need for change have placed both the moral force and the potential power of the American people on the side of a radical reformer in a progressive direction. Even the U.S. ruling class, badly shaken by the failure of the trickle-down economics, and driven by the desire to save capitalism from itself, is now open to the idea of extensive economic changes. So, the question, once again, is what kind of changes?
There are strong indications that, in the absence of sustained and overwhelming pressure from below, President Obama will not initiate reforms beyond the restructuring schemes of the ruling plutocracy—schemes that are dictated primarily by the needs of market profitability, or capitalist survival. This is clearly reflected in his choice of economic advisors and his wholehearted support for the Bush administration’s criminally fraudulent bailout scheme of the Wall Street financial gamblers.
Evidence shows that momentous historical changes often take place during or as a result of deep social and economic crises. These include not only transformative socioeconomic revolutions such as the great French revolution of 1789 or the Soviet Revolution of 1917, but also some of the major reforms in the United States, such as the New Deal reforms of the 1930s or the “supply-side” restructuring policies of the 1980s.
An essential characteristic of capitalism is that it grows in an erratic, contradictory, and cyclical pattern. Alternating periods of boom and bust are rather well established in the history of advanced capitalist economies. Economists make a distinction between the short-term or “usual” business cycles, ranging from a few to several years, and the longer industrial cycles of a few to several decades known as long waves or “Kondratieffs,” after the Russian statistician who systematically chronicled such historical developments.
The U.S. economy has since the mid 19th century experienced a number of such long cycles: the 1848-97 cycle (consisting of 1848-73 expansion, 1873-97 contraction), the1897-1937 cycle (1897-1929 expansion, 1929-37 contraction), and the 1948-1982 cycle (1948-73 expansion, 1973-82 contraction). The fourth long cycle, which began in 1983 and continued to expand until 2000, is now in decline .
Mainstream theories attribute the alternating periods of boom and bust in the long economic cycles to the metaphorical “invisible hand” of the market mechanism: both upturns and downturns are automatically brought about by purely endogenous, “self-correcting powers” of the market system. While this may be true for the change or turn from expansion to decline, the reverse is not true; that is, the turn from long waves of contraction to those of expansion is not automatic—it requires government intervention.
During periods of expansion and prosperity, champions of laissez-faire economic doctrine tirelessly flaunt the magic and the blessings of the “invisible hand” of the market mechanism. Accordingly, and just as tirelessly, they warn governments against any intervention in economic affairs.
But when long expansive cycles turn into long depressive cycles that make the market system vulnerable to social turmoil, business and government leaders dispel all pretensions of deferring the management of the economy to Adam Smith’s “invisible hand” and, instead, rush to the rescue of the system with all kinds of reforms and restructuring schemes.
These include not only domestic measures of legal, economic, political and institutional restructuring, but (at times) also foreign policies designed to facilitate or capture new markets and investment opportunities abroad. The fate of the capitalist system is integrally intertwined with its ability to weather the challenges posed by such “menacing” long periods of crisis.
Long periods of crises can be menacing to the established order because the outcome of the underlying crisis-management strategies, of institutional overhauls, and of class struggles are neither pre-determined nor predictable. Economic, socio-political and institutional changes in response to long periods of crises, at times, develop in relatively autonomous, random, and uncontrollable ways that could place the capitalist system at fateful cross-roads, including the road to socialism and the road to war and fascism.
Diehard fanatics of laissez-faire doctrine aside, “far-sighted” capitalist establishment understands the gravity of such ominous long periods of crisis. And that is why, depending on the concrete circumstances of the crisis period (especially the degree of the pressure from the grassroots, or lack thereof), their restructuring policies can be vastly different—ranging, for example, from the New Deal economics of the 1930s to the trickle-down Reaganomics of the 1980s.
A brief comparison and/or contrast of the forces behind the New Deal economics of the 1930s with those behind the neoliberal “trickle-down” economics of the 1980s can be helpful to an understanding of why, left alone (i.e. in the absence of a sustained and effective pressure from below), the changes that will be initiated by the Obama administration will be more favorable to the kleptocracy than the overwhelming majority of the American people.
It is obvious that the sheer severity of the current crisis has already forced a “job creation” stimulus package of public works projects on the agenda of the Obama administration. The question is how the projected investment in the long neglected infrastructure will be carried out.
Will it be directly financed and supervised by federal, state and local governments, including strict guidelines, rigorous reviews of projects, public oversight, streamlining of the processes, and competitive bidding—similar to FDR’s Works Progress Administration of the 1930s? Or, will it be the kind of the wasteful outsourcing and crony contracting that has become the hallmark of “rebuilding” New Orleans, or Iraq?
1. The Great Depression of the 1930s and the New Deal Economics
The economic crash of 1929 and the ensuing long depression resulted from a complex set of factors. A discussion of those factors is beyond the scope and focus of this study. Whatever its causes, the fact remains that the depression made living conditions for the overwhelming majority of people extremely difficult.
Economic hardship prompted popular unrest. Large numbers of the unemployed and economically distressed frequently took to the streets in the early 1930s. Their desire for change swelled the ranks of socialist, communist, and other opposition parties. Left activists gained certain influence among labor ranks, and workers’ movement for unionization, illegal in many industries until 1935, spread rapidly. Here is how the late Studs Terkel describes that turbulent situation:
In the early thirties, there was a resurgence of an almost dead labor movement. There were various radical activities: the Trotskyites up in Minneapolis, the communists over there in Toledo, the Socialists there, Wobblies in Cleveland, Detroit and so on. The union literature was like the labor literature of a century ago—looking toward a successor to capitalism. . . . The literature carried a vision .
Labor and other grassroots’ support for third party candidates in the 1932 presidential election resulted in unprecedented number of votes for those candidates. Third-party votes were even more impressive in congressional and local elections .
Business and government leaders clearly understood the gravity of the situation and the need for reform to fend off revolution: “F.D.R. was very significant in understanding how best to lead this sort of situation. . . . The industrialists who had some understanding recognized this right away. He could not have done what he did without the support of important elements of the wealthy class” .
The core principle of the ensuing big business-government consensus reforms, known as the New Deal, was that government intervention must be limited to stimulative and distributive measures, and that the management of industries and businesses should be left to the private sector. While this would provide relief to the economically hard-pressed, and thus reduce social tension, it would also stimulate the economy and promise stable growth and rising profitability.
Judgments of the New Deal efficacy in terms of turning the economic contraction of the 1930s to expansion are far from uniform. While the majority of economic historians tend to (romantically) idealize and exaggerate its effectiveness, others tend to err in the opposite direction by downgrading the positive effects of the New Deal reforms.
Actual achievements of those reforms, however, seems to lie somewhere in between: while the U.S. economy remained anemic until 1941, and the long post-war expansion did not start until late 1940s, the fact remains that the reforms did succeed in stemming the declining tide of the Depression and restoring the waning confidence in the market and the government.
For the purposes of our discussion in this essay, the degree of the effectiveness of the New Deal reforms is of secondary importance. The primary point is, rather, to show that crisis periods also provide opportunities for change; and that meaningful change in favor of the working class and other grassroots requires pressure from below.
2. Stagflation of the 1970s and Reaganomics
The long economic expansion of the immediate post-World War II period, known as the Golden Age of the U.S. economy, came to an end by the late 1960s and early 1970s. The expansion was then followed by a decade of economic difficulties that came to be known as the “stagflation” of the 1970s, which meant a combination of stagnation and inflation, or high rates of both unemployment and inflation.
As the twin evils of stagnation and inflation dragged along throughout the 1970s, and the purported “self-correcting powers” of the market mechanism proved incapable of reversing the worsening economic crisis, the ruling elites (once again) rolled up their sleeves and rushed to the rescue of the bedeviled market.
The long contractionary economic cycle of the 1970s was, of course, not nearly as severe an economic problem as the Great Depression of the 1930s. Accordingly, the economic hardship of the grassroots and, therefore, the people pressure for reform was not as compelling or threatening to the established order as it had been during the Great Depression.
These differences in the social and economic conditions between the two crisis periods of the 1930s and 1970s help explain why the reforms or restructuring measures that were implemented in response to the Great Depression were more radical and more attentive to the needs of the masses than those that were implemented in response to the economic difficulties of the 1970s.
The overwhelming grassroots’ reaction to the economic hardship of the Great Depression, and the concomitant threat to the capitalist order, had forced various factions of the ruling class to put their differences aside and mobilize behind FDR’s New Deal reforms that, as mentioned earlier, were designed to both rescue the capitalist system and alleviate poverty, unemployment and economic distress.
By contrast, the neoliberal or supply-side restructuring measures that were put into effect by the business and government leaders in response to the 1970s stagflation took place nearly free of any significant pressure from below. Not surprisingly, the interests of the workers and other economically-distressed classes were relegated to be served through the so-called trickle-down economics.
In the absence of effective people pressure in the late 1970s and early 1980s, even a large segment of the Democratic Party, the so-called Reagan Democrats, joined the Republican Party in an orchestrated effort to undermine the New Deal and other safety net programs and promote President Reagan’s “trickle-down” economics.
A cynical strategy (later acknowledged by David Stockman, President Reagan’s budget director) to achieve this objective was to deliberately create a huge budget deficit—through a simultaneous increase in military spending and a drastic tax cut for the wealthy—so that cuts in social spending would then be forced on the recalcitrant members of the Congress in an effort to fill the budget gaps that were thus created.
The strategy worked: the sweeping supply-side tax cuts for the wealthy along with drastic increases in military spending created huge budget deficits that were then paid for through relentless cuts in social spending throughout the 1980s. The regressive supply-side tax overhauls since the early 1980s have led to an unprecedented redistribution of resources from the bottom up.
The neoliberal restructuring schemes that started with the arrival of Ronald Reagan in the White House also included an aggressive deregulation of business. The deregulation campaign has since drastically reduced the capacity of agencies like the Environmental Protection Agency (EPA), the Occupational Safety and Health Agency (OSHA), and the Civil Rights Commission to monitor the standards for business conduct. Deregulation has also led to significant restructuring and increased concentration of riches and resources in fewer and fewer hands.
The supply-side restructuring agenda has also included a relentless anti-labor collaboration between the business and government leaders that has led (among other baleful consequences) to an easier dismissal of union workers and an equally easier hiring of the so-called contingency ones; enhanced mobility of U.S. capital throughout the world; increased privatization and/or outsourcing policies and practices; and, consequently, a cut in real wages and benefits of about 15-25 percent since the early 1980s.
By the same token that the neo-liberal, supply-side restructuring policies have been detrimental to the poor and working classes, to the environment and social safety net programs, to public health and education, and to the public or national infrastructure, they have been a boon to the wealthy and the big business.
Not surprisingly, as a result of aggressive neoliberal economic restructuring, which began as soon as President Reagan was inaugurated, most U.S. corporations regained “healthy” profit rates by mid-1983. The combined business-government efforts to revive corporate profitability through supply-side economic policies thus achieved their desired effects: labor costs in real terms fell, and the long declines of the 1970s in productivity, profitability, and investment all turned into long expansions by the mid-1980s—thereby ushering in a new long wave of expansion that, with few short-term declines (one in 1987-88, the other in 1991-92), continued until 2000.
3. Implications for the Current Recession and Obamanomics
Two major conclusions can be drawn from this brief comparison/contrast between the restructuring policies prompted by the Great Depression of the 1930s and those prompted by the economic difficulties of the 1970s, that is, between the New Deal Economics and Reaganomics.
The first conclusion is that, contrary to the widespread myth of the self-correcting powers of market mechanism, long cycles of economic decline cannot automatically change course from contraction to expansion; rescue policy interventions are needed to turn them around, and save capitalism from its own destructive dynamics.
The second conclusion is that rescue plans of such troubled economies, or endangered capitalism, are often shaped not so much by abstract presidential visions as they are by market or capitalist imperatives, on the one hand, and the balance of political power of the conflicting socioeconomic interests, on the other. It follows that, depending on the outcome of the underlying class struggle, policy components of such rescue packages can be vastly different.
If the pressure from below is strong enough to threaten the established order, the interests of the grassroots will be taken into account as part of the needed rescue plans—as it happened during the Great Depression of the 1930s and the resulting New Deal reforms.
Otherwise, business and government leaders will craft rescue plans as they deem it most beneficial to the interests vested in big capital, without much regard to labor and other grassroots strata—as it happened during the economic difficulties of the 1970 and the resulting trickle-down economic policies.
What are the implications of these conclusions for the economic policies of President-elect Barack Obama (also called Obamanomics)?
Details of Obamanomics remain to be seen when Obama arrives in the White House. There are strong indications, however, that, so far, his economic policy messages and projections fall way short of audacious or pioneering. Indeed, they seem to be designed to project policy continuity and stability, as desired by the Wall Street.
This is clearly reflected in the composition of his team of economic advisors who, having come from the current and previous administrations, championed most of the policies of deregulation, privatization and outsourcing that gradually led to the current market meltdown .
Obama’s preference for economic policy continuity is also reflected in his wholehearted support for the fraudulent bailout schemes of the Wall Street financial giants spearheaded by the Department of the Treasury and the Federal Reserve Bank.
Obama’s promised change will be seen largely in non-economic areas such as civil liberties, the environment, regulatory issues, race relations, diplomatic protocols, and so on.
In the realm of economics too the Obama administration will have to bring about some policy changes. This would consist largely of a “job creation” stimulus package that would be geared to infrastructure repair and expansion, especially in the areas of mass transit and public transportation. Such an economic stimulus package, however, would be due to no thanks to Obama, as it would be dictated largely by the dire socio-economic conditions on the ground, that is, by market imperatives, or the mission to rescue capitalism.
The Obama administration will also have to introduce some major changes in the financial sector. This would most probably include nationalization of a number of major banks such as the Citigroup that are technically bankrupt but their insolvency is (so far) not acknowledged—banks whose toxic assets are too huge to be bailed out .
Based on all the major signs and signals revealed thus far, Obamanomics portends to be an amalgam of Herbert Hoover economics, New Deal economics and Reaganomics.
The Hooverian component of Obamanomics is clearly reflected in his support for the Wall Street bailout scam. In the face of the Great Depression, President Hoover (like the current government, supported by Obama) showered the bankers with public money in an effort to bail them out. All he did, however, was to prolong the crisis; the policy eventually led to the failure of almost all banks within two years.
The New Deal component of Obamanomics would consist of his administration’s having to put into place a “job-creation” stimulus package that would include relatively extensive investment in public works project.
And the Reaganomics component would consist of financing such a stimulus package through major banks and the Wall Street financial intermediaries. Instead of directly financing public works projects through the federal, state and local governments, with open and rigorous public oversight, the Obama administration seems intent on, first, giving/lending taxpayers’ money to money-center banks, and then having them re-lend that money for public works projects—and make fortunes in the process.
This would be a boon for the failed financial giants of the Wall Street, as it would represent yet another, indirect or roundabout, way of bailing them out. It can, therefore, be called New Deal reforms carried out by methods of Reaganomics—through the outsourcing of the financing aspect of the public works projects.
4. Lessons for the grassroots
Political implications of this discussion for the grassroots are unmistakable: unless effective pressure from below is brought to bear on the Obama administration and the Congress, the urgently needed economic changes will be geared, primarily, to the interests of corporate America, especially the corrupt financial giants of the Wall Street. People pressure is needed to counterbalance the pressure from the captains of capital, who are busy dictating Obama’s choice of cabinet members and other appointments, as well as his economic agenda.
To be effective, the pressure from below has to go beyond sending e-mails or making phone calls to the offices of the elected officials, as they are largely in the pockets of the ruling plutocrats and are hopelessly corrupt. Only through widespread and sustained protest demonstrations and non-violent civil disobedience that would threaten the status quo can a relatively radical change in favor of the grassroots be forced upon the ruling class.
The following is a partial list of demands around which such mass protests can be mobilized—demands that are, incidentally, by no means radical or revolutionary. They are, indeed, marginal financial and fiscal changes that can be implemented within the existing system and its institutions.
1. Demand the establishment of a universal health care system. While many Americans don’t seem to be yet ready to demand socialized medicine (like what some Europeans enjoy), a single payer system like Canada’s would be a huge improvement, as it will save money and cover all Americans.
2. Demand the following regarding the market meltdown, the rescue/bailout plans, and monetary policy:
a. full disclosure and transparency of the books and balance sheets of the insolvent financial institutions;
b. full and open accountability for management policies and practices that led to the insolvency of those institutions. This is meant not to be so much for “crime and punishment” reasons as for diagnostic and preventive ones.
c. Instead of trying to salvage a mountain of mortgage-backed toxic assets, the government should allow for a market cleansing of such worthless assets by purchasing the threatened mortgages at the current, depreciated or market values, not at the inflated face values. Not only will this method rescue the vulnerable homeowners, it will also cost taxpayers much less money.
d. In return for the huge sums of taxpayers’ money given away, nationalize (purchase) Citigroup and other insolvent banks on the basis of the real, depreciated market price of their assets and, then, use the thus nationalized banks to issue loans at reasonable rates, and thereby unfreeze the credit markets.
e. Nationalize the Federal Reserve Bank (just as central banks are publicly-owned in most countries of the world), institute a high and strict reserve requirement for private bank lending, thereby limiting the money-creation power of commercial banks. Money creation must be a government prerogative, not private banks’.
3. Demand the following regarding fiscal policy and/or taxation system:
a. re-introduce the more progressive pre-Bush and pre-Reagan taxation system, or tax schedules.
b. Tax capital gains at the same rate as wages and profits, not at half the rate. Also, require payment of these taxes at the time of sale of assets, not deferred indefinitely if the gains are simply reinvested in yet more assets.
c. Close offshore tax havens.
d. Re-introduce the estate tax.
e. Stop multiple depreciations of buildings for purposes of fraudulent tax write-offs; that is, a building should be depreciated only once, not multiple times.
f. Place a cap on the amount of property tax that is excluded from taxable income.
g. On the spending side of fiscal policy, demand “peace dividends” by demanding an end to the wars in Iraq and Afghanistan, by downsizing the military empire, by closing down the nearly 800 hundred U.S. military bases abroad, and by re-allocating a significant portion of military spending to non-military public spending.
4. Regarding the implementation of the projected “job creation” stimulus package, which is currently being crafted by the Congress and the Obama economic team, demand the following: no outsourcing of the financing of the public works projects, that is, direct government financing, not through the banks; rigorous reviews, public oversight, and competitive bidding of public works projects, not crony contracting or outsourcing of the kind that has marked the “rebuilding” of Iraq, or New Orleans.
As noted earlier, none of this is really radical or transformative, requiring systemic or structural changes. It is simply reversing some of the excessive supply-side or neoliberal giveaways to big business and the wealthy. Or, as Michael Hudson of the University of Missouri, puts it, “It is a small step back toward the Progressive Era a century ago—the era that set Americaon the path of prosperity that made the 20th century the American century” .
Nonetheless the Bush/Obama economic policy makers, in concert with most members of the Congress, may balk at most of the reforms suggested here; they will certainly do so as long as the American people have not started speaking out and asking some hard questions. For now the people seem to be in shock and disbelief of the magnitude of the crisis and, perhaps more importantly, of the treacherous government collaboration with Wall Street sharks in looting their treasury and mortgaging their future.
But as the crisis drags along, the economic hardship becomes more agonizing, and the extent of the theft surrounding the Wall Street bailout scam becomes public, the people are bound to speak out. Only then, that is, only when pressure from below threatens the established order, will radical reforms in a progressive direction stand a chance.
Ismael Hossein-zadeh, author of the recently published The Political Economy of U.S. Militarism (Palgrave-Macmillan 2007), teaches economics at Drake University, Des Moines, Iowa.
 Explanation of the underlying dynamics of this pattern is beyond the purview of this essay. Interested readers can consult, for example, Ernest Mandel, The Long Waves of Capitalist Development (Cambridge University Press 1980).
 Studs Terkel, Hard Times: An Oral History of the Great Depression (New York: Pantheon Books 1970), P. 309.
 See, for example, F. F. Piven and R. A. Cloward, Poor people’s Movements (New York: Pantheon Books 1977).
 Studs Terkel, Hard Times: An Oral History of the Great Depression (New York: Pantheon Books 1970), PP. 268-69.
 Michael Whitney, “The Obama Dream Team,” counterpunch.com (28-30 November 2008), http://www.counterpunch.com/whitney11282008.html
 F. William Engdahl, “The Real Truth behind the Citigroup Bank Nationalization,” http://www.engdahl.oilgeopolitics.net/Financial_Tsunami/Citigroup_Abyss/citigroup_abyss.html
 Michael Hudson, “The Obama Letdown,” Counterpunch.com (26 November 2008), http://www.counterpunch.com/hudson11262008.html