One of the best pieces of advice anyone can give a new President or reelected President in an economy that experiences a recession on average once every four or five years—keeping in mind that the long cycles of recent decades plausibly represent a period doubling characteristic of a phase transition to chaos—is, “Take your recession early in your term.”
Ronald Reagan did this, taking credit for Jimmy Carter’s ending the ‘Seventies inflation by appointing Paul Volcker in 1978. Jimmy’s problem was that he didn’t understand how our monetary system works until after bringing a bunch experts to Camp David and learning about it midterm. He followed his principles, ultimately whipped inflation, and lost the election. Paul Volcker was a monetarist who did what he said he was going to do, and tightened credit, the source of credit-money in a fiat fractional reserve monetary system.
Obama won the election by brilliant data mining and positioning in swing states, and because Romney was such an unappealing personality.
Obama was lucky.
Like Carter, he didn’t understand the problems that confronted him in his first term—a corrupt and fraudulent Wall Street, excessively leveraged and coddled by the Treasury and the Fed when their bad derivative bets blew up. Franklin Roosevelt had a better understanding and a stiffer backbone in his dealings with the bankers. Heads rolled. Obama let hundreds of billions of dollars of bad debt be piled onto the Treasury’s sovereign debt.
Obama does understand that America’s middle class is being hollowed out. His solution is to raise marginal tax rates on high income people, in part. In my view, this is a terribly important part, as I believe a sickness of self-regard (“we are gods”) has entered the American elites and nothing would benefit the polity more than taking some of the starch out of their shirts and bringing them back down to Earth with the rest of us working folk.
I would love to see the payroll tax rate lowered and the ceiling removed, for example. Imagine that! Or the Bush-Obama tax cuts on the over-250 thousand dollars brackets removed. Or better, those rates increased to Reagan levels around 50 percent.
There should be a wealth tax, and a financial transactions tax (the high frequency traders are already imposing such a tax and pocketing the proceeds).
But the larger problem is the debt that was largely created because it was so easy to do so after Nixon removed the dollar’s tether to gold 41 years ago. Only monetary reform will address some of the root causes of American inequality at this point, a preponderance of which originates in the financial sector.
Glass-Steagall needs to be reinstated. Was it an accident that America went from the ‘Thirties to the Oh-Oh decade without a major financial crisis? The derivatives markets need to be made transparent and regulated (such a move is likely to reveal a house or horrors, however, showing many big banks to be effectively insolvent). The big banks need to be downsized “by fiat” or required to maintain capital ratios such that they do it by themselves. Perpetrators of fraud need to be prosecuted.
And perhaps the Fed needs to buy up a bunch of federal debt and forgive it before the Fed itself is shut down. The failure of fiat, fractional reserve banking is writ large across the entire Western world. It will be a miracle if the BRICs don’t also emulate us in this regard. But they may benefit by leapfrogging in this area as in others.
What to replace the Fed? Something not owned by the banks at a minimum, something owned by the American people. Ron Paul and Andrew Jackson get this right. The American people accurately perceived the self-dealing of Wall Street via the Fed in the crisis. Those with the expertise and access to see and understand it up close have been nauseated by the level of corruption that Obama did not “begrudge.” This has been his major failing. There was a moment when he could have marshaled support from both the far right and the far left and explained to the American people why reform was needed. He sold out. (He may have considered health care a more important priority in a nation about to collapse, a point of view I have sympathy with. See the Wilkinson video below.)
If gridlock wins in Obama’s second term—because Obama is a consummate politician and may not attempt anything that he deems impossible—or may he, in a second term?—it will be because our system is broken, and the absolute failure and gut-wrenching Crisis apparently required in America to forge a new national identity and social contract (and this is per The Fourth Turning, which has been so durably prophetic lo these past couple of decades)—it will be because that Crisis has not yet come to a head, and Americans remain divided and willing to go down with their parties “on principle” instead of compromising.
I’d also like to see “economic policy” replaced with “social policy.” What I mean by that is democratic capitalism within the following constraints:
First, workfare and health benefits for the economically displaced (i.e., unemployed; health care is available for everyone).
Second, a tax system sufficiently progressive to produce a more “optimal” after-tax distribution of income, consumption and wealth. Here I am relying of the results of Wilkinson et al. that I take to be the most sweeping condemnation of the narrow, money-based approach to welfare adopted by economists. Can we pull off an enlightened Scandinavian-type democratic capitalism (not really socialist, because the state doesn’t own the means of production, just influences the distribution of product)? I hope so. The Scandinavian countries have recently been ranked as the most prosperous in the world.
It may take the next generation to get us there. It was nice to see youth breaking for Obama.
Capitalism is great, but it needs to function within a moral framework providing social justice while not encouraging dependency. Libertarianism and traditional Republicanism leave that to the market, and markets fail to provide it. Ultimately increasing inequality will cause aggregate demand to collapse as most people simply don’t have enough money. We’re halfway there. We may have to go all the way for everyone to get the point. We may not have to wait that long to get there. And then we will see as well to what purpose the President puts all the sinister powers he and George W. Bush accrued that have so eroded the Constitutional rights of the American people. To what means, and to what ends?
It may all be determined in the Crisis to come.