The Obama Presidency and the Political Economy of Austerity
On 8 September, Professor Robert Kuttner delivered a public lecture on “The Obama Presidency and the Political Economy of Austerity.” John Shattuck, President and Rector, provided the introductory remarks, and Julius Horvath, Head, Department of Economics, acted as chair of the event, which was attended by CEU faculty members and students as well as representatives of the diplomatic corps and the media.
President Barack Obama was elected in November 2008, at a moment when a “bubble-economy,” spurred by excesses in the financial economy, was collapsing along with major financial institutions. The emergency policies begun by the Bush economic team, and expanded by Obama’s team, were sufficient to prevent a full-scale depression but not to kindle a strong recovery. Those policies had three basic parts:
- a $700 billion rescue of the banking system, to save large banks from insolvency and to keep credit flowing in frozen money markets. This was combined with the use of the Federal Reserve’s balance sheet to guarantee and purchase securities. This program of financial relief prevented a financial collapse, but has left a risk-averse banking system.
- an economic stimulus program of $775 billion, mostly to be spent over three years. During the same three years, state and local governments are short about $460 billion, meaning that the net government stimulus is well under one percent of GDP. At the time of its enactment, administration economists were projecting a far less severe recession.
- a program to restructure mortgages that were suddenly worth less than the value of the property. This program has modified some 400,000 loans, of several million mortgages at risk. Neither housing prices nor the value of mortgage-backed securities has recovered. Only purchases by government agencies are keeping the mortgage sector functioning.
The fact that the crisis might have been much more severe but for these policies is not impressing voters. Democrats are bracing for a major defeat in the midterm elections of November 2010. Republicans have blocked other Obama initiatives, but voters seem more inclined to blame the incumbent government than the opposition party. Meanwhile, a debate is ensuing about whether the economy needs an austerity program to reassure financial markets or an expansionary program, including more public spending to reduce unemployment. To demonstrate his commitment to budget reform, the President appointed a fiscal commission, most of whose members are inclined more toward the austerity view. The combination of opposition from Republicans and pressure from the fiscal commission has limited Obama’s options. The proposed austerity program includes cuts to Social Security, creating divisions in President Obama’s own party.
Building on these facts, in his lecture, Professor Kuttner compared the present economic situation to that of what Britain and the US had to face in the 1930s, claiming that the present economic crisis is more serious for the US than the one in the thirties. When giving the example of the New York Times calling the crisis “The Great Recession,” he expressed his disagreement with the term, suggesting that, as “The Great Depression” would also be incorrect, the right term could be “The Great Stagnation.” During his talk, the Professor posed a number of questions: Whether the path that Obama had chosen to deal with the crisis was the best economically; his answer was that Obama could have chosen a bigger stimulus. Whether the path that Obama had chosen was the only one he could have taken, politically; Kuttner stated that it would have been better to put together a bolder program, even with Republicans blocking it. Whether the crisis could be cured; Kuttner believes that it can, but the process would presuppose debate outside of the present mainstream debate. Kuttner also elaborated on how much the answers given to the crisis reflect Obama’s own character and shared his assumption that, on the one hand, Obama had underestimated the crisis and, therefore, had not always made the best choices, and on the other hand, the Republicans had decided to block the President’s initiatives. He also emphasized Obama’s continuing to govern as a consensus builder, which, according to Kuttner, is a noble enterprise but impossible given current political circumstances. He finished his lecture with a challenge to President Obama: in the 1940s, re-arming had proved to be a major solution for restoring the economy; presently, he argued, the US President should make the case that the tools necessary to start the recovery process without any wars are given—a case, he argued, that only the US President can make mainstream politics. The lecture was followed by an engaging question and answer session.
Robert Kuttner is co-editor of The American Prospect magazine and a senior fellow at Demos. He was a longtime columnist for BusinessWeek and continues to write columns for Huffington Post, the Boston Globe and the New York Times international edition. He co-founded the Economic Policy Institute and serves on its board. The latest of Kuttner’s nine books is A Presidency in Peril. He is best known for his 1997 book, Everything for Sale: the Virtues and Limits of Markets. His other writing has appeared in the New York Times Magazine, the Atlantic, the New Republic, the New Yorker, Dissent, Foreign Affairs, Columbia Journalism Review, Harvard Business Review, Political Science Quarterly and the New England Journal of Medicine. Previously, Robert Kuttner served as national staff writer on the Washington Post, chief investigator of the US Senate Banking Committee and economics editor of the NewRepublic. He has taught at Boston University, Brandeis University, the University of Massachusetts and Harvard’s Institute of Politics. He was educated at Oberlin College, the University of California at Berkeley and the London School of Economics.