Obamanomics: Why the Stimulus Plan Will Not Revive the Economy

Arun Gupta Dec 12, 2008


Shortly after his Jan. 20 inauguration, if all goes according to plan, President Barack Obama will submit an economic stimulus plan to Congress. The plan will be of such historic proportions that the media will compare it incessantly to the New Deal; it will probably come with an eye-popping price tag of more than $500 billion; free-market ideologues will wail about the end of capitalism but will be almost powerless to stop it; Congress will jockey to lard it with pet projects as the price of approval.

And like the New Deal, Obama’s stimulus plan will almost certainly fail to pull the economy out of a historic free-fall. For one, the plan is inadequate. Two, it will be drafted and overseen by Obama’s economic “dream team,” who are committed to the failed ideology that got us into this mess. Three, there’s the matter of the still-festering financial crisis. And four, there has been no national debate over economic priorities such as who controls the economy, how production should be structured and what should be produced.

Because of these factors, the stimulus plan will be designed to benefit specific industrial and financial sectors, not the public. If the downturn proves vicious and long-lived, the government will have to introduce even more dramatic economic programs and policies, just like during the Great Depression.

The silver lining is that a failed stimulus will open up organizing opportunities around socializing wealth, such as universal singlepayer healthcare or subsidized housing; expanding the notion of what is a public utility, such as banking or energy; and rethinking how production is structured, a process that is already happening with the automobile industry bailout plan.

Right now the hype over a stimulus plan is at a fever pitch, and supplicants from industries of all sorts to local governments of all sizes have lined up hats in hand. The plan’s key components are taking shape: a middle- class tax cut; aid to local governments, especially to the 41 states expected to run budget deficits in 2009; an extension of unemployment benefits and expanded access to food stamps; up to $40 billion to cover state shortfalls in Medicaid; and around $150 billion for municipal and state infrastructure projects, mainly roads and bridges, but also ports, airports, mass transit, waterworks, sewers and schools.

The centerpiece will be a “green recovery” plan, perhaps $100 billion, and will likely be a hodgepodge of initiatives ranging from green construction, weatherizing old homes and building a national electricity transmission and distribution grid to subsidizing wind and solar power, hybrid cars and mass transit systems.


But it’s too little too late. A $700 billion plan over two years amounts to barely 2.5 percent of the gross domestic product (GDP). In November Goldman Sachs estimated the economy would shrink at an annual rate of 5 percent in the fourth quarter of 2008. As bad as that is, the New Year will be uglier as the retail sector gets walloped by a dismal holiday shopping season. So 5 percent of the GDP may be a reasonable benchmark for a stimulus. Add to that the 2 percent the U.S. economy needs to grow every year to keep pace with inflation and population growth, and the growth gap may be nearly 7 percent or close to $1 trillion of annual economic activity.

Another reason to be skeptical is the claim that a stimulus will “save or create 2.5 million jobs” over two years. There is no way to measure if a job has been saved. It doesn’t inspire confidence if an Obama White House is trying to cook the books before there is even a plan on paper. Conservative pundit George Will asks correctly, “How will anyone calculate the number of jobs ‘saved’? In what sense saved? Saved from what? Saved by what?”

Let’s give Obama the benefit of the doubt and assume his plan creates 2.5 million jobs. It’s still spitting in the wind. Every year, the U.S. economy has to add about 1.8 million jobs to keep up with the net surplus of new workers entering the job force. The recession started in December 2007, and jobs began evaporating in January 2008. With more than 2 million jobs projected to be lost in 2008, the deficit is about 4 million jobs this year. Some 3.6 million jobs will be needed to keep up with workforce growth in 2009 and 2010, and with job losses running at 400,000 per month recently, the actual total of jobs needed by 2011 may be well in excess of 10 million, which dwarfs the 2.5 million goal.


Then there is the issue of who will manage the economy. Barack Obama is not just retaining some of the key personnel of the Bush administration, such as Defense Secretary Robert Gates, he’s also keeping one of the key management principles of the Bush years: rewarding failure.

Not that anyone noticed. Wall Street, academics, pundits and the corporate media — including the Wall Street Journal, Fox News and Karl Rove — have been writing Obama mash notes, praising his “dream team.” Some progressives grumbled at the roster of anti-tax, pro-deregulation proponents, but consoled themselves that the reviled Larry Summers was not asked to be secretary of the Treasury.

But this is cold comfort. Stephen Dubner, co-author of Freakanomics, calls Summers, tapped to be the director of the White House National Economic Council, “the general who conducts the campaign.” Summers mentored Timothy Geithner, Obama’s choice for Treasury secretary, during the Clinton years when both served in the Treasury Department, and the two were disciples of Robert Rubin, who hailed from Goldman Sachs.

These days, Rubin, Summers and Geithner are credited with managing the global economy through the turbulent nineties, including the Mexican, East Asian, Russian and Latin American financial crises. This narrative glosses over the role they played in forcing countries, particularly in Asia, to liberalize financial flows.

A New York Times account from February 1999 noted: “It was American officials who pushed for the financial liberalization that nurtured the speculation (even if developing nations themselves welcomed it). And it was American bankers and money managers who poured billions of dollars into those emerging markets. Then, when the crisis hit, American officials insisted on tough measures like budget cuts and high interest rates, which many economists argue made things worse.”

Summers and Rubin were the point men for liberalization, which led to the rise of oligarchic billionaires and financial panics that saw huge outflows of funds, currency devaluations, mass impoverishment and Western capital sweeping in to cherry-pick industries at fire-sale prices.

In the late 1990s, Summers joined with Rubin and then Federal Reserve chairman Alan Greenspan to aggressively block the U.S. government from regulating derivatives. These are the financial products, such as credit default swaps, at the center of today’s economic storm.


In picking Tim Geithner to be his Treasury secretary, Obama is choosing someone whose record of late as president of the Federal Reserve Bank of New York is a compendium of catastrophe. Geithner’s role at the New York Fed has landed him in the heart of every big financial bailout in 2008, earning him the title of the “secretary of bailouts.” But even before these botched operations, The New Republic notes, Geithner failed to take action after evidence started accumulating in 2007 that “U.S. banks were undercapitalized.”

In March 2008, Geithner helped kill off Bear Stearns, handing the carcass to JPMorgan Chase for a song, while the New York Fed swallowed about $29 billion in toxic securities that have lost $2.7 billion on paper so far. Portfolio Magazine said he “got suckered by Wall Street” because of the lopsided deal and detailed many of the chummy associations Geithner has with Wall Street honchos whose firms profited from the Bear Stearns deal, including the omnipresent Goldman Sachs.

After deciding that Bear was too big to fail, Geithner and current Treasury Secretary Hank Paulson (also of Goldman Sachs) let Lehman Brothers collapse in September. Within 24 hours the contagion spread to money market funds. They were roiled after one fund “broke the buck,” leading to a freeze in commercial paper purchases, a critical tool for financing business operations. And the Fed and Treasury had to step in to save insurance giant AIG because of its exposure to Lehman debt.

The Wall Street Journal observed, “Mr. Geithner was the driving force behind the government takeover of insurance giant AIG — a ‘rescue’ that has itself twice had to be rescued with more taxpayer capital.” The government lifeline to AIG is at $150 billion and rising, because there is no coherent rescue plan. Most recently, AIG announced it faces about $10 billion more in loses linked to credit default swaps not covered by any of the bailout plans already enacted.

Most recently, Geithner has done some lifting for his old boss Rubin, who is a top player at Citigroup. The government has had to bail out the Citigroup bailout, upping its ante to $45 billion while promising to backstop about a quarter trillion in troubled assets.


Another suspect figure joining the Obama team is Paul Volcker, a former Federal Reserve chairman who has been chosen to head the new Economic Recovery Advisory Board. Volcker has been given a free pass by the media because he hasn’t been as slavish as Greenspan in his devotion to the free markets. But Volcker played a critical role in ushering in neoliberalism in the late 1970s.

Volcker engineered a dramatic shift in economic policy from guaranteeing full employment to fighting inflation using massive increases in interest rates. High inflation was slashed but the result was deindustrialization, unemployment rates above 10 percent, a severe recession and the weakening of organized labor. High interest rates benefited creditors and shareholders. The share of income held by the top one percent soared from a historic low of 23 percent in the mid-seventies to about 35 percent by 1985. High interest rates also crippled developing nations as debt payments soared. In turn, this set the stage for IMF-engineered structural adjustment programs that conditioned aid to nations sliding toward bankruptcy with demands of draconian cuts in education, and health and social services, wholesale privatization and trade and financial liberalization.

Conservatives are also pleased that Obama appointed Christina Romer to chair his Council of Economic Advisors because she is known for academic work that concluded tax cuts are a powerful economic stimulus.

Summers, Geithner, Romer and Volcker’s history is not just of academic interest. Obama’s dream team may look to raid social security and Medicare to pay for ballooning deficits. In September, Summers wrote in the Washington Post, “We still must address issues of entitlements and fiscal sustainability.” This is code word for slashing social welfare.


Because Obama is committed to neoliberal policies, he is shying away from any debate. Talking about economic priorities means talking about winners or losers.

For instance, the lack of open debate has pushed the auto industry to the edge. While the executives and shareholders of the Big Three should be kicked to the curb, letting the companies fail could drag under auto-parts suppliers, dealerships and U.S.-based foreign auto plants, resulting in more than a million jobs lost.

The auto industry is to blame for its ramshackle state, but unions are being cast as scapegoats. Labor costs are not the reason General Motors may go under. It’s because it chose to continue building SUVs even as gas prices crept up for years.

Mandating hybrid technology and high gas mileage is a given, but many consumers may rekindle their love affair with gas-guzzlers now that oil prices have tanked. Green car technology should be combined with a tax on oil that keeps it above $100 a barrel. The revenue could help address the climate crisis, but Big Oil would fight it to the death. And Wall Street and the Democrats are preparing a cap-and-trade scheme in carbon emissions. It won’t reduce greenhouse gases, but it could inflate a huge new speculative bubble.

Without open debate, economic policies will be designed for powerful business interests to profit from. The way out of this mess is to address 30 years of declining wages and benefits, reducing foreign trade imbalances and giving developing countries the space to get off the commodity and export-oriented production treadmill.

Obama’s plan may help some parts of the country and some industries and stave off a depression, but it won’t create a just economy for the future. Just like the 1930s, real change has to come from below.

By Jessica Lee

While Wall Street is recoiling from the economic blow and politicians are arguing on Capitol Hill, average Americans are taking matters into their own hands. Here are some of their stories:


City Life/Vida UrbanaTAKING A STAND

Many people facing immediate eviction in the Boston area have received unexpected support in the form of a human blockade. A group of activists from the group have mobilized in front of foreclosed homes in the last several months in support of residents. Less than 12 hours after Barack Obama was elected, the group organized to help an African-American family in Boston’s Mattapan neighborhood. The group criticizes banks such as Bank of America, Countrywide Mortgage and JPMorgan Chase that own mortgages on homes where families in financial distress are striving to meet monthy housing payments. “It’s a bittersweet time, you know, because Obama’s theme was ‘yes we can, we can fight against injustice,’” said housing and tenants rights activist James Brooks, “and the banks are saying ‘no you can’t.’”


In Chicago, some 200 laid-off union workers with United Electrical, Radio and Machine Workers of America Local 1110 won a $1.75 million settlement after occupying their shuttered factory for six days. The showdown began in early December when their employer Republic Windows and Doors gave them three days notice that their plant was closing. Protesting that the company did not give them 60 days notice of a mass layoff as required by federal law and demanding owed vacation pay, the workers took over the factory Dec. 5. An outpouring of support from across the country ensued, forcing the company and its lead creditor Bank of America to meet the workers’ demands. The factory occupation mirrors direct action taken by workers in the 1930s to push for union recognition and better pay and working conditions.


Miami housing activist Max Rameau sees the economic crisis as an opportunity for the city’s homeless. As thousands of homes sit empty after foreclosure, Rameau takes it upon himself to open them up and find a family to move inside. Thanks to a once-booming condo market, Florida has the nation’s second-highest foreclosure rate, with one in every 178 homes in default, according to the Associated Press. While individuals around the country are quietly squatting vacant homes, Rameau has taken the issue public, saying, “Homeless people across the country are squatting in empty homes. The question is: Is this going to be done out of desperation or with direction?”


When the foreclosed home of single mother Jocelyne Voltaire headed for the auction block Oct. 17, a coalition of women was there to help her out. Once CODEPINK, a national peace action group, heard about Voltaire’s case in Queens Village, New York, the group rallied its base and raised the $30,000 needed to save her home. Voltaire, a mother of four and a victim of a predatory loan, suffered the loss of her eldest son earlier this year while he was serving with the U.S. Marine Corps in the Middle East.