by Laryn

We have mentioned this before. But it becomes more clear with each passing day that even before the recent financial markets meltdown Mr. Obama was hoping some crisis would provide an excuse for the federal government to intervene heavily in our capitalist system.

Back in 2006, when Mr. Obama was writing his second autobiography, his hope was that international competition of the global economy would be enough of a problem to trigger the government to take action.

From 2006 and Obama’s second autobiography, The Audacity Of Hope – Thoughts On Reclaiming The American Dream, pp 86-95:

Opportunity

YOU’LL GET LITTLE argument these days, from either the left or the right, with the notion that we’re going through a fundamental economic transformation. Advances in digital technology, fiber optics, the Internet, satellites, and transportation have effectively leveled the economic barriers between countries and continents. Pools of capital scour the earth in search of the best returns, with trillions of dollars moving across borders with only a few keystrokes…

But there’s also no denying that globalization has greatly increased economic instability for millions of ordinary Americans. To stay competitive and keep investors happy in the global marketplace, U.S.-based companies have automated, downsized, outsourced, and offshored. They’ve held the line on wage increases, and replaced defined-benefit health and retirement plans with 401(k)s and Health Savings Accounts that shift more cost and risk onto workers.

The result has been the emergence of what some call a “winner-take-all” economy, in which a rising tide doesn’t necessarily lift all boats. Over the past decade, we’ve seen strong economic growth but anemic job growth; big leaps in productivity but flatlining wages; hefty corporate profits, but a shrinking share of those profits going to workers¦

For the most part, though, the Republican economic agenda under President Bush has been devoted to tax cuts, reduced regulation, the privatization of government services— and more tax cuts.

Administration officials call this the Ownership Society, but most of its central tenets have been staples of laissez-faire economics since at least the 1930s: a belief that a sharp reduction—or in some cases, elimination—of taxes on incomes, large estates, capital gains, and dividends will encourage capital formation, higher savings rates, more business investment, and greater economic growth; a belief that government regulation inhibits and distorts the efficient working of the market; and a belief that government entitlement programs are inherently inefficient, breed dependency, and reduce individual responsibility, initiative, and choice.

Or, as Ronald Reagan succinctly put it: “Government is not the solution to our problem; government is the problem.” …

What is clear is that the sea of red ink has made it more difficult for future administrations to initiate any new investments to address the economic challenges of globalization or to strengthen America’s social safety net…

But over the long term, doing nothing probably means an America very different from the one most of us grew up in. It will mean a nation even more stratified economically and socially than it currently is: one in which an increasingly prosperous knowledge class, living in exclusive enclaves, will be able to purchase whatever they want on the marketplace—private schools, private health care, private security, and private jets— while a growing number of their fellow citizens are consigned to low-paying service jobs, vulnerable to dislocation, pressed to work longer hours, dependent on an underfunded, overburdened, and underperforming public sector for their health care, their retirement, and their children’s educations.

It will mean an America in which we continue to mortgage our assets to foreign lenders and expose ourselves to the whims of oil producers; an America in which we underinvest in the basic scientific research and workforce training that will determine our long-term economic prospects and neglect potential environmental crises.

It will mean an America that’s more politically polarized and more politically unstable, as economic frustration boils over and leads people to turn on each other.

Worst of all, it will mean fewer opportunities for younger Americans, a decline in the upward mobility that’s been at the heart of this country’s promise since its founding.

That’s not the America we want for ourselves or our children. And I’m confident that we have the talent and the resources to create a better future, a future in which the economy grows and prosperity is shared. What’s preventing us from shaping that future isn’t the absence of good ideas. It’s the absence of a national commitment to take the tough steps necessary to make America more competitive—and the absence of a new consensus around the appropriate role of government in the marketplace.

TO BUILD THAT consensus, we need to take a look at how our market system has evolved over time…

Our greatest asset has been our system of social organization, a system that for generations has encouraged constant innovation, individual initiative, and the efficient allocation of resources.

It should come as no surprise, then, that we have a tendency to take our free-market system as a given, to assume that it flows naturally from the laws of supply and demand and Adam Smith’s invisible hand. And from this assumption, it’s not much of a leap to assume that any government intrusion into the magical workings of the market— whether through taxation, regulation, lawsuits, tariffs, labor protections, or spending on entitlements—necessarily undermines private enterprise and inhibits economic growth. The bankruptcy of communism and socialism as alternative means of economic organization has only reinforced this assumption. In our standard economics textbooks and in our modern political debates, laissez-faire is the default rule; anyone who would challenge it swims against the prevailing tide.

It’s useful to remind ourselves, then, that our free-market system is the result neither of natural law nor of divine providence. Rather, it emerged through a painful process of trial and error, a series of difficult choices between efficiency and fairness, stability and change. And although the benefits of our free-market system have mostly derived from the individual efforts of generations of men and women pursuing their own vision of happiness, in each and every period of great economic upheaval and transition we’ve depended on government action to open up opportunity, encourage competition, and make the market work better.

In broad outline, government action has taken three forms. First, government has been called upon throughout our history to build the infrastructure, train the workforce, and otherwise lay the foundations necessary for economic growth. All the Founding Fathers recognized the connection between private property and liberty, but it was Alexander Hamilton who also recognized the vast potential of a national economy—one based not on America’s agrarian past but on a commercial and industrial future. To realize this potential, Hamilton argued, America needed a strong and active national government, and as America’s first Treasury secretary he set about putting his ideas to work. He nationalized the Revolutionary War debt, which not only stitched together the economies of the individual states but helped spur a national system of credit and fluid capital markets. He promoted policies—from strong patent laws to high tariffs—to encourage American manufacturing, and proposed investment in roads and bridges needed to move products to market…

This tradition, of government investment in America’s physical infrastructure and in its people, was thoroughly embraced by Abraham Lincoln and the early Republican Party. For Lincoln, the essence of America was opportunity, the ability of “free labor” to advance in life. Lincoln considered capitalism the best means of creating such opportunity, but he also saw how the transition from an agricultural to an industrial society was disrupting lives and destroying communities.

So in the midst of civil war, Lincoln embarked on a series of policies that not only laid the groundwork for a fully integrated national economy but extended the ladders of opportunity downward to reach more and more people. He pushed for the construction of the first transcontinental railroad. He incorporated the National Academy of Sciences, to spur basic research and scientific discovery that could lead to new technology and commercial applications. He passed the landmark Homestead Act of 1862, which turned over vast amounts of public land across the western United States to settlers from the East and immigrants from around the world, so that they, too, could claim a stake in the nation’s growing economy. And then, rather than leave these homesteaders to fend for themselves, he created a system of land grant colleges to instruct farmers on the latest agricultural techniques, and to provide them the liberal education that would allow them to dream beyond the confines of life on the farm.

Hamilton’s and Lincoln’s basic insight—that the resources and power of the national government can facilitate, rather than supplant, a vibrant free market—has continued to be one of the cornerstones of both Republican and Democratic policies at every stage of America’s development.

The Hoover Dam, the Tennessee Valley Authority, the interstate highway system, the Internet, the Human Genome Project—time and again, government investment has helped pave the way for an explosion of private economic activity. And through the creation of a system of public schools and institutions of higher education, as well as programs like the GI Bill that made a college education available to millions, government has helped provide individuals the tools to adapt and innovate in a climate of constant technological change.

Aside from making needed investments that private enterprise can’t or won’t make on its own, an active national government has also been indispensable in dealing with market failures—those recurring snags in any capitalist system that either inhibit the efficient workings of the market or result in harm to the public…

But it was during the stock market crash of 1929 and the subsequent Depression that the government’s vital role in regulating the marketplace became fully apparent. With investor confidence shattered, bank runs threatening the collapse of the financial system, and a downward spiral in consumer demand and business investment, FDR engineered a series of government interventions that arrested further economic contraction. For the next eight years, the New Deal administration experimented with policies to restart the economy, and although not all of these interventions produced their intended results, they did leave behind a regulatory structure that helps limit the risk of economic crisis: a Securities and Exchange Commission to ensure transparency in the financial markets and protect smaller investors from fraud and insider manipulation; FDIC insurance to provide confidence to bank depositors; and countercyclical fiscal and monetary policies, whether in the form of tax cuts, increased liquidity, or direct government spending, to stimulate demand when business and consumers have pulled back from the market.

Finally—and most controversially—government has helped structure the social compact between business and the American worker. During America’s first 150 years, as capital became more concentrated in trusts and limited liability corporations, workers were prevented by law and by violence from forming unions that would increase their own leverage. Workers had almost no protections from unsafe or inhumane working conditions, whether in sweatshops or meatpacking plants. Nor did American culture have much sympathy for workers left impoverished by capitalism’s periodic gales of “creative destruction”—the recipe for individual success was greater toil, not pampering from the state. What safety net did exist came from the uneven and meager resources of private charity.

Again, it took the shock of the Great Depression, with a third of all people finding themselves out of work, ill housed, ill clothed, and ill fed, for government to correct this imbalance. Two years into office, FDR was able to push through Congress the Social Security Act of 1935, the centerpiece of the new welfare state, a safety net that would lift almost half of all senior citizens out of poverty, provide unemployment insurance for those who had lost their jobs, and provide modest welfare payments to the disabled and the elderly poor. FDR also initiated laws that fundamentally changed the relationship between capital and labor: the forty-hour workweek, child labor laws, and minimum wage laws; and the National Labor Relations Act, which made it possible to organize broad-based industrial unions and forced employers to bargain in good faith.

Part of FDR’s rationale in passing these laws came straight out of Keynesian economics: One cure for economic depression was putting more disposable income in the pockets of American workers. But FDR also understood that capitalism in a democracy required the consent of the people, and that by giving workers a larger share of the economic pie, his reforms would undercut the potential appeal of government-managed, command-and-control systems—whether fascist, socialist, or communist— that were gaining support all across Europe. As he would explain in 1944, “People who are hungry, people who are out of a job are the stuff of which dictatorships are made.”

For a while this seemed to be where the story would end—with FDR saving capitalism from itself through an activist federal government that invests in its people and infrastructure, regulates the marketplace, and protects labor from chronic deprivation. And in fact, for the next twenty-five years, through Republican and Democratic administrations, this model of the American welfare state enjoyed a broad consensus. There were those on the right who complained of creeping socialism, and those on the left who believed FDR had not gone far enough. But the enormous growth of America’s mass production economy, and the enormous gap in productive capacity between the United States and the war-torn economies of Europe and Asia, muted most ideological battles…

There was only one problem with this liberal triumph—capitalism would not stand still. By the seventies, U.S. productivity growth, the engine of the postwar economy, began to lag. The increased assertiveness of OPEC allowed foreign oil producers to lop off a much bigger share of the global economy, exposing America’s vulnerability to disruptions in energy supplies…

U.S. companies began to experience competition from low-cost producers in Asia, and by the eighties a flood of cheap imports—in textiles, shoes, electronics, and even automobiles—had started grabbing big chunks of the domestic market…

In this more competitive global environment, the old corporate formula of steady profits and stodgy management no longer worked. With less ability to pass on higher costs or shoddy products to consumers, corporate profits and market share shrank, and corporate shareholders began demanding more value….

Still, the conservative revolution that Reagan helped usher in gained traction because Reagan’s central insight—that the liberal welfare state had grown complacent and overly bureaucratic, with Democratic policy makers more obsessed with slicing the economic pie than with growing the pie—contained a good deal of truth…

Forced to compromise with a Democrat-controlled Congress, Reagan would never achieve many of his most ambitious plans for reducing government. But he fundamentally changed the terms of the political debate. The middle-class tax revolt became a permanent fixture in national politics and placed a ceiling on how much government could expand. For many Republicans, noninterference with the marketplace became an article of faith…

[I]t was Clinton who would accomplish what Reagan never did, putting the nation’s fiscal house in order even while lessening poverty and making modest new investments in education and job training. By the time Clinton left office, it appeared as if some equilibrium had been achieved—a smaller government, but one that retained the social safety net FDR had first put into place.

Except capitalism is still not standing still. The policies of Reagan and Clinton may have trimmed some of the fat of the liberal welfare state, but they couldn’t change the underlying realities of global competition and technological revolution. Jobs are still moving overseas—not just manufacturing work, but increasingly work in the service sector that can be digitally transmitted, like basic computer programming. Businesses continue to struggle with high health-care costs. America continues to import far more than it exports, to borrow far more than it lends.

Without any clear governing philosophy, the Bush Administration and its congressional allies have responded by pushing the conservative revolution to its logical conclusion— even lower taxes, even fewer regulations, and an even smaller safety net. But in taking this approach, Republicans are fighting the last war, the war they waged and won in the eighties, while Democrats are forced to fight a rearguard action, defending the New Deal programs of the thirties.

Neither strategy will work anymore. America can’t compete with China and India simply by cutting costs and shrinking government—unless we’re willing to tolerate a drastic decline in American living standards, with smog-choked cities and beggars lining the streets. Nor can America compete simply by erecting trade barriers and raising the minimum wage—unless we’re willing to confiscate all the world’s computers.

But our history should give us confidence that we don’t have to choose between an oppressive, government-run economy and a chaotic and unforgiving capitalism. It tells us that we can emerge from great economic upheavals stronger, not weaker. Like those who came before us, we should be asking ourselves what mix of policies will lead to a dynamic free market and widespread economic security, entrepreneurial innovation and upward mobility. And we can be guided throughout by Lincoln’s simple maxim: that we will do collectively, through our government, only those things that we cannot do as well or at all individually and privately.

In other words, we should be guided by what works.

WHAT MIGHT SUCH a new economic consensus look like? I won’t pretend to have all the answers, and a detailed discussion of U.S. economic policy would fill up several volumes. But I can offer a few examples of where we can break free of our current political stalemate; places where, in the tradition of Hamilton and Lincoln, we can invest in our infrastructure and our people; ways that we can begin to modernize and rebuild the social contract that FDR first stitched together in the middle of the last century.

Let’s start with those investments that can make America more competitive in the global economy: investments in education, science and technology, and energy independence.

That Mr. Obama was thinking this way back in 2006 is quite telling.

Moreover, isn’t it odd how we just happened to have an economic crisis that fits his hopes and dreams perfectly?

It’s almost as if it were tailor-made.