Monday, March 02, 2009

Change that will cost a fortune

Business Times - 03 Mar 2009
Obama will face huge political and legislative obstacles in garnering support for his three dramatic policy proposals

By LEON HADAR
WASHINGTON CORRESPONDENT

A FEW days after the historic 2008 presidential election and in the midst of the worst economic downturn in American history since the Great Depression of the 1930s, Rahm Emanuel was selected by then President-elect Barack Obama as his chief of staff. He explained what would turn out to be the guiding principle of the new Democratic administration: 'You never want a serious crisis to go to waste.'

'What I mean by that is that it's an opportunity to do things you could not do before,' he said.

Mr Emanuel's advice may have sounded a bit Machiavellian. But Mr Obama's top White House aide demonstrated that he was a brilliant student of the history of the American presidency. Indeed, two of the great US presidents in the 20th century - Democrat Franklin Delano Roosevelt (FDR) and Republican Ronald Reagan had taken advantage of huge and painful economic crises that followed them into office in order to launch a radical restructuring of the American political-economic system.

FDR used the economic depression that followed the 1929 stockmarket crash and decades of Republican- led laissez faire policies and rising social-economic inequality as an opportunity to initiate what could be described as the third American Revolution (the first two being the War of Independence and the Civil War). It took the form of the New Deal: expanding government intervention in the economy; raising the tax burden on the rich and providing assistance to the poor; pursuing national industrial policies; and creating vast federal-backed economic projects.

Mr Roosevelt created the modern American welfare state, including the national insurance programme (Social Security) whose foundations were preserved and expanded by both Democratic and Republican presidents - and, in particular, by Democratic President Lyndon Johnson, who enlarged the social-economic safety net by creating new federal programmes to assist the poor and the elderly.

Mr Reagan was elected in 1980 at a time when the US economy was experiencing an explosive mix of rising inflation and growing unemployment ('stagflation') which was blamed in part on the social-democratic (or 'liberal', in American political jargon) policies pursued by his predecessors.

Mr Reagan (like Margaret Thatcher in Britain) used the economic crisis as an opportunity to transform - not to abolish - the foundations of the welfare state created by FDR and expanded by his successors, and to advance a major turn to the political right. It was a counter-revolution in the form of Reaganomics: diminishing the role of the government in the economy and deregulating it along free-market lines; lowering the tax burden on the wealthy and the middle class, and cutting support for welfare programmes.

Mr Reagan, as Candidate Obama suggested in 2008, was a 'transformative' president. Bill Clinton announced that 'the era of Big Government is over' and (like Tony Blair in Britain) expanded some of his predecessor's free-market policies, including by approving major (and, in retrospect, harmful) changes to the regime that had regulated the financial markets since the 1930s.

Or, to apply Rahm Emanuel's dictum here, Mr Clinton (unlike FDR and Mr Reagan, and now Mr Obama) was not provided with an opportunity - an economic crisis - to use in order to transform Reaganomics.

But after watching Mr Obama's address before Congress and reading his 10-year budget proposal, it is becoming clear that unlike Mr Clinton and more like Mr Reagan, Mr Obama fashions himself as a transformative president who is going to use the financial crisis and what could be a long and deep economic recession, as a 'once in a generation' opportunity (as he put it) to alter, and in some cases replace, the free market-oriented political-economic structures that were established by Mr Reagan and have been in place since then.

Moreover, Mr Obama also believes that his win last November, and the Democratic takeover of both the Senate and the House of Representatives as well as the enormous personal and political support he enjoys among the American people, give him enough 'political capital' to press for dramatic political-economic reforms.

Republicans and conservative pundits are already arguing that Mr Obama and his aides are planning to introduce 'socialism' - if not 'communism' - into the American economy, that they are trying to exploit a 'golden opportunity to restructure the American economy in ways that would allow politicians to micromanage other sectors of the economy the way they have micromanaged the housing market into disaster', according to conservative economist Thomas Sowell.

In reality, much of what Mr Obama has proposed in his speech and in his budget proposal - increasing the tax burden on wealthy Americans and the big corporations; strengthening the regulation of the financial industry; fixing the healthcare system; helping create a new green industry; expanding government support for education and social programmes - do not amount to a revolution a la the New Deal.

Like Mr Reagan, who attempted to restrain the power of FDR's welfare state, Mr Obama is trying to control some of the dramatic effects that have been produced by Reaganomics - and, in particular, the irresponsible behaviour of Wall Street and the growing social-economic equality in America.

In fact, as a way of signifying that he does not want to see the return of the era of big government, Mr Obama is also calling for reducing the spending in the federal government, in a way that will lead eventually to a decline in the budget deficit.

There is no doubt that Mr Obama is going to face huge political and legislative obstacles from Republicans as well as from conservative Democrats in garnering support for his three dramatic policy proposals.

First, the White House intends to use the revenues from the higher taxes on the wealthy and saving from insurers and drug-makers to create a US$634 billion, 10-year 'health reform reserve' as a downpayment to finance various healthcare programmes. Mr Obama expects that the health reserve will be seen as the first step in his plan to develop a more affordable and cost-effective health insurance system for individuals and employers.

On the energy front, the Obama administration plans to require industries to buy permits to emit the heat-trapping gases that contribute to global warming, and to use the revenues to finance new alternative energy sources that would help America reduce its dependency on foreign energy and deal with the problems posed by global warming.

And the most dramatic step to counter the effects of Reaganomics would involve reducing the social-economic inequality that has increased since the 1970s by making the tax code more progressive and by increasing the tax burden on the top 5 per cent of households by about US$1 trillion and by approving US$500 billion in net tax cuts for the middle class over the next 10 years.

All of these and other programmes were part of the agenda promoted by Mr Obama during the campaign. His budget for the 2010 fiscal year of about US$3.6 trillion is the largest in US history (in relative terms) since the time of FDR.

Even some of his supporters admit that it will be difficult, if not impossible, to shrink the gigantic federal deficit by taxing wealthy Americans and businesses, including by cutting subsidies to farmers and banks, and by ending the war in Iraq and cutting the Pentagon budget.

Moreover, Washington lobbyists are expected to fight against increasing taxation on, and cutting subsidies for, their powerful clients. The defence budget could actually grow if Washington escalates the war in Afghanistan and slows down US withdrawal from Iraq (as the president is planning to do).

Mr Obama's counter-argument is that his ambitious spending programmes are actually going to bring about long-term reduction in spending on healthcare and other schemes.

Nevertheless, if one adds the costs of the economic stimulus package and the plans to fix the financial system to the proposed budget, it becomes clear that 'change you can believe in' is also going to be the kind of change that will cost you a lot of money.

Copyright © 2007 Singapore Press Holdings Ltd. All rights reserved.

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