Tom Palley has written an excellent opinion piece for the Financial Times on why Obama is failing, and he requested that I reproduce it here. However, to read it, I’d prefer if you clicked on the link in the title of Tom’s piece below. That will take you to the Financial Times blog itself–the more hits that pieces like this are seen to get in the conventional media, the better (to encourage this, there are some links in the Financial Times piece that I haven’t reproduced in this repost).
Though I concur with Tom’s opinions, I can fully understand Obama’s decision to use the same advisors that Clinton before him (and to some extent Bush) had also used. Fundamentally, Obama is a politician, not an expert in economics, and as a politician determined to take an intelligent approach to the problems confronting America, he sensibly decided to get his information on these challenges from the very best.
How was he to know that the world’s leading economists, the “very best” in this crucial field, actually knew nothing about how the real economy actually functions?
Only after 2 years in office, when the economy is not recovering from the recession as his advisors told him it would, and the remedies that he throws at it (on their advice) turn out to be more damp squibs that the weapons of mass economic reconstruction he was told they would be, must it slowly be dawning on him that may don’t understand the economy.
He’s learning the hard way the lesson I and many other critical economists acquired as we studied for our economics degrees–mostly by reacting incredulously to weird propositions that our Professors would use to derive their models–that there is something rotten in the state of economic thinking.
Fortunately, I had time to undertake scholarly research to confirm that initial guttural reaction. Yes, what simply felt like crap to me rather than wisdom, really was crap: the weird propositions that my Professors would put forward were kludges to hide fundamental flaws in the underlying theory. In full view in the academic literature of economics, paper after paper proved that the theory did not hold together.
Sometimes, as with Piero Sraffa, a critic had proven a fatal flaw in one aspect of the theory (in Sraffa’s case, the theory of income distribution and the concept of a production function linking output of goods to inputs of labor and capital). Other times, it was an “own goal”, as leading neoclassical economists tried to prove something they hoped was true–such as that market demand curves obeyed all the laws they had derived for individual demand curves, and that they therefore necessarily sloped downwards so that there could be only one equilibrium between supply and demand–and proved that this wasn’t true.
In any genuine science, these discoveries, being fundamental to the theory, devastating in their impact and vast in number, would have caused an intellectual crisis that would ultimately have led to a revolution–as with the shift from the Ptolemaic to the Copernican view of the structure of the solar system. But in economics, what happened instead was that these flaws were ignored–if they had been discovered by the critics like Sraffa–or papered over by truly absurd assumptions, if they had been “own goals”.
The end result was that economic theory was an utter shambles of false abstractions, and I wrote Debunking Economics to bring this to the attention of people who fighting for social justice but whose endeavors were being blocked by economists.
Unfortunately, Obama didn’t read it.
So now a man who had hopes to be remembered for not only being America’s first black President, but also for being one of its great social reformers as well, will probably go down like Herbert Hoover, who is known more for his failure to prevent the Great Depression than for anything else. To cite Wikipedia here:
When the Wall Street Crash of 1929 struck less than eight months after he took office, Hoover tried to combat the ensuing Great Depression with volunteer efforts, none of which produced economic recovery during his term. The consensus among historians is that Hoover’s defeat in the 1932 election was caused primarily by failure to end the downward economic spiral. As a result of these factors, Hoover is ranked poorly among former US Presidents.
Such will almost certainly be Obama’s fate as well, though not because he was a poor President but because he was determined to be a good one, and he therefore followed the advice of the economists in combating the beginnings of the Second Great Depression. How was he to know that their wayward economic theories had actually helped set up this calamaity in the first place, and that having caused it by means they did not understand, that they were the last ones who were able to give him the economic advice he actually needed?
So much for me; over now to Tom’s views–and please read them via the link, as requested. One of the many reasons that neoclassical economics has become dominant is that newspaper editors believed, as Obama did, that the dominant economists were the best ones, and non-orthodox thinkers like Tom and I were shut out of the opinion pieces even more effectively than we were marginalized within the economics profession itself. The more pieces like Tom’s get read in the mainstream media, the sooner those days will be over–and the long-overdue intellectual revolution in economics can begin.
Financial Times Economists’ Forum, December 2, 2010
Copyright Thomas I. Palley
The great American novelist Mark Twain observed “history does not repeat itself but it rhymes.” Today the rhyme is with the 1930s, and if you don’t hear it read FDR’s great Madison Square Garden speech of October 1936:
“For twelve years this nation was afflicted with hear-nothing, see-nothing, do-nothing government. The nation looked to government but the government looked away. Nine mocking years with the golden calf and three long years with the scourge! Nine crazy years at the ticker and three long years in the breadlines! Nine mad years of mirage and three long years of despair! Powerful influences strive today to restore that kind of government with its doctrine that that government is best which is most indifferent.”
Despite this clarity, the Obama administration insists on hearing a rhyme with the 1990s. That tone deafness has its roots in political choices made at the administration’s outset and explains why the administration has stumbled so badly in its first years. If continued, the economic and social consequences will be grave.
In 2008 President Obama captured the nation with a message of change, yet in office he has chosen to deliver change of style rather than change of substance. At the headline level this choice was reflected in his call for bi-partisanship that looked to split the difference with Republicans. In economic policy, it was reflected in the wholesale reappointment of the Clinton administration team led by Larry Summers and Timothy Geithner, a case of continuity not change.
Now, the administration is sinking under failure of its economic policy. That failure is due to its attempt to revive a 1990s paradigm that never worked as advertised and can only deliver stagnation. Painful though it is for Democrats to acknowledge, the reality is the economic policies of President Clinton were largely the same as those of President Bush. On this the record is clear for those willing to see. The Clinton administration pushed financial deregulation; twice reappointed Alan Greenspan; promoted corporate globalization through NAFTA and China PNTR; initiated the strong dollar policy; spoke of the “end of the era of big government”; contemplated privatization of Social Security; and struck down a core element of the New Deal by ending the right to welfare.
The main difference between the Clinton and Bush administrations was the former’s willingness to offer some helping-hand policies to cushion the harsh effects of the invisible hand. Differences in outcomes were not policy driven but reflect the fact the Clinton administration enjoyed the good fortune of the Internet investment bubble. It also benefitted from the beginning of the housing bubble when American families had plenty of untapped home equity and credit.
President Obama’s fateful decision to go with Clintonomics meant the recession was interpreted as an extremely deep downturn rather than a crisis signaling the bankruptcy of the neoliberal paradigm that has ruled both Republicans and Democrats for thirty years. That implied the recession could be fully addressed with stimulus, which was the same response as the Bush administration to the recession of 2001.
The current recession is the deepest economic downturn since the Great Depression of the 1930s, inviting comparisons with President Franklin Delano Roosevelt. FDR had the advantage of taking office three years into the Depression when the unemployment rate was near 25 percent. The verdict was in: the system needed change. President Obama took office as the crisis was deepening. Those who had designed the system could still argue it could be revived and as establishment insiders they had the upper hand. But that argument is done and today the prospect is of long stagnation.
The New Deal was a break with both the politics and economic policies of the past. Its economic policy innovations like Social Security, the Securities and Exchange Commission, the Fair Labor Standards Act, and the Wagner Act granting the right to organize, are still celebrated. However, it was FDR’s new politics of solidarity and compassion that created the necessary political space: solidarity that recognized the country was in the Depression together and compassion that recognized many were suffering through no fault of their own. That is the political rhyme President Obama must hear, while the New Deal is the policy rhyme.
The President’s failure to deliver on the country’s desire for change of substance has left a vacuum that is being filled by dangerous unstable forces. This is the tale of the Tea Party, which is a tale that has resonance for Europe. The economic risk, already more advanced in Europe, is a doubling-down of disastrously failed hardcore neoliberal economic policies. The political risk is a rise of intolerance and xenophobia.
These are not normal times. If the administration persists with its deafness to history it will surely hit the rocks and an historical opportunity for progressive change will be squandered. Worse yet, its deafness will leave the field open to the extreme right whose “blame-the-victim” social message and “liquidationist-austerity” economic policies clearly confirm today’s rhyme is with the history of the 1930s.