The New Deal dollar and the Obama dollar

Obama told the world during his presidential campaign that his presidency will be one of consequence. In his inaugural address, he proclaimed: "There are some who question the scale of our ambitions - who suggest that our system cannot tolerate too many big plans ... What the cynics fail to understand is that the ground has shifted beneath them ... The question we ask today is not whether our government is too big or too small but whether it works."

Rahm Emanuel, Obama's chief of staff, famously said that a crisis is a terrible thing to waste. A corollary is that government intervention is an even more terrible thing to waste, which is something that the Obama team has yet to realize.

Obama has the rare opportunity to reverse the Reagan revolution of smearing government as always being the problem, never the solution. There is now a growing general consensus that the abdication of government responsibility to regulate free-market fundamentalism has been the root cause of the current global economic crisis, and that the free-market solution adopted by Paulson during the George W Bush administration in response to failed markets has been in itself a failure.

Midway through his first 100 days, sensitive to criticism of his "tell it like it is" warnings about the seriousness of the economic crisis, Obama shifted his rhetoric to sound like his campaign opponent, John McCain claiming that the economy is fundamentally sound, a line that sank the Herbert Hoover presidency in the 1932 presidential election.

Very few people beside the diehard cheerleaders of free-market fundamentalism at CNBC, can now honestly conclude from either economic data or personal experience that the economy is fundamentally sound. By yielding to criticism that his rhetoric was talking down the market, Obama is in danger of letting a serious global crisis go to waste. An economy that is fundamentally sound needs no fundamental structural reform, only an emergency treatment before returning to business as usual.

Obama needs to understand that the market is not the economy. The market operating through a price system is only a partial mirror of the economy. The task at hand is to save an economy severely impaired by income stagnation. Restoring with future tax revenue the price bubble of financial markets that had been detached from the real economy is to mask the symptom while ignoring the disease. Such an approach robs the market's ability to self-correct imbalances and distortions caused by a dysfunctional monetary policy and government abdication of responsible regulation.

Larry Summers, Obama's top economic advisor, is known as a strong defender of free markets. In a predictable Faustian declaration, Summers explains: "The view that the market economy is inherently self-stabilizing, always, has been dealt a fatal blow ... This notion that the economy is self-stabilizing is usually right, but it is wrong a few times a century and this is one of those times."

The central ideological consequence of this fatal market failure, Summers says, is that there "is a need for extraordinary public action at those times ... The debate over whether you can love your country and hate your government has been settled with a negative answer." Love of country is now congruent with love of government, albeit smart government, which to Reaganites is an oxymoron.

Obama's new progressivism
Obama's new progressivism is based on the rehabilitation of government intervention in a failed market economy, even as his top economist only accepts the progressive battle cry as a temporary necessity. Even Obama himself has to clarify publicly that he realizes that Americans do not envy or resent the rich because even the American dream allows the poor to emulate the rich. But he stops short of proposing an income policy even when it is obvious that income disparity creates destabilizing imbalance between supply and demand. The failure of government intervention from misuse, such as intervention to help wayward financial institutions rather than victimized individuals, can turn the US into a failed state and the economy into a failed market.

Rather than a national income policy to raise income for all, Obama chooses an income redistribution path through raising taxes on the rich and cutting taxes on the poor and the middle class, whose members are really the working poor because of a decade of wage stagnation.

An income policy will relieve the working poor by guaranteeing every worker a good living wage to be an effective consumer without unsustainable debt. After all, it is a very American idea, which was first put into practice successfully by Henry Ford. Thus far, the reality is that the American dream has turned into a nightmare in which the poor emulate the rich by spending beyond their meager means and taking on unsustainable debt, not by spending rising income. Effective income parity does not aim at lowering the income of the rich, it aims at raising the income of the poor.

While Summers is continuing Paulson's aim of saving free-market capitalism with temporary transitional state capitalism, Obama's rhetoric until recently had been couched in a far-reaching progressive agenda of reversing widening income disparity and unsustainable wage/price imbalances that have left the world with overcapacity caused by insufficient demand, which had to be masked by excessive debt.

But Obama's March 12 speech before the Conference Board, a group representing the interests of big business, was disappointing in that it made our progressive reformer sound like just another garden variety "trickle down" market fundamentalist. Obama's strategy of first putting out the raging financial fires before dealing with long-term structural reform is fundamentally flawed because the arsonist responsible for the raging fires is a decades-long denial of the urgent need for fundamental structural reform. There is an overwhelming prospect that if and when the raging fire is contained, fundamental reform will give way to business-as-usual with a celebration of the resilience of market fundamentalism. The prospect of recurring crises every decade will continue.

Obama's initiatives blocked by centrists
Obama's three core progressive initiatives - universal education, universal health care and energy/environment transformation - if implemented without watered-down compromise, will be steps to restore US society to its true core values, not just a new, improve American dream that bears little resemblance to harsh reality.

Unfortunately, the Obama team is dominated by centrists who have now taken on the battle standard of the failed alliance of neo-liberals in global economics and neo-conservatives in global security. These centrists view their leader's grand progressive agenda as merely a convenient temporary antidote of emergency intensive care for a dysfunctional and unjust economic system and a militant hegemonic foreign policy.

According to Summers: "It is periodically the task of progressives to, ironically, save the market system from its own excesses." Centrists are reformers who believe that slavery can be eliminated simply by paying below-living wages.

The call by Summers, in his new post as chairman of the White House National Economic Council, for international coordination of stimulus programs is being rejected by his counterparts in the European Union. Disagreements between the EU and the US over how to deal with the global recession is widening as EU governments show little appetite for the US formula of piling up more public debt to fight the collapse in output and jobs caused by excess private debt. European social democrats are not on the same wavelength with the pro-big-business, pro-market approach of Paulson/Summers/Geithner, as three market fundamentalist musketeers, supported by Fed chairman Ben Bernanke as the ever loyal D'Artignan.

To the Europeans, shifting private debt to public debt is not only self deception, especially under a destructive regime of dollar hegemony, it is also particularly dangerous if all sovereign debts are denominated in dollars that EU central banks cannot print but have to earn through foreign trade.

Government stimulus packages are funded with future tax revenue. It is natural that tax money is viewed by the paying public as funds that should be spent within each country. Government bailout money to transnational financial institutions is likely to be used globally. Every government is now engaged in a race to maximize national multiplier effects of its stimulus programs. Thus while all governments are paying lip service to resist protectionism against movement of goods, few have faced up to the new form of financial protectionism practiced by transnational institutions.

The transfer of funds from London to New York by Lehman Brothers during the early hours of its bankruptcy filing is an example of the problem of financial nationalism. Scores of hedge funds that had hundreds of millions of dollars in cash and other securities parked with Lehman's prime brokerage operation in London have had their accounts frozen and the funds transferred to New York, leaving the United Kingdom with less money to settle the bankrupt firm's liabilities.

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