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At this point it’s clear that, barring some sort of catastrophic revelation, Obama is going to win the election. The most important task facing him will be fixing the economy. Given his economic proposals to date, what strategy can we expect him to employ? What sort of economic philosophy does Obama believe in?

1) Tax cuts. When you want to convince people to do something, whether it be spend or go to university, you cut taxes on doing that thing. So, Obama wants a tax credit for companies that create new jobs in the US. He wants a tax credit so you can buy your own insurance He wants to cut taxes on the middle class in general, so they will spend more and save more. He wants to offer a tax credit for going to university. There will be a 10% mortgage credit.

Although his tax cut plan is not as expensive as McCain’s, it is not revenue neutral, it will reduce government income, going into a recession. However it will also increase taxes somewhat on the rich, and reduce taxes on the middle class and the poor.

2) He wants to reinstitute pay-go rules. If he follows through on this, there will be few new large programs.

3) He believes in crude Keynesian stimulus, which is untargeted. Case in point, a windfall tax on oil companies which will be used to pay $1,000 to each US family.

4) He believes in smaller amounts of targeted spending for pet projects, for example 150 billion over 10 years for green jobs (that’s 15 billion a year. After seeing how much money was spent on banks in the last couple months, I trust everyone realizes that this is, indeed, small change.)

5) He wants to expand the military. Yes, this is an economic policy because if you want to cut costs there are very few places in the federal government to do it. The easiest place to do it without affecting too many normal citizens is actually the military. If you put the military off-limits for significant cuts, there are no easy other wins that add up to real money and no easy pay-go offsets.

6) He believes in workers rights, unionization and a higher minimum wage. All good things.

What does this add up to?

The Good

Obama’s tax plan will put more of the burden on the rich, he will raise the minimum wage, make unionization easier and generally help workers. The effect won’t be large, but for the poorest workers and for unions, it will be noticeable. The tax credit for going to university is large enough to be really noticeable and a lot of kids who wouldn’t have been able to go otherwise will make it.

The Ugly

Pay-go, $1,000 checks and mortgage credits. Oh sure, they all seem good, but pay-go is being passed after Wall Street got its two trillion or so, and before Main Street gets anything near the same amount. Doesn’t seem fair, and that’s because it isn’t. You will pay for the bail out, but get few of the benefits, beyond avoiding having to eat rats.

As for $1,000 checks and mortgage credits—these things seem good. Everyone likes getting a check in the mail, everyone who owns a house likes the idea of mortgage credit. But, in fact, the money will go either to paying down debts or to oil inflation. And the mortgage credit will help keep the the suburban expansion system going. And that’s not a good thing, because each time the suburbs expand it leads to more oil being needed, and since the US has to buy that from overseas, and can’t afford to, that’s a bad thing.

The Bad

To understand the bad it’s necessary to understand how stimulus works. If I give everyone in the country $1,000 dollars, they run out and spend it, or save it, or use it to pay down debts. The spending is what I mostly wanted, I want demand to increase so companies sell more stuff, need more workers and so on. So this is good. But let’s say that the structure of the economy is unhealthy, that people are spending money on things that aren’t good for America’s overall health? Then every dollar I give them to spend as they choose is actually causing damage.

This is where the US is right now. The suburban sprawlconomy generates demand for more oil just at the time when oil production appears to have reached its global peak. Money into real estate, slowing down or stopping the drop in home prices keeps American houses actually overpriced. This may not seem like a big deal – who doesn’t like having a house that’s expensive? Well, who doesn’t is the people who have to service the mortgages. The more the mortgage costs, the more of their income Americans spend on just paying that. That’d be okay if wages had kept up with housing prices over the last thirty years, or especially over the last 8, but they haven’t. Americans spend more and more of their income on their houses, leaving less and less money for anything else. They don’t save, so American business and government has to borrow money from overseas. They have less and less money to spend on consumer goods and recreation, meaning demand either drops or the US has to borrow money from overseas as well.

Too high house prices squeeze out other economic activity, then. They make you feel rich, but they actually make people in aggregate poorer, not in nominal wealth, but in real disposable income.

So then, giving people money may seem good, giving housing credits may seem good, but it does not solve the structural problems in the economy. The suburban sprawlconomy, creating new development and development, exurb after suburb, is a large part of what is wrong with the US’s economy. You don’t want to give money to people who are just going to go back to doing the same things that caused the problem the last time. (That’s not to say you don’t want people to have money, there are other ways to get it to them.)

Which leads to the financial crisis, which we need to discuss for a moment. Obama pushed very strongly for the final bill that passed, including calling up Democratic members and convincing them to vote for it. He put his muscle behind it, hard. It was, in a very real sense, his first governing act. And what is notable about the bailout bill is this—it does not include significant regulatory changes to the banking industry. It does not have strong language changing industry compensation practices, without which the same behavior will continue, because it will continue to be rewarded. Now it is possible that Obama could pass massive regulatory changes once he is in power and has indicated some interest in doing, but once the worst part of the crisis is over, one wonders if he will or if he will be able to even if he wants to. The Blue Dogs won’t go for it, many conservative Democrats in the Senate won’t go for it. But my guess, honestly, is that Obama won’t want to make really fundamental changes and tighten regulation up brutally. He won’t, say, reinstitute Glass-Steagall.

Which is to say, at the end of the day, the old Bush economy is still going to be more or less in place. A bit battered, a bit knocked about, but the same essential sprawlconomy with a military-industrial component. Money will still go through the same channels and will do the same things as it did in the past. The fundamental changes which need to be made, won’t be made. And that means that in 2 to 4 years, outside, we’ll be back here again, except with a lot less ability to make changes because we’ll have a lot less real money.

Obamanomics then is "do the same things smarter and with some more kindness for ordinary people". Unfortunately, no matter how smart you do the same things that got the US to this point, they are still stupid. Doing stupid smart is not what the US needs.


So, you may be thinking "that’s all very nice, Ian, but what’s the alternative?"

The alternative is liberalism, rather than neo-liberalism. A liberal looking at this problem thinks "there’s a supply bottleneck, I need to make that bottleneck go away". A liberal looking at this problem thinks "for the purposes of stimulus it really doesn’t matter who spends the money, a dollar is a dollar". A liberal looking at the problem doesn’t think "I should cut taxes so people do more of the wrong things". A liberal looking at the problem thinks "let’s change the economy so that people acting to make themselves happy make things better, not worse."

How does a liberal do these things? Well, first a liberal decides to take away the inflation problem, that whenever people get money they spend it on things that cause the demand for oil to increase. He does so by making a huge multi-hundred billion dollar investment in fuel efficiency by buying up all the least fuel efficient vehicles, by spending massively on public transit, by doing a massive fiber build-out and encouraging businesses to telecommute. He reduces the speed limit to 55 on all roads. He starts charging people for driving during rush hour. He encourages businesses to have workers work 9 hour days and take off a long weekend every two weeks. He massively invests in green energy. He sets up a program to refit every building in the US so that it uses as little energy as possible, or even produces energy. He changes the energy network so every American can sell power to the power company. In doing all these things, he actually reduces US demand for oil and increases its energy output. And all this activity creates jobs, a lot of jobs, which can’t be offshored or outsourced.

And while the liberal may give a tax credit here, or a tax credit there, a lot of things he just has the government do, or has it spend the money directly. When you refit your house you don’t get a tax credit, you get someone to come and do the work, then a government inspector checks it’s done properly, then the company that refitted the house gets paid you get a reduced bill and share in some of the savings by actually receiving a check every month for as long as you live in the house. When new networks are set up, the government exercises eminent domain and encourages municipalities to set up their own networks. It forces large cable and phone companies to let anyone sell time on their networks, just like in the old dial up days and just like in countries like Japan that are far ahead of the US. Governments build the networks themselves, and run them themselves, since the major telecom companies have proven they wont’ give the US good broadband.

A liberal looking at the current situation says "if I go to real universal health care the US economy will save 5% of GDP, I know this because every single country in the world that has done it has gotten those savings." And he tells you, "your taxes will go up, but because you will not have to pay for insurance your spending income will actually go up. And if your employer pays for insurance I will make him give you half that as a pay raise. And as a result, ordinary Americans will actually have more money to spend as well as better health care."

A liberal would say "the financial sector needs to be cut down to size. I’m going to reregulate it and make it into a servant of the real economy again, and take the massive incentives for fraud out if it by making it pay not much more than any other industry."

The point here is that when the natural inclination of the market, given money, is to do the wrong thing, you have to very specifically spend the money on the right thing. Monetary policy right now doesn’t work, because it tells people to "go ahead and do what you’re doing". Tax cuts don’t work, even if targeted, because they say "if you feel like it". Spending directly on doing exactly what needs to be done, that works. Now a good liberal, also a good free marketer, knows that you don’t want to do this all the time, that in many cases the market is better, or monetary policy is better. But he understands that sometimes the free market can’t save itself; that sometimes if you want the right thing done, you’ve just got to do it and not futz around.

Oh, I know all of this is a dream. Obama’s not a liberal, despite all the screaming. That’s not his fault, there’s hardly a liberal left in America. As I like to joke, "Americans wouldn’t know a liberal if he gave them universal health care". And some will say that if Obama was a liberal, he couldn’t be elected, though frankly, after this campaign, I think that’s a weak argument.

But, because Obama isn’t a liberal, what he’s going to do is do neo-liberalism, aka:Reaganomics, one more time. One more roll of the dice at the land casino. It won’t work, and in a few years we’ll be back here again.

And then we’ll find out whether or not Obama can learn from experience. Most people can’t, really, they just repeat the same mistakes over and over again. But some can. FDR did, he tried something and if it didn’t work, he tried something else, and it was something genuinely different. Obama, it is said, models himself after the Kennedys, but I hope he’ll learn something from FDR as well.

Or it’ll be a long 4 years of failing Obamanomics, and then it may be something much worse.

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Ian Welsh

Ian Welsh

Ian Welsh was the Managing Editor of FireDogLake and the Agonist. His work has also appeared at Huffington Post, Alternet, and Truthout, as well as the now defunct Blogging of the President (BOPNews). In Canada his work has appeared in and BlogsCanada. He is also a social media strategy consultant and currently lives in Toronto.

His homeblog is at