The New New Deal Page 6
Like most liberals, Obama believed public education was underfunded. As a boy in Hawaii, he received a scholarship to a posh private academy, a springboard to the elite institutions of higher learning he attended with the help of federal student loans. As an organizer in Chicago’s ghetto, he saw a darker side of education, working in over-crowded schools that lacked textbooks and toilet paper, schools where computers seemed like unimaginable luxuries, schools where malnourished and illiterate children lost their innocence. And as a senator, he heard kids denounce budget cuts that ended their day at 1:30 P.M. “They wanted more school,” he marveled.55 So as a candidate, Obama promised more money to renovate schools, expand early childhood education, and make college more affordable.
At times, though, Obama strayed from the traditional liberal script, warning that money alone would not clean up the mess.
In Chicago, Obama had seen too many undereducated kids, and too many burned-out teachers and administrators who made excuses for habitual failure. “Few of these educators sent their own children to public schools; they knew too much for that,” he wrote.56 “But they would defend the status quo with the same skill and vigor as their white counterparts of two decades before.” They spoke of “these kids,” not “our kids,” as in “these kids can’t learn.” They blamed drug-addled parents, gang-infested neighborhoods, “the system.” It’s tough to get Obama mad, but they managed. When he saw These Kids with absentee fathers, living with grandparents and single moms, relying on food stamps—kids, in other words, like the young Barack Obama—he wanted to make sure they got the same chance to thrive.
“It’s more than an intellectual issue for him,” says his pickup basketball buddy Arne Duncan, the former Chicago schools chief who became his education secretary. “It’s personal. It’s visceral.”
Obama concluded that bold reform—paying teachers based on student performance, promoting charter schools, forcing schools to meet higher standards, demanding accountability through measurable results—was the only hope for These Kids. So even though it was blasphemy to powerful Democratic teachers unions, he supported the lofty goals of Bush’s No Child Left Behind law, like putting excellent teachers in every classroom, as well as its accountability measures, like new powers to shut down failing schools. No Child was also a rare example of the bipartisan cooperation Obama admired, a compromise that Bush crafted in 2001 with Ted Kennedy and the leaders of the House education committee, conservative Republican John Boehner of Ohio and liberal Democrat George Miller of California. “Crazy me, I thought a new president deserved a chance to succeed,” Miller recalls.
No Child swiftly became unpopular—partly because the Republicans never funded it, partly because parents and teachers loathed its standardized tests. During the campaign, Obama fired up Democratic crowds with swipes at Bush for “labeling a school and its students as failures one day and then abandoning them the next.”57 But he never said No Child was a bad idea. He called it a “starting point.”
He was a bit slippery about the ending point. Education reformers loved his rhetoric about accountability and charters, and his heretical suggestion that ineffective teachers should lose their jobs. They took heart in his friendship with Duncan, a hero of the movement. But they weren’t sure how hard he was willing to fight the defenders of the status quo in his party. They knew that behind the scenes, he had warned the reformers on his team not to “poke the unions in the eye,” and a few of his advisers were old-guard union sympathizers. His speeches tended to emphasize more-money carrots rather than get-tough policy sticks. And he seemed suspiciously optimistic about “collaboration,” as if bringing together teachers, administrators, and other stakeholders could magically overcome obstacles to student achievement.
But he did talk purty. He waxed lyrical about education as the rocket of opportunity that launched the biracial son of a teenage mom to the U.S. Senate, the safeguard for America’s meritocratic idea that you don’t need to be born rich to get ahead: “I’m running for president to give the young sisters out there born with a gift for invention the chance to become the next Orville and Wilbur Wright; to give the young boy out there who wants to create a life-saving cure the chance to be the next Jonas Salk; to give the child out there whose imagination has been sparked by the wonders of the Internet the chance to become the next Bill Gates.”58 Knowledge was the currency of the information age, and Obama described school reform as the only way to prepare kids for a wired economy where they’d compete with anyone with an Internet connection anywhere in the world. While two thirds of all new jobs required higher education or advanced training, our percentage of young adults with college degrees fell “somewhere between Bulgaria and Costa Rica.” China was graduating four times as many engineers. We couldn’t keep doing the same things—giving inept teachers life tenure, propping up dropout factories, dumbing down standards to put smiley faces on mediocrity—and expect different results.
Our schools, Obama said, “will help determine not only whether our children have the chance to fulfill their God-given potential, or whether our workers have the chance to build a better life for their families, but whether our nation will remain in the 21st century the kind of global economic leader we were in the 20th century.”59
That was Obama’s general critique of the Bush economy: Ordinary families were losing ground, and the United States was losing its edge. Energy, health care, and education were big parts of the problem—but not the whole problem.
The Economy: “We’re All in This Together”
Obama opened his first major economic speech with another FDR story.60 Speaking at Nasdaq headquarters in September 2007, he reminded his audience of financial executives that seventy-five years earlier, as the Depression raged, Roosevelt had called for a national “reappraisal of values” in a San Francisco campaign speech. “This vision of America would require change that went beyond replacing a failed president,” Obama pointedly recalled. Just as FDR replaced Herbert Hoover’s you’re-on-your-own ethic with a spirit of common purpose, “the idea that we’re all in this together,” Obama wanted to replace Bush’s Ownership Society with a renewed commitment to shared prosperity.
Again, the media focused on Obama’s in-your-face challenge to Wall Street to accept stricter oversight. But again, his deeper message was his call for a new reappraisal of values. The stock market had just hit an all-time high, but wages had been flat throughout the Bush years, with income inequality reaching its highest level since the Gilded Age.61 The average CEO made almost as much per day as the average worker made per year, and the manufacturing sector was at its lowest employment level since 1950; Obama spoke of laid-off factory workers competing with their teenagers for minimum wage jobs at Walmart. And new data had just revealed the first monthly job losses in four years. If an upturn had failed to boost the middle class, what would a downturn do?
“We certainly do not face a test of the magnitude that Roosevelt’s generation did,” Obama said. “But we are tested still.”
At the time, a long-simmering mess involving dodgy subprime mortgages had just boiled into the broader markets. While Federal Reserve chairman Ben Bernanke had assured Congress the subprime chaos “seems likely to be contained,” and Bush was still predicting “high growth” for 2008, the United States had just entered the first stage of the worst financial implosion since the Depression.
But nobody knew that yet. When Obama visited Wall Street, his economic focus was still the long term. And his economic strategy was giving a break to the middle class, as well as low-income workers hoping to join the middle class. Bush’s trickle-down approach had produced spectacular profits for oil companies and health insurers, as well as the bond traders and investment bankers in the audience at Nasdaq, but too many Americans were struggling to pay their bills.
“That pain,” Obama warned, “has a way of trickling up.”
It wasn’t Bush’s fault that U.S. corporations kept outsourcing work to countries with cheap labor and
lavish government incentives, replacing workers with robots and other technologies that didn’t demand pensions, and showering bonuses on CEOs who slashed payrolls. Like our dirty energy habit, broken health care system, and declining schools, those trends all predated the Bush presidency. The days when a high school dropout could land a factory job and enjoy middle-class security on a single income with the same employer for the rest of his life were long gone, and Obama never claimed he’d bring them back.
Obama’s critique of Bush was not that he created these long-term challenges, but that he ignored them—and sometimes made them worse. The heart of the critique was the reverse Robin Hood effect of Bush’s 2001 and 2003 tax cuts, which vaporized the surplus he inherited from Clinton to give wealthy people their money back. Bush returned more cash to the top 1 percent of taxpayers than the bottom 80 percent combined—the same top 1 percent that enjoyed almost two thirds of all U.S. income gains during his presidency.62 Families earning over $3 million a year received over 450 times as much as the median taxpayer, and the genetic-lottery-winning heirs of the super-rich received multimillion-dollar windfalls from the near-elimination of estate taxes. Meanwhile, the 35 million low-income workers who didn’t earn enough to pay income taxes but were still on the hook for Social Security and Medicare payroll taxes, gas taxes, and other taxes received zilch. In a speech at Brookings the day after his Nasdaq talk, Obama recounted what his wealthiest campaign adviser, the billionaire investor Warren Buffett, had told him: “If there’s class warfare going on in America, then my class is winning.”63
Bush’s theory, the Republican Party’s theory, saw taxes on investors and businesses as the ultimate drag on growth. But that philosophy had flunked a series of reality tests. Republicans had thundered that Clinton’s modest tax hikes on high earners would tank the economy, and had crowed that Bush’s tax cuts would unleash a boom. Then impressive growth throughout the Clinton years gave way to anemic growth during the Bush years. What was the point of showering all that money on “job creators,” as the GOP called top-bracket taxpayers, if they weren’t going to create jobs? In The Audacity of Hope, Obama suggested that when your drapes cost more than an average worker’s yearly salary, you can afford to pay a bit more in taxes so that every child has the same opportunities.64 At Brookings, he proposed to end all the Bush tax cuts targeting the upper brackets, while closing tax loopholes for hedge fund managers, oil companies, and other well-wired interests.
But Obama had no intention of campaigning as a tax hiker. His marquee proposal was a “refundable” tax credit for 95 percent of American workers, including those 35 million workers who didn’t earn enough to pay income taxes. Unless your income was in the top 5 percent, Obama would refund $500 of your payroll taxes, up to $1,000 per family. He called it the Making Work Pay credit, because it would swing the pendulum back from rewarding wealth toward rewarding work.
The Beltway was not impressed. Columnists like Ruth Marcus of the Washington Post dismissed Making Work Pay as an $80 billion pander, “more of the same old Democratic campaign playbook.”65 What kind of hypocrite attacks Bush for creating deficits with unaffordable handouts to the rich, then argues for expanding those deficits with unaffordable handouts to everyone else? But Obama thought it was only fair to return some cash to the families still waiting for Bush’s handouts to the investor class to trickle down. And he suspected that when those families felt insecure about their homes and jobs, when their costs and debts increased faster than their wages, the rest of America’s consumer-driven economy would eventually suffer—including the investor class. Making Work Pay was a first step toward getting prosperity to trickle up again, to do a better job of growing the pie as well as sharing the pie.
“In this modern, interconnected economy,” Obama said at Nasdaq, “there is no dividing line between Main Street and Wall Street.”
This thinking now represented a near-consensus within the Democratic Party. In the 1990s, a battle had raged between the party’s Wall Street wing of corporate-friendly, deficit-conscious centrists, led by Robert Rubin at Treasury, and its Main Street wing of union-friendly, fairness-conscious liberals, led by Robert Reich at Labor. Politically, Rubin won the “battle of the Bobs,” persuading Clinton to focus on balanced budgets; Reich’s pleas for public investments were largely ignored. But intellectually, after Reich retreated to Berkeley and Rubin landed at Citigroup, the Bush era’s combination of fiscal irresponsibility and growing inequality created a cease-fire. By 2007, even the fierce market economist Larry Summers, Rubin’s ally and successor at Treasury, had concluded that middle-class insecurity was “the defining issue of our time,” warning that the widening chasm between the rich and everyone else threatened the capitalist system. A magazine profile about “Larry Summers’s Evolution” noted that he “sounds, strangely enough, a little like Bob Reich.”66
Sure, Summers was trying to reinvent himself as a Democratic wise man after a furor over his overly provocative remarks about women in science had forced him to resign the Harvard presidency. But he hadn’t changed. The country had changed. He didn’t have to be warm and cuddly to see that the economic tide was only lifting yachts. And the surpluses he and his fellow Rubinites had worked so hard to build had been frittered away—not on the Reich-style spending schemes they had spent so much time fighting, but on givebacks to the well-off and a quagmire in Iraq. In retrospect, investments in crumbling infrastructure and middle-class security no longer seemed so profligate. At least the country would have had something to show for them.
So these days, most Democrats sounded a little like Bob Reich, and Obama was no exception. Even without a surplus, he believed we needed to make strategic investments to outcompete our economic rivals. And if “strategic investments” sounded like Democratic code for “big spending,” that didn’t mean they weren’t needed.
His investment strategy began with the first three pillars of that “new foundation for growth,” lowering energy, health, and tuition costs while nurturing the clean-energy sector, computerizing the medical sector, and modernizing the education sector. But it extended wherever he thought public dollars could boost long-term output. He proposed to double spending on research, to make sure we would still lead the world in innovation. He aimed to double support for domestic manufacturing, to make sure we would still make stuff in America.
After fiascos like the levee collapses in New Orleans and a bridge collapse in Minneapolis, Obama also pledged to upgrade our infrastructure, from congested roads and runways to deteriorating dams and sewers. He was especially keen on new-economy infrastructure like broadband and high-speed rail; our global ranking for high-speed Internet access had plunged from first to fifteenth, while our intercity passenger rail remained a global joke. Obama also promised better public works, not just more public works. The Bush era’s biggest infrastructure legislation, a $286 billion transportation bill called SAFETEA-LU, was a case study in bad governance, showering money on states without regard for national needs, financing new sprawl roads in sparsely populated areas while neglecting repairs to crowded urban transit systems. It was larded with a record 6,376 pet-project earmarks like the infamous Bridge to Nowhere inserted by Alaska congressman Don Young, who also named the entire bill for his wife Lu. Obama proposed to supplement the traditional asphalt-industrial complex with an independent “infrastructure bank” that would select projects by merit, a radical concept in this porky sector.
On the surface, America still seemed okay. The Dow was soaring. Unemployment was below 5 percent. But Obama saw our rickety bridges, slow trains, and obsolete grid—as well as our dropout rates, health-induced bankruptcies, and flat wages—as evidence of a country falling apart. We had done a swell job helping billionaires buy drapes, but we had neglected our common interests. We had failed to fix our national roof while the sun was shining, and now it looked like rain.
Obama was always careful to point out that government couldn’t solve every problem. But he knew from his own expe
riences with food stamps and student loans how Uncle Sam could help bring the American dream within reach. He also knew from history how government had helped launch high-growth, high-wage industries like aerospace, semiconductors, and biotech. And as much as he admired the free market, he didn’t see how it could fix our leaky pipes. He was convinced that some market failures would never be solved without government.
And the worst market failure since the Depression was coming soon.
— THREE —
The Collapse
Larry Summers liked to say that in economics, things take longer to happen than you think they will, and then happen faster than you thought they could.
By December 2007, bad things were starting to happen. The construction industry had stopped constructing. Lenders weren’t lending. The economy had slipped into recession, although no one knew that yet; the Blue Chip forecast, the conventional wisdom of the econometrics world, still expected modest growth in the coming year. National Review supply-sider Larry Kudlow was still crowing that “the Bush boom is alive and well,” ridiculing “the doom and gloom from the economic pessimistas.67 … These guys are going to end up with egg on their faces.” But Summers, a leading pessimista, was already warning of a “perfect storm,” perhaps the worst recession since the early 1980s. In a speech at Brookings, he suggested his own doom and gloom might even be overly optimistic: “History has cautioned that situations like the current one are likely to surprise on the downside for a considerable time.”68
In Washington, the conversation had turned to short-term stimulus, as it did whenever the economy turned sour. At the time, countercyclical Keynesian stimulus, a staple of introductory economics classes, was not overly controversial. Almost everyone seemed to agree that when the goods-and-services engine known as aggregate demand stalled, government could help get it humming again by injecting money into the economy, either by taxing less or spending more. All the major presidential candidates were assembling fiscal stimulus plans. Republican Mitt Romney proposed the most aggressive plan, $250 billion worth of tax cuts; he also criticized McCain’s call for short-term spending cuts as the opposite of stimulus.69