Dear David,
President Obama faces two huge challenges in the next few months. One is dealing with the reality of an impending depression. It will take much stronger medicine to avert a depression than the measures taken to date, and the president needs to rally public opinion if he is to persuade Congress to act at the necessary scale.
The related challenge is about appearances -- about whether middle America feels that the federal outlays are trickling down to regular people. So far, bankers seem to be getting too much and Main Street too little.
The two challenges are related. If the solutions are not bolder, they won't cure the crisis. If the public isn't persuaded of the need, Congress won't act. If the economy keeps sinking, the people will lose confidence in the president's leadership.
And if President Obama doesn't boldly address both challenges, his presidency is in trouble. I take heart from some of the subtle shifts in the president's positioning in recent weeks, but he needs to go farther, and move faster.
At the core of both problems is the sinking economy and the fact that he hired a team of orthodox economic advisers to fix it. A radical crisis requires radical solutions, but the economic team has been far behind the curve in the remedies it has put forward, both in the reality and the optics.
The Reality: To prevent a slide into depression, you will need to spend roughly another three trillion dollars of public money in order to pay for a second stimulus package (at least a trillion) and to recapitalize the banking system (as much as two trillion.) Neither Congress nor public opinion is remotely prepared for that action yet. No one but the president is capable of the kind leadership necessary to move public opinion in this direction, and Barack Obama is a better teacher than most presidents. But that money needs to be understood as practical help for ordinary American families, not as more bailout for the culprits who created the mess.
Faced with three trillion dollars in additional needs, the administration has only $350 billion at its disposal -- the as yet unspent TARP funds. Right now, the administration seems to be trying to spend that money several times over -- first as an equity guarantee to anchor more borrowing from the Federal Reserve as the core of Tim Geithner's latest bank rescue; then as a source of public funds for the auto restructuring; and again as part of the plan to refinance mortgages and prevent foreclosures. This string is more than played out. There are limits, financially and politically, to the use of the Fed as all-purpose piggy-bank. At some point very soon, Congress needs to be brought back in, because your efforts require both Congressional support and a lot more real money. And Congress will only act if the people understand the stakes.
The political reality is that the economy needs to be on the mend by mid-2010, or the Democrats will lose seats in the mid-term election. But most informed observers think that if present trends continue, the economy will not be in recovery by Election Day 2010. If the Republicans eat into what is now a bare working Congressional majority, you will face legislative gridlock. And the perception of a weakened presidency will become a reality -- portending even worse political news for the president's re-election in 2012.
Right now, the president has enlisted some Republican governors like Charlie Crist urging diehard GOP legislators to back his program. That's a trifecta. It splits the opposition party, reinforces the perception of Republican obstructionism in Congress, and vindicates the president's bipartisan overtures. Well done! But this will last only as long as President Obama's program seems to be working.
The Appearances: As you must know, President Obama is at grave risk of getting on the wrong side of a populist backlash, which the Republicans -- however improbably -- will exploit. Regular Americans are losing savings, incomes and jobs, and see vast sums from bank rescues going mainly to bankers. A USA Today/Gallup poll published Monday shows that 83% of Americans favor federal aid to create jobs, 67% favor aid to states in financial trouble, and 64% favor relief to homeowners facing foreclosure. But only 39% favor aid to banks. I recently gave a speech to a blue collar audience, and one questioner asked why they didn't just mail a check for $100,000 to every American family instead. Far fetched as that sounds, the seven trillion dollar cost about equals the direct and indirect costs of the serial bank bailouts (counting advances and guarantees from the Fed.) In days ahead, you will be hearing more of this on talk radio and cable TV.
You already grasp the need for better symbolism on this front. The limit on executive pay for top bankers getting federal relief is a good start. But the public expects a lot more. In the public mind, the bank bailout is conflated with the stimulus package; and what gets the publicity is the fact that the relief is going mostly to bankers, bank shareholders, and bondholders.
It did not help that Tim Geithner went on stage before his plan was ready for prime time. The plan laid an egg on Wall Street, but the financial market is not the only audience that matters. Geithner's approach is also increasingly unpopular with ordinary people and with commentators. The fact that Geithner's latest housing rescue also channels the relief through banks and bondholders, and solves only a fraction of the foreclosure crisis, does not help either.
The week that the 2008 election campaign locked in your favor, was, in retrospect, a very close call. That was the week of September 29, after candidate Obama had announced that even though the bank bailout bill was not perfect, he would support it. A large majority of House Republicans, meanwhile, refused to support the bill. Their mail and phone calls were running a hundred to one against the measure.
As you will recall, John McCain clumsily announced the suspension of his campaign and dramatically returned to the Senate, where he played no useful role whatever. When the dust settled, the White House rounded up just enough Republican votes over rank and file GOP opposition, and Barack Obama looked like a statesman while McCain looked like an inept opportunist. But had McCain behaved as a more adroit demagogue and played to the latent populism in the backlash against the bill, he could have been the net beneficiary while painting Obama as the "elite" agent of the banks. Given the close Republican alliance with Wall Street and McCain's own prior record, the claim would have been preposterous, but politically it might have worked.
There will continue to be this sort of risk going forward. Republicans will posture as pseudo-populists. The administration's emergency measures both need to cure the economic collapse -- and to do so by symbolically and palpably siding with regular people.
With all of these alarms, there is still a lot that I find encouraging about the president's actions in recent weeks.
Item: President Obama's event January 31 launching the task force on middle class working families chaired by Vice President Biden was superb, and the president's remarks were spot on. Among other things, he declared:
We know that you cannot have a strong middle class without a strong labor movement. We know that strong, vibrant, growing unions can exist side by side with strong, vibrant and growing businesses. This isn't a either/or proposition between the interests of workers and the interests of shareholders. That's the old argument. The new argument is that the American economy is not and has never been a zero-sum game. When workers are prospering, they buy products that make businesses prosper. We can be competitive and lean and mean and still create a situation where workers are thriving in this country.
We have not heard language like that in the Oval Office since Franklin Roosevelt. And the Employee Free Choice Act, if enacted, would not just create a stronger labor movement but a stronger constituency for the Obama administration and future progressive electoral majorities. It puts the president on the side of working Americans.
Item: I noted with great interest a most unusual front-page piece in the New York Times February 10, headlined, "Geithner Said to Have Prevailed on the Bailout." In this piece, you and unnamed officials were quoted to the effect that Geithner had won the argument inside the administration against more severe executive pay limits and other tough conditions on banks receiving additional government aid.
What made this piece so interesting is that it deliberately publicized a split in a team famous for self-discipline and for never leaking anything about internal disputes. A blunter translation of the leak might be "You won that one and good luck, Tim, this baby is all yours." I certainly hope that's what you meant, because the baby is something of an orphan that nobody wants to claim. And if Geithner is not doing the job in a way that protects the public interest and the president, he certainly deserves to be isolated. Unless he improves on his performance to date, I would not be surprised if in six months, Geithner "decided" to resign to spend more time with his family.
It will be interesting to see whether the center-right economic team who took senior posts in the campaign and then got the top jobs in the administration learns how to get with a bolder program. If they don't, it is up to the political team to re-educate them or to find people who get it right. I certainly hope you and the president are also talking to people who have a more radical view of how to fix the banking system, like Joe Stiglitz, Nouriel Roubini, Dean Baker, James Galbraith and Paul Krugman. The fact that people like Alan Greenspan and Sen. Lindsey Graham have said that bank nationalization might be necessary certainly gives the president some cover.
Item: In early February, the president's economic advisers came up with the idea of a White House summit on fiscal responsibility, which was held this Monday, February 23. The idea was to reassure fiscally conservative Blue Dogs and lay the groundwork for a "grand bargain" long promoted by Robert Rubin, Pete Peterson, and some in Congress to pay for the sins of emergency deficit spending this year and next by cutting back on Social Security and Medicare down the road. The preferred vehicle to bring this about was a bipartisan commission modeled on the base-closing commission. It would come up with a plan for automatic triggers for cutbacks in social insurance, and would be subject only to an up or down Congressional vote.
But someone failed to run the political traps. There was plenty of consultation with the Blue Dog Democrats and with some senior Republicans, but nobody thought to tell Nancy Pelosi or Harry Reid. Senior Congressional Democrats, among them Senate Finance Committee Chairman Max Baucus, who is nobody's idea of a fiscal wastrel, warned the president that this was no time to be cutting back on Social Security and Medicare or putting government on bipartisan automatic pilot.
To his credit, the president changed the character of the White House summit, and preempted it with a budget briefing for reporters on the administration's commitment to being the deficit back below three percent of GDP by 2013 -- by letting the Bush tax cuts expire and by finding other revenue -- not by gutting social insurance. Despite a lot of rhetoric about bipartisanship, the idea of a commission is off the table. Congratulations on preventing what might have been a political debacle and seizing the fiscal high ground.
Item: It has been a real pleasure to see President Obama get out of the Washington bubble and get back on the road. His speech in Springfield, where the campaign began, marking the two-hundredth anniversary of President Lincoln's birth, was one of his finest. And he articulated the themes that must be persuasive to Americans if he is to save the economy and his presidency.
In that speech, he challenged "the philosophy that says every problem can be solved if only government would step out of the way; that if government were just dismantled, divvied up into tax breaks, and handed out to the wealthiest among us, it would somehow benefit us all."
And he added:
"Such knee-jerk disdain for government - this constant rejection of any common endeavor -- cannot rebuild our levees or our roads or our bridges. It cannot refurbish our schools or modernize our health care system; lead to the next medical discovery or yield the research and technology that will spark a clean energy economy.
"Only a nation can do these things. Only by coming together, all of us, and expressing that sense of shared sacrifice and responsibility -- for ourselves and one another -- can we do the work that must be done in this country. That is the very definition of being American."
I hope we hear a lot more of this.
Before the economy moves toward recovery, we will need a very different strategy for reviving a functioning banking sector -- one rebuilds a simplified financial system to serve the real economy. The current approach is more about saving existing zombie banks, and the people notice. You can call it receivership or nationalization, but sooner or later the president will have to embrace it, and it is better done sooner.
We also need a plan to prevent foreclosures that goes directly to help homeowners, rather than hoping that by giving more incentives to banks and bondholders we can somehow induce them into passing along some relief -- a plan that helps homeowners directly. I think the political team gets that. Either the economic team needs to get it, or you need to get a different economic team.
There is the further challenge of branding the practical help that the Obama administration is already providing. Franklin Roosevelt had the blue eagle of the NRA plastered in every store window. And when jobs came via the CCC or the WPA, nobody doubted who was the author of that help. For now, even though $780 billion is a lot of money, it passes through so many hands before it finally reaches local communities that it isn't branded as help from President Obama. You are probably better equipped to figure out that one than I am, but it is another challenge.
In closing, let me say that during the campaign I wrote a lot of commentary, sometimes back-seat-driving what you were doing. Nine times out of ten when I second guessed your tactics, you were already several steps ahead of me. You're a stellar political strategist. However, you now have the added challenge of governing, and of governing on the edge of a depression with a team of economic advisers that is sometimes more of an echo of the past than an asset. You don't have much margin of error, and you need to get the politics right in order to get the economics right. We all need you and President Obama to succeed.
Robert Kuttner is co-editor of The American Prospect and a senior fellow at Demos. His best selling book is "Obama's Challenge: America's Economic Crisis and the Power of a Transformative Presidency.