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Restoring the Balance

Picking a new head for the National Economic Council is an important moment for the president's rapidly realigning staff. The old economic models are broken, and a little entrepreneurial populism is exactly what is needed.
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Picking a new head for the National Economic Council is an important moment for the president's rapidly realigning White House staff. It is an opportunity to do two very critical things at once going into the president's crucial final full year before the reelection campaign gets into full swing. The first of these is the most urgent project of this next year: finding some way in this badly damaged economy to start seriously generating some new jobs. The second mission is possibly even more important to the president's reelection and long-term political health and legacy: restoring the balance in the Democratic coalition.

Ever since William Jennings Bryan's "Cross of Gold" speech at the 1896 Democratic convention, after which the populists merged their movement and their party with the Democrats, the political party I am proud to call mine has on economic issues been an uncomfortable coalition of those working-class populists and urban business leaders. Woodrow Wilson was the first Democratic president to govern with this uncomfortable coalition, and he chose fairly evenly between the two. FDR and Truman were more clearly on the populist side, JFK was more in the middle between the two, and LBJ went more with the populists, but all of those presidents had significant business figures as part of their advisers and political coalition. Carter and Clinton both leaned much more heavily toward the business (increasingly Wall Street) wing of the party but both had more populist progressive advisers as well. Having smart guys like Joe Stiglitz and Bob Reich on the same side as me during those White House policy fights didn't mean we won half the time, but us progressives inside won a few rounds at least.

Flip to the transition period in late 2008. As the economy was on the verge of crashing around us, the president-elect decided to make his bet overwhelmingly with the Wall Street-oriented side of the party, the folks who were proteges and aligned ideologically with Bob Rubin. There were a couple of exceptions (Volcker and Jared Bernstein) but they were relegated to relatively minor positions. I had the sense at the time that Obama felt that he needed to have people who understood the financial sector and industry players really well, and that in a time of crisis he was looking for a team that wouldn't be too torn apart ideologically to make clear quick recommendations. But whatever the reasons, what had become the wing of economic thinkers with a sizable edge in the Clinton years became virtually the only view Obama has heard since he became president. With Tim Geithner's mentor and ideological twin Larry Summers leaving the NEC, now is the time to restore a measure of balance to the president's economic council.

The biggest reason that is so important is because of the jobs issue. The macroeconomic Wall Street-oriented guys like Geithner and Summers have never been focused on the specifics of how you produce jobs in the short term -- it is just not how they think. Macroeconomists think in terms of whether the GDP is going up or down, whether finance is flowing and the banks are healthy. They tend to think, as administration officials used to say ad nauseum until someone in the political team finally got them to stop, that jobs are a lagging indicator that will come back around someday, after the banks get more financially comfortable and start lending again. The problem is that the shock to this economy from the damage done by the financial crisis has made classical macroeconomics a dead-end street. Banks are more comfortable, but they are still not lending money because (a) there are a lot of toxic assets still on the books, (b) no one thinks main street businesses will be making money anytime soon, and (c) the Wall Street banks think they can still make more money in speculative trading than in boring investment.

The old economic models are broken, and a little entrepreneurial populism is exactly what is needed right now: someone with fresh ideas regarding how to spur manufacturing, how to jump-start new industries and companies. You need someone to provide a balance to Geithner's classical macroeconomic thinking, someone who wants to invest in middle class jobs not somewhere in the future when the economy has healed itself a lot more, but now. Right now. The president needs to face the fact that there aren't a lot of creative new ideas coming from the financial macroeconomists and Rubin proteges.

Here's what is also true on the political side: Whatever happens, there are few economic thinkers anywhere that believe prosperity and big job gains are right around the corner. We are very likely to still have an economy in the doldrums in the fall of 2012. If Obama stays with an economic team all drawn from the same crowd as he has now, and they all keep advising him to do the same things he has been trying all along, no one is going to give him any political credit two years from now. He has to be seen as FDR was in 1936: Things were still bad, but he was willing to keep trying and trying and trying some more on new ideas to spur the economy, and at least some working class folks -- Social Security recipients, WPA workers, etc. -- had a little bit of money to spend. If Obama brings in a new economic team with some new middle-class, jobs-oriented ideas, it will help him immeasurably in terms of keeping voters' patience. The other politically crucial thing it will do is that it will unite his party. The populists in the Democratic coalition -- labor, poor people, working-class women, immigrant laborers -- want to feel like their president is on their side, that he is taking chances and trying new things that will help them economically.

There are a lot of good candidates from the progressive populist wing of the party. A former Senator like Byron Dorgan or Don Riegle or Jon Corzine (in spite of being a former Goldman Sachs guy, Corzine is a serious economist populist). A former labor guy like the brilliant Ron Bloom, who is already in the administration. Lots of good economic writers and thinkers as well. But I know the administration wants to check either the former CEO box or the woman box in terms of their symbolic hirings, so let me throw one choice into the ring that fits one of those two boxes: Leo Hindery. I'll admit some bias, as he is a friend of mine. But the economist I respect as much as any other, Rob Johnson (who would also be a great candidate but doesn't want it), said to me the other day that he thought Leo was the best candidate he could possibly think of, and I have to agree with him. One of the most successful CEOs in the country over the last couple of decades, a great manager, a longtime writer on issues of manufacturing and trade, it would be hard for business leaders to say he wasn't qualified. Leo is a tried and true populist, a close friend of the labor movement, in spite of being a retired CEO. He has great political relationships on Capitol Hill and a good working relationship with new White House COS Pete Rouse. The only political downside, if you can call it that, is that he has been a critic of White House economic policy, but I think hiring him would show that Obama was open to new ideas.

Leo is not the only good candidate, but hiring him or someone like him, someone who will restore balance to the president's economic team and political coalition, and someone who will walk in the door with a raft of fresh ideas that Geithner and Summers haven't been thinking about, would go a long way in getting the president ready to take on the economic challenges of the next two years. The bottom line for me isn't a particular candidate, it is that the president understands that he, his party and governing coalition, and our country need an NEC head who is not tied to traditional Wall Street-oriented ideas about the economy, or someone from corporate America that isn't bothered by the outsourcing of jobs and the trade deficit. We need an NEC chair who has a track record of caring passionately about manufacturing jobs, our crumbling infrastructure, our trade deficit, and new approaches to creating good paying jobs for middle and working-class Americans. Having someone like that to run the NEC to balance Geithner's macroeconomic financial sector orientation at Treasury is crucial to rebuilding our economy, and to rebuilding confidence in this administration that they care about the middle class who has lost so much in the last ten years.

Update: This post was written yesterday before I had the chance to look at the stunning NYTimes story in this morning's paper. Entitled "Cheap Debt for Corporations Fails to Spur Economy", it summarizes better than anything I could write why the classical macro-economic model embraced by the Bob Rubin wing of the Democratic Party is not working in the deeply damaged economy of 2010. The article describes how one major corporation after another is borrowing "vast sums of money for next to nothing- simply because they can", but instead of using that borrowing to invest and create jobs, they are using it to (a) stockpile cash against worries of future weakness in the economy; (b) invest in new technology that allows them to "be more efficient and cut jobs"; (c) lower their next year's tax bill; (d) buy long term bonds (in one case mentioned, a 100 year bond); and (e) finance new mergers and acquisitions.

In case you are keeping track at home, none of those 5 things creates jobs or benefits workers.

The old economic model is fundamentally broken, torn apart by the incredibly deep damage done to this economy by the last decade of erosion of middle class buying power, and the Bush recession and financial market collapse of 2008. We need an NEC head who will bring fresh ideas and a different economic model to the administration.

Cross-posted at my home blog,, where you can read all of my writing on economics and the Obama administration.

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