To say that President Obama will face daunting challenges is
stating the obvious. What is less obvious, however, is that these challenges
also represent opportunities for change in favor of peace and economic security
The dire economic circumstances and the urgent need for
change have placed both the moral force and the potential power of the American
people on the side of a radical reformer in a progressive direction. Even the
U.S. ruling class, badly shaken by the failure of the trickle-down economics,
and driven by the desire to save capitalism from itself, is now open to the
idea of extensive economic changes. So, the question, once again, is what kind
There are strong indications that, in the absence of
sustained and overwhelming pressure from below, President Obama will not
initiate reforms beyond the restructuring schemes of the ruling plutocracy -- schemes
that are dictated primarily by the needs of market profitability, or capitalist
survival. This is clearly reflected in his choice of economic advisors and his
wholehearted support for the Bush administration�s criminally fraudulent
bailout scheme of the Wall Street financial gamblers.
Evidence shows that momentous historical changes often take
place during or as a result of deep social and economic crises. These include
not only transformative socioeconomic revolutions such as the great French
revolution of 1789 or the Soviet Revolution of 1917, but also some of the major
reforms in the United States, such as the New Deal reforms of the 1930s or the
�supply-side� restructuring policies of the 1980s.
An essential characteristic of capitalism is that it grows
in an erratic, contradictory, and cyclical pattern. Alternating periods of boom
and bust are rather well established in the history of advanced capitalist
economies. Economists make a distinction between the short-term or �usual�
business cycles, ranging from a few to several years, and the longer industrial
cycles of a few to several decades known as long waves or �Kondratieffs,� after
the Russian statistician who systematically chronicled such historical
The U.S. economy has since the mid 19th century experienced
a number of such long cycles: the 1848-97 cycle (consisting of 1848-73
expansion, 1873-97 contraction), the1897-1937 cycle (1897-1929 expansion,
1929-37 contraction), and the 1948-1982 cycle (1948-73 expansion, 1973-82 contraction).
The fourth long cycle, which began in 1983 and continued to expand until 2000,
is now in decline .
Mainstream theories attribute the alternating periods of
boom and bust in the long economic cycles to the metaphorical �invisible hand�
of the market mechanism: both upturns and downturns are automatically brought
about by purely endogenous, �self-correcting powers� of the market system.
While this may be true for the change or turn from expansion to decline, the
reverse is not true; that is, the turn from long waves of contraction to those
of expansion is not automatic -- it requires government intervention.
During periods of expansion and prosperity, champions of
laissez-faire economic doctrine tirelessly flaunt the magic and the blessings
of the �invisible hand� of the market mechanism. Accordingly, and just as
tirelessly, they warn governments against any intervention in economic affairs.
But when long expansive cycles turn into long depressive
cycles that make the market system vulnerable to social turmoil, business and
government leaders dispel all pretensions of deferring the management of the
economy to Adam Smith�s �invisible hand� and, instead, rush to the rescue of
the system with all kinds of reforms and restructuring schemes.
These include not only domestic measures of legal, economic,
political and institutional restructuring, but (at times) also foreign policies
designed to facilitate or capture new markets and investment opportunities
abroad. The fate of the capitalist system is integrally intertwined with its
ability to weather the challenges posed by such �menacing� long periods of
Long periods of crises can be menacing to the established
order because the outcome of the underlying crisis-management strategies, of
institutional overhauls, and of class struggles are neither pre-determined nor
predictable. Economic, socio-political and institutional changes in response to
long periods of crises, at times, develop in relatively autonomous, random, and
uncontrollable ways that could place the capitalist system at fateful
crossroads, including the road to socialism and the road to war and fascism.
Diehard fanatics of laissez-faire doctrine aside,
�far-sighted� capitalist establishment understands the gravity of such ominous
long periods of crisis. And that is why, depending on the concrete
circumstances of the crisis period (especially the degree of the pressure from
the grassroots, or lack thereof), their restructuring policies can be vastly
different -- ranging, for example, from the New Deal economics of the 1930s to
the trickle-down Reaganomics of the 1980s.
A brief comparison and/or contrast of the forces behind the
New Deal economics of the 1930s with those behind the neoliberal �trickle-down�
economics of the 1980s can be helpful to an understanding of why, left alone
(i.e. in the absence of a sustained and effective pressure from below), the
changes that will be initiated by the Obama administration will be more
favorable to the kleptocracy than the overwhelming majority of the American
It is obvious that the sheer severity of the current crisis
has already forced a �job creation� stimulus package of public works projects
on the agenda of the Obama administration. The question is how the projected
investment in the long neglected infrastructure will be carried out.
Will it be directly financed and supervised by the federal,
state and local governments, including strict guidelines, rigorous reviews of
projects, public oversight, streamlining of the processes,
and competitive bidding -- similar to FDR�s Works Progress Administration of
the 1930s? Or, will it be the kind of the wasteful outsourcing and crony
contracting that has become the hallmark of �rebuilding� New Orleans, or Iraq?
1. The Great Depression of the 1930s and the New Deal
The economic crash of 1929 and the ensuing long depression
resulted from a complex set of factors. A discussion of those factors is beyond
the scope and focus of this study. Whatever its causes, the fact remains that
the depression made living conditions for the overwhelming majority of people
Economic hardship prompted popular unrest. Large numbers of
the unemployed and economically distressed frequently took to the streets in
the early 1930s. Their desire for change swelled the ranks of socialist,
communist, and other opposition parties. Left activists gained certain
influence among labor ranks, and workers� movement for unionization, illegal in
many industries until 1935, spread rapidly. Here is how the late Studs Terkel
describes that turbulent situation:
In the early thirties, there was a resurgence of an almost
dead labor movement. There were various radical activities: the Trotskyites up
in Minneapolis, the communists over there in Toledo, the Socialists there,
Wobblies in Cleveland, Detroit and so on. The union literature was like the
labor literature of a century ago -- looking toward a successor to capitalism.
. . . The literature carried a vision .
Labor and other grassroots� support for third party
candidates in the 1932 presidential election resulted in unprecedented number
of votes for those candidates. Third-party votes were even more impressive in
congressional and local elections .
Business and government leaders clearly understood the
gravity of the situation and the need for reform to fend off revolution:
�F.D.R. was very significant in understanding how best to lead this sort of
situation. . . . The industrialists who had some understanding recognized this
right away. He could not have done what he did without the support of important
elements of the wealthy class� .
The core principle of the ensuing big business-government
consensus reforms, known as the New Deal, was that government intervention must
be limited to stimulative and distributive measures, and that the management of
industries and businesses should be left to the private sector. While this
would provide relief to the economically hard-pressed, and thus reduce social
tension, it would also stimulate the economy and promise stable growth and
Judgments of the New Deal efficacy in terms of turning the
economic contraction of the 1930s to expansion are far from uniform. While the
majority of economic historians tend to (romantically) idealize and exaggerate
its effectiveness, others tend to err in the opposite direction by downgrading
the positive effects of the New Deal reforms.
Actual achievements of those reforms, however, seems to lie
somewhere in between: while the U.S. economy remained anemic until 1941, and
the long post-war expansion did not start until late 1940s, the fact remains
that the reforms did succeed in stemming the declining tide of the Depression
and restoring the waning confidence in the market and the government.
For the purposes of our discussion in this essay, the degree of the effectiveness of the New
Deal reforms is of secondary importance. The primary point is, rather, to show
that crisis periods also provide opportunities for change; and that meaningful
change in favor of the working class and other grassroots requires pressure
2. Stagflation of the
1970s and Reaganomics
The long economic expansion of the immediate post-World War
II period, known as the Golden Age of the U.S. economy, came to an end by the late
1960s and early 1970s. The expansion was then followed by a decade of economic
difficulties that came to be known as the �stagflation� of the 1970s, which
meant a combination of stagnation and inflation, or high rates of both
unemployment and inflation.
As the twin evils of stagnation and inflation dragged along
throughout the 1970s, and the purported �self-correcting powers� of the market
mechanism proved incapable of reversing the worsening economic crisis, the
ruling elites (once again) rolled up their sleeves and rushed to the rescue of
the bedeviled market.
The long contractionary economic cycle of the 1970s was, of
course, not nearly as severe an economic problem as the Great Depression of the
1930s. Accordingly, the economic hardship of the grassroots and, therefore, the
people pressure for reform was not as compelling or threatening to the
established order as it had been during the Great Depression.
These differences in the social and economic conditions
between the two crisis periods of the 1930s and 1970s help explain why the
reforms or restructuring measures that were implemented in response to the
Great Depression were more radical and more attentive to the needs of the
masses than those that were implemented in response to the economic difficulties
of the 1970s.
The overwhelming grassroots� reaction to the economic
hardship of the Great Depression, and the concomitant threat to the capitalist
order, had forced various factions of the ruling class to put their differences
aside and mobilize behind FDR�s New Deal reforms that, as mentioned earlier,
were designed to both rescue the capitalist system and alleviate poverty,
unemployment and economic distress.
By contrast, the neoliberal or supply-side restructuring
measures that were put into effect by the business and government leaders in
response to the 1970s stagflation took place nearly free of any significant
pressure from below. Not surprisingly, the interests of the workers and other
economically distressed classes were relegated to be served through the
so-called trickle-down economics.
In the absence of effective people pressure in the late
1970s and early 1980s, even a large segment of the Democratic Party, the
so-called Reagan Democrats, joined the Republican Party in an orchestrated
effort to undermine the New Deal and other safety net programs and promote
President Reagan�s �trickle-down� economics.
A cynical strategy (later acknowledged by David Stockman,
President Reagan�s budget director) to achieve this objective was to deliberately
create a huge budget deficit -- through a simultaneous increase in military
spending and a drastic tax cut for the wealthy -- so that cuts in social
spending would then be forced on the recalcitrant members of the Congress in an
effort to fill the budget gaps that were thus created.
The strategy worked: the sweeping supply-side tax cuts for
the wealthy along with drastic increases in military spending created huge
budget deficits that were then paid for through relentless cuts in social
spending throughout the 1980s. The regressive supply-side tax overhauls since
the early 1980s have led to an unprecedented redistribution of resources from
the bottom up.
The neoliberal restructuring schemes that started with the
arrival of Ronald Reagan in the White House also included an aggressive
deregulation of business. The deregulation campaign has since drastically
reduced the capacity of agencies like the Environmental Protection Agency
(EPA), the Occupational Safety and Health Agency (OSHA), and the Civil Rights
Commission to monitor the standards for business conduct. Deregulation has also
led to significant restructuring and increased concentration of riches and
resources in fewer and fewer hands.
The supply-side restructuring agenda has also included a relentless
anti-labor collaboration between the business and government leaders that has
led (among other baleful consequences) to an easier dismissal of union workers
and an equally easier hiring of the so-called contingency ones; enhanced
mobility of U.S. capital throughout the world; increased privatization and/or
outsourcing policies and practices; and, consequently, a cut in real wages and
benefits of about 15-25 percent since the early 1980s.
By the same token that the neo-liberal, supply-side restructuring
policies have been detrimental to the poor and working classes, to the
environment and social safety net programs, to public health and education, and
to the public or national infrastructure, they have been a boon to the wealthy
and the big business.
Not surprisingly, as a result of aggressive neoliberal
economic restructuring, which began as soon as President Reagan was
inaugurated, most U.S. corporations regained �healthy� profit rates by
mid-1983. The combined business-government efforts to revive corporate
profitability through supply-side economic policies thus achieved their desired
effects: labor costs in real terms fell, and the long declines of the 1970s in
productivity, profitability, and investment all turned into long expansions by
the mid-1980s -- thereby ushering in a new long wave of expansion that, with
few short-term declines (one in 1987-88, the other in 1991-92), continued until
3. Implications for the current recession and Obamanomics
conclusions can be drawn from this brief comparison/contrast between the
restructuring policies prompted by the Great Depression of the 1930s and those
prompted by the economic difficulties of the 1970s, that is, between the New
Deal Economics and Reaganomics.
The first conclusion is that, contrary to the widespread
myth of the self-correcting powers of market mechanism, long cycles of economic
decline cannot automatically change course from contraction to expansion;
rescue policy interventions are needed to turn them around, and save capitalism
from its own destructive dynamics.
The second conclusion is that rescue plans of such troubled
economies, or endangered capitalism, are often shaped not so much by abstract
presidential visions as they are by market or capitalist imperatives, on the
one hand, and the balance of political power of the conflicting socioeconomic
interests, on the other. It follows that, depending on the outcome of the
underlying class struggle, policy components of such rescue packages can be
If the pressure from below is strong enough to threaten the
established order, the interests of the grassroots will be taken into account
as part of the needed rescue plans -- as it happened during the Great
Depression of the 1930s and the resulting New Deal reforms.
Otherwise, business and government leaders will craft rescue
plans as they deem it most beneficial to the interests vested in big capital,
without much regard to labor and other grassroots strata -- as it happened
during the economic difficulties of the 1970 and the resulting trickle-down
What are the implications of these conclusions for the
economic policies of President-elect Barack Obama (also called Obamanomics)?
Details of Obamanomics remain to be seen when Obama arrives
in the White House. There are strong indications, however, that, so far, his
economic policy messages and projections fall way short of audacious or
pioneering. Indeed, they seem to be designed to project policy continuity and
stability, as desired by Wall Street.
This is clearly reflected in the composition of his team of
economic advisors who, having come from the current and previous
administrations, championed most of the policies of deregulation, privatization
and outsourcing that gradually led to the current market meltdown .
Obama�s preference for economic policy continuity is also
reflected in his wholehearted support for the fraudulent bailout schemes of the
Wall Street financial giants spearheaded by the Department of the Treasury and
the Federal Reserve Bank.
Obama�s promised change will be seen largely in non-economic
areas such as civil liberties, the environment, regulatory issues, race
relations, diplomatic protocols, and so on.
In the realm of economics, too, the Obama administration
will have to bring about some policy changes. This would consist largely of a
�job creation� stimulus package that would be geared to infrastructure repair
and expansion, especially in the areas of mass transit and public
transportation. Such an economic stimulus package, however, would be due to no
thanks to Obama, as it would be dictated largely by the dire socio-economic
conditions on the ground, that is, by market imperatives, or the mission to
The Obama administration will also have to introduce some
major changes in the financial sector. This would most probably include
nationalization of a number of major banks such as the Citigroup that are
technically bankrupt but their insolvency is (so far) not acknowledged -- banks
whose toxic assets are too huge to be bailed out .
Based on all the major signs and signals revealed thus far,
Obamanomics portends to be an amalgam of Herbert Hoover economics, New Deal
economics and Reaganomics.
The Hooverian component of Obamanomics is clearly reflected
in his support for the Wall Street bailout scam. In the face of the Great
Depression, President Hoover (like the current government, supported by Obama)
showered the bankers with public money in an effort to bail them out. All he did,
however, was to prolong the crisis; the policy eventually led to the failure of
almost all banks within two years.
The New Deal component of Obamanomics would consist of his
administration�s having to put into place a �job-creation� stimulus package that
would include relatively extensive investment in public works project.
And the Reaganomics component would consist of financing
such a stimulus package through major banks and the Wall Street financial
intermediaries. Instead of directly financing public works projects through the
federal, state and local governments, with open and rigorous public oversight,
the Obama administration seems intent on, first, giving/lending taxpayers�
money to money-center banks, and then having them re-lend that money for public
works projects -- and make fortunes in the process.
This would be a boon for the failed financial giants of Wall
Street, as it would represent yet another, indirect or roundabout, way of
bailing them out. It can, therefore, be called New Deal reforms carried out by
methods of Reaganomics -- through the outsourcing of the financing aspect of
the public works projects.
4. Lessons for the grassroots
Political implications of this discussion for the grassroots
are unmistakable: unless effective pressure from below is brought to bear on
the Obama administration and Congress, the urgently needed economic changes
will be geared, primarily, to the interests of corporate America, especially
the corrupt financial giants of Wall Street. People pressure is needed to
counterbalance the pressure from the captains of capital, who are busy
dictating Obama�s choice of cabinet members and other appointments, as well as
his economic agenda.
To be effective, the pressure from below has to go beyond
sending e-mails or making phone calls to the offices of the elected officials,
as they are largely in the pockets of the ruling plutocrats and are hopelessly
corrupt. Only through widespread and sustained protest demonstrations and
non-violent civil disobedience that would threaten the status quo can a
relatively radical change in favor of the grassroots be forced upon the ruling
The following is a partial list of demands around which such
mass protests can be mobilized -- demands that are, incidentally, by no means
radical or revolutionary. They are, indeed, marginal financial and fiscal
changes that can be implemented within the existing system and its
1. Demand the establishment of a universal health care
system. While many Americans don�t seem to be yet ready to demand socialized
medicine (like what some Europeans enjoy), a single payer system like Canada�s
would be a huge improvement, as it will save money and cover all Americans.
2. Demand the following regarding the market meltdown, the
rescue/bailout plans, and monetary policy:
a. Full disclosure and transparency of the books and balance
sheets of the insolvent financial institutions;
b. Full and open accountability for management policies and
practices that led to the insolvency of those institutions. This is meant not
to be so much for �crime and punishment� reasons as for diagnostic and
c. Instead of trying to salvage a mountain of
mortgage-backed toxic assets, the government should allow for a market
cleansing of such worthless assets by purchasing the threatened mortgages at
the current, depreciated or market values, not at the inflated face values. Not
only will this method rescue the vulnerable homeowners, it will also cost
taxpayers much less money.
d. In return for the huge sums of taxpayers� money given
away, nationalize (purchase) Citigroup and other insolvent banks on the basis
of the real, depreciated market price of their assets and, then, use the thus
nationalized banks to issue loans at reasonable rates, and thereby unfreeze the
e. Nationalize the Federal Reserve Bank (just as central
banks are publicly-owned in most countries of the world), institute a high and
strict reserve requirement for private bank lending, thereby limiting the
money-creation power of commercial banks. Money creation must be a government
prerogative, not private banks.�
3. Demand the following regarding fiscal policy and/or
a. Reintroduce the more progressive pre-Bush and pre-Reagan
taxation system, or tax schedules.
b. Tax capital gains at the same rate as wages and profits,
not at half the rate. Also, require payment of these taxes at the time of sale
of assets, not deferred indefinitely if the gains are simply reinvested in yet
c. Close offshore tax havens.
d. Reintroduce the estate tax.
e. Stop multiple depreciations of buildings for purposes of
fraudulent tax write-offs; that is, a building should be depreciated only once,
not multiple times.
f. Place a cap on the amount of property tax that is
excluded from taxable income.
g. On the spending side of fiscal policy, demand �peace
dividends� by demanding an end to the wars in Iraq and Afghanistan, by
downsizing the military empire, by closing down the nearly 800 hundred U.S.
military bases abroad, and by re-allocating a significant portion of military
spending to non-military public spending.
4. Regarding the implementation of the projected �job
creation� stimulus package, which is currently being crafted by the Congress
and the Obama economic team, demand the following: no outsourcing of the
financing of the public works projects, that is, direct government financing,
not through the banks; rigorous reviews, public oversight, and competitive
bidding of public works projects, not crony contracting or outsourcing of the
kind that has marked the �rebuilding� of Iraq, or New Orleans.
As noted earlier, none of this is really radical or
transformative, requiring systemic or structural changes. It is simply
reversing some of the excessive supply-side or neoliberal giveaways to big
business and the wealthy. Or, as Michael Hudson of the University of Missouri,
puts it, �It is a small step back toward the Progressive Era a century ago -- the
era that set America on the path of prosperity that made the 20th century the
American century� .
Nonetheless, the Bush/Obama economic policy makers, in
concert with most members of the Congress, may balk at most of the reforms
suggested here; they will certainly do so as long as the American people have not
started speaking out and asking some hard questions. For now the people seem to
be in shock and disbelief of the magnitude of the crisis and, perhaps more
importantly, of the treacherous government collaboration with Wall Street
sharks in looting their treasury and mortgaging their future.
But as the crisis drags along, the economic hardship becomes
more agonizing, and the extent of the theft surrounding the Wall Street bailout
scam becomes public, the people are bound to speak out. Only then, that is,
only when pressure from below threatens the established order, will radical
reforms in a progressive direction stand a chance.
 Explanation of the underlying dynamics of this pattern
is beyond the purview of this essay. Interested readers can consult, for
example, Ernest Mandel, The Long Waves of
Capitalist Development (Cambridge University Press 1980).
 Studs Terkel, Hard
Times: An Oral History of the Great Depression (New York: Pantheon Books
1970), P. 309.
 See, for example, F. F. Piven and R. A. Cloward, Poor people�s Movements (New York:
Pantheon Books 1977).
 Studs Terkel, Hard
Times: An Oral History of the Great Depression (New York: Pantheon Books
1970), PP. 268-69.
 Michael Whitney, �The Obama Dream Team,�
CounterPunch (28-30 November 2008).
 F. William Engdahl, �The Truth behind the Citigroup Bank
Nationalization,� Online Journal (27 November 2008).
 Michael Hudson, �The Obama Letdown,� CounterPunch (26 November 2008).
Ismael Hossein-zadeh, author of the
recently published The
Political Economy of U.S. Militarism (Palgrave-Macmillan 2007), teaches
economics at Drake University, Des Moines, Iowa.