On inauguration day, after the euphoric mass celebration on the Mall and before the black-tie balls that evening, leading Democrats gathered for dinner in Washington’s Park Hyatt Hotel. It was a crowd including Paul Volcker, former head of the Federal Reserve, Lawrence Summers, incoming head of the National Economic Council, and three future cabinet secretaries.
But the first person to speak was the last Democratic occupant of the Oval Office – Bill Clinton. And in his brief comments the former president sketched a passionately optimistic view of the political implications of the current crisis. “We are at a pivotal moment in this country,” the politician who taught the American left how to win elections in the age of Ronald Reagan exulted. “I think there will be a progressive majority in this country for the next 30 years.”
For the Main Street families losing their homes and their jobs, and for the Wall Street firms that have been facing collapse, the economic crisis has felt like a natural disaster. The economy, as the investor Warren Buffett put it this week, seems to have “fallen off a cliff”. But Mr Clinton urged his listeners to perceive in the cataclysm a once-in-a-lifetime chance. President Barack Obama and his administration have “an enormous opportunity”, he said with a note of wistfulness. “They will have more freedom to do it than any other team in a long time.”
After barely 50 days in office, it is clear the administration perceives the watershed identified by Mr Clinton and intends to exploit it. This determination to turn the world’s deepest economic downturn since the Great Depression into the beginning of a new era of progressive politics in America is the most important political consequence – and the biggest political gamble – of the crisis of capitalism in capitalism’s homeland.
Rahm Emanuel, the president’s chief of staff, likes to say that a crisis is a terrible thing to waste. Mr Obama, characteristically, provides a more stirring spin. Beginning with his inaugural address, he served notice that he intended to be a consequential president, rebutting future critics even as he laid out his plans: “There are some who question the scale of our ambitions – who suggest that our system cannot tolerate too many big plans ... What the cynics fail to understand is that the ground has shifted beneath them ... The question we ask today is not whether our government is too big or too small but whether it works.”
The echo of Reagan – remember when government was the problem and not the solution? – is meaningful and intentional. Early in the primary fight, Mr Obama ruffled Clintonian feathers by naming Reagan as the most significant president of modern times. Mr Obama hopes to have a similar impact. According to former Reagan staffers, the Obama team has gone so far as to get in touch with detailed questions about the mechanics of the Gipper’s White House and how they choreographed his first 100 days.
Nor is it just the hope-drenched Obama-ites who see in the economic downturn a chance to change America’s political weather. Grizzled Democratic warriors see the opportunity, too. “I have been in government for 35 years and this is the most exciting time. You really feel you are making history,” says Charles Schumer, New York’s senior senator. “In every generation there are tectonic elections which redefine the role of government. Obama has a chance to create a new generation of Democrats.”
“I have never seen a shift in public opinion like the one we’ve had now,” agrees Barney Frank, the influential congressman. Mr Frank believes the long era of “Republican ascendancy”, which he dates to Richard Nixon’s election in 1968, has been replaced by a period of Democratic dominance.
Republicans, too, admit their era of setting the terms of the political debate has come to an end. “The only question is whether the Obama era lasts two years, four years, or eight years,” says Newt Gingrich, the former House of Representatives speaker who is re-emerging as powerful intellectual force in the party. “The question is whether this is a new era or an interregnum.”
The Obama era, if that is what it becomes, will be built on the two defining political and economic shifts of the past six months: the evident and acknowledged failure of “market fundamentalism” and the response by Hank Paulson as Treasury secretary.
Ideologically, the manifest failure of market fundamentalism is the starting point. There are, to be sure, some hardcore Republican hold-outs: Mr Gingrich argues that the current crisis “is a government problem, not a market problem”. But the consensus view is that, as Alan Greenspan, former Fed chairman, confessed in his influential congressional testimony in October, there was a “flaw” in the model.
Mr Summers, a strong defender of free markets, likewise has concluded: “The view that the market economy is inherently self-stabilising, always, has been dealt a fatal blow ... This notion that the economy is self-stabilising is usually right, but it is wrong a few times a century and this is one of those times.”
The central political consequence of this market failure, Mr Summers says, is that there “is a need for extraordinary public action at those times”. As he put its: “The debate over whether you can love your country and hate your government has been settled with a negative answer.” This rehabilitation of intervention in the economy as not just acceptable but essential is the second foundation for Mr Obama’s new progressive agenda.
Usefully for the Democrats, it was the outgoing administration that brought the state back in with a vengeance. “Paulson is the champion nationaliser of all times. He managed more nationalisation than any man on the planet,” says Fred Bergsten, director of the Peterson Institute for International Economics. “It is maybe a bit of protection for Obama.”
Mr Paulson said his purpose was to save capitalism. Mr Obama wants to do much more than that. Over the past few weeks, he has unveiled a sweeping progressive agenda aimed not merely at sorting out the market economy’s travails but addressing a deeper failing in the current manifestation of American capitalism. That flaw, in his view, is the rising income inequality and median wage stagnation of the past three decades – it is this central idea that unites his ambitious project.
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Education, one of Mr Obama’s three main initiatives, is all about fixing what economists identify as a leading cause of income inequality. Healthcare reform, the president’s second big initiative, would lighten one of the main burdens on the falling-behind middle class.
Only energy and environmental reform, his third mission, is not directly connected to income inequality – but, as with the other two, its proposed financing is built on the view that income inequality is a central fact of America today. Mr Obama unapologetically advocates a shift to a more redistributive tax system: he wants the very rich to pay for the programmes that he hopes will alleviate the stagnation of wages of those in the middle.
Campaigning on class has long been political poison for the Democrats. As recently as the Democratic primaries, economic inequality did not seem to work as a central campaign theme. Americans’ reluctance to vote according to their apparent class interests became a truism of politics and a source of considerable hand-wringing on the left. In What’s the Matter with Kansas? Thomas Frank attributed it to the right’s skill at playing up cultural issues. George Soros, the hedge fund manager and active Democrat, says it was because Americans, unlike Europeans, did not envy the super-rich – they hoped to emulate them.
The credit crunch exposed a more hard-nosed reason for the political quiescence of the stagnant middle class. As is now being discovered, the era of cheap money allowed families to consume far more than they produced. All of those home equity loans, vendor-financed car deals and credit card purchases may have masked the reality that real incomes were falling behind.
The financial crisis has turned that old political logic upside down. As the recession deepens, cultural issues pale in significance next to economic ones. Public anger towards Wall Street – late-night comedians have taken to calling for Chinese-style public executions – has transformed the Masters of the Universe from heroes to villains. The end of cheap credit seems meanwhile to have shattered middle America’s illusion that it too was partaking in the prosperity of the second Gilded Age.
The result is that class and redistribution are no longer dirty words in American politics. “John Kerry [the 2004 Democratic presidential candidate] was intimidated out of talking about economic redistribution because it was class warfare,” says congressman Frank. Now, by contrast, “people are very aware that in the good times they weren’t getting any, that income maldistribution greatly increased”.
This shift may be why the right’s most strident criticisms of the new president – that Mr Obama is a “socialist” or even a “Manchurian candidate” with a secret plot to destroy capitalism – are making little headway with the public. Instead, the accusations underscore an important and little-noted aspect of the American left’s reaction to the crisis: for all the bold reach of the progressive agenda Mr Obama has laid out, neither the president nor anyone in the Democratic mainstream is challenging the tenets of the market economy. Indeed, the Democratic White House has been more allergic to the idea of nationalising banks than have some leading Republicans.
At a time when historical analogies are popular, one anniversary is not much talked about in the US: the fall of the Berlin Wall 20 years ago. But even as it goes largely unacknowledged, the collapse of communism is helping to define the debate about the most significant crisis of capitalism in 80 years. During the Great Depression it was possible for some American progressives to look to the Soviets and wonder whether they had it right. Today, that option does not even get a hearing.
Mr Obama, the most ambitious president since Reagan, is determined to use this pivotal moment to advance an agenda on income inequality he began to talk about before the credit crunch began. But even as he lays out bold – many would say too bold – plans for the long term, he and his team recognise that their first and necessary step is to patch up America’s faltering capitalist engine. According to Mr Summers: “It is periodically the task of progressives to, ironically, save the market system from its own excesses.”
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