Most reports on the selection of William Daley as President Obama’s new chief of staff and Gene Sperling as the head of his National Economic Council included a few lines of criticism from progressives who were unhappy with these picks. Since there was not much space for the argument, these lines probably left many readers wondering why progressives don’t like Daley and Sperling.
To remove this sense of wonder, I will spell out the progressive case against the new team. (I get to do it because this is my column.)
Both Daley and Sperling were major actors in the Clinton administration. At the center of the Clinton administration’s economic policy was the idea that reducing the budget deficit was the key to boosting the economy. He held the view that if the deficit fell, then the private sector could be counted on to provide the demand to fill the gap created by less demand from the public sector.
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While the private sector did fill the gap in the late ’90s, it did so from growth that was driven by a stock bubble. The stock bubble primarily fueled consumption, which hit a record high as a share of the GDP. It also led to somewhat higher investment, although much of this was in hare-brained, Internet start-ups of little or no value.
The stock bubble burst over the years 2000-2002. The resulting recession featured what was at the time the longest period without job growth in the post-World War II era.
Three other features of Clinton-era policy made the recovery from this recession more difficult. First, Robert Rubin’s high dollar policy led to a massive trade deficit. An overvalued dollar provides a huge subsidy to imports, and effectively imposes a tariff on exports.
Banks like Citigroup (where Rubin took a top post after leaving the Clinton administration) may like a high dollar because it makes them more powerful in an international context, however, it is about the worst imaginable policy from the standpoint of manufacturing workers. The high dollar is the main factor behind the loss of six million manufacturing jobs over the last 13 years. The basic story is simple: it is very hard to compete when your currency gives your competitors a 30 percent cost advantage.
A second part of the story were the NAFTA-type trade deals that further depressed the wages of manufacturing workers by deliberately placing them in direct competition with low-paid workers in the developing world. The predicted and actual result of placing manufacturing workers in competition, while leaving highly paid professionals like doctors and lawyers largely protected, is an upward redistribution of income.
This is bad to those who want to see the gains from growth broadly shared and also from the standpoint of sustaining high levels of demand. These trade deals transfer money from those most likely to spend it to people higher up the income ladder who are likely to save a larger share of their income.
The Clinton economic agenda was also about setting Wall Street loose, even as the huge banks maintained their “too big to fail” training wheels. This meant that they could take enormous risks with creditors, knowing that the government will come to the rescue if necessary.
It was this growth path that laid the seeds for the economic wreckage that engulfed the country when the housing bubble finally burst in 2007. To be sure, the Bush administration left these policies in place and ignored all the warning signs, even as the dangers grew ever larger. For this it deserves at least an equal share of the blame. But there is little reason to believe the Clintonites would have changed course before disaster hit had they been at the helm.
This is the small matter that leads progressives to be unhappy with the renewed dominance of the Clinton economic team. If progressives had devised policies that caused 25 million people to be unemployed or underemployed, cost the economy $4 trillion in lost output and caused millions of people to lose their homes, they and their children and their grandchildren would be exiled from policy circles for the next century. However, for the Clinton crew, it’s just a matter of putting on a “pro-growth” hat and going back to work.
This is not just a matter of demanding atonement for past errors of calamitous proportions. There is the concrete issue of how the Obama administration is going to address the problem of near double-digit unemployment.
Working with a Republican Congress is not going to make things easy, but Obama could take the position that he has the job plan to put people back to work and the Republican Congress is trying to block him. Or, he could take the position that times are tough and we (meaning not people like the policymakers) will just have to tough it out.
Unfortunately, the new Obama team seems likely to follow the second route. This will mean that tens of millions of people across the country will experience economic hardship because the people designing economic policy can’t shoot straight. But hey, why should this get anyone upset?