State of the Union: The War on Demand and the Sputnik Moment

President Barack Obama’s call for a five-year freeze in non-security, discretionary spending during his State of the Union address is exactly what should not be done, for the economy and for the future of his presidency. The President’s call for a government that lives within its means shows that, at least in terms of ideas, he has caved to what Krugman has suitably termed the “war on demand.” The great Polish economist Michael Kalecki long ago explained the reasons for the dislike of demand policies in his classic on “The Political Aspects of Full Employment,” in which he argues that it is the elites’ abhorrence of empowering the lower classes that is behind the doctrine of “sound finance” (i.e. balanced budgets).

That explains the pressures, from Republicans and from Obama’s new economic advisors, which maintain with Gene Sperling the continuity with the Clinton advisors represented by Larry Summers in the first two years of his administration. As noted in the documentary “Inside Job,” the problem is this is a Wall Street government. And it still is. So government spending to promote full employment is not, and will not be, a priority anytime soon. In this sense, Obama is not moving to the center after the midterm election defeat like Clinton did in 1994, simply because he was already there.

Besides, somebody should tell the president that one of the main reasons firms innovate is because they expect people to buy their goods, and that requires demand expansion. And education is certainly better than ignorance, but people with diplomas may not find jobs, which must be created by an expansion in demand.

But progressives should not be discouraged, since it is seldom the case that left-wingers are actually in power (despite Fox News’ parallel reality), and still reforms have been enacted. After all, it was during the Lyndon Johnson administration that civil rights legislation was passed, even though the president as congressman and senator had a very poor record on civil rights. So progressives should pressure Obama’s administration, in particular, in topics that his administration seems open to having stirred.

And the “Sputnik moment” opens some space for a discussion of the role of government in promoting investment in education, R&D and infrastructure. It brings back the memories of the best in the Kennedy-Johnson years, the can-do attitude of a government that can plan and deliver through careful planning and efficient management complicated and specific goals like putting a man on the moon. So perhaps liberals should pressure for a reform of the federal administration, to which the president alluded in his speech, that includes Jamie Galbraith’s proposal for an infrastructure bank that can provide permanent funding for innovation. That would be an institutional innovation worthy of a Sputnik moment.