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Go Big Or Go Home, Mr. President

EJ Dionne, writing in the Washington Post, urges President Obama to set his inner Keynes free and lead the US and the world out of the dangers of another economic collapse, regardless of domestic political resistance.

I’m not as confident as EJ and Paul Krugman this this would work either politically or economically.  And I’m not so sure the inner Obama is as Keynesian as the outer Krugman.  But EJ is definitely right about one thing: right or wrong, win or lose, when it comes to economic policy the President has no choice but to lead from his gut and speak from his heart.

The country is deeply worried about the economy, and worried also that this White House doesn’t know what to do — about jobs, about the dollar, about the deficit, about the global financial crisis.  The President has lost the country’s confidence on the economy and the White House is not currently putting forward a convincing narrative that would explain where we are, how we got here and what we should do next.

This is one of those times when even the most cautious and cool headed of politicians must nail his colors to the mast.  The national debate over economic policy has merged with the more fundamental questions of national identity and direction.  Does President Obama believe that the blue social model is the only decent way to go — and if so, how does he plan to make it work?  Does the President think the blue model needs fundamental adjustments to survive?  If so, what are those adjustments that we need to make and how do we get there? Does he think its day is done — and if so, what will replace it and what will get us to the new promised land?

I don’t think the country understands where the President comes down on these issues.  (I’m not sure I do; my guess would be that he is in camp number two: reform blue in order to save it — more Tim Geithner than EJ Dionne.  But I could be wrong and within that position I don’t know whether he favors minor tweaking or major change.)

At this point the President needs to tell the people what he really thinks.  He can’t make political calculations about what will and won’t fly.  Maybe public opinion will agree with him and maybe it won’t, but if he isn’t seen to be leading from conviction rather than calculation I don’t think he can lead at all.

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  • stephen b

    He can’t tell us what he really believes because it is anathema to several hundred years of our American tradition. He has told is what adjustments to the blue model he favors: tax the rich; job training for veterans; government intervention in corporations, financial markets and health care. His only urge is to do more of these things, in more places with more energy. He knows this is politically unpalatable, so is frozen in place.

  • cja

    I agree with stephen. Obama doesn’t know what to do; he’s in over his head and has been since day one.

  • Scott

    His economic plan for nearly three years has been to caulk your windows, properly inflate your tires, and transfer money from taxpayers to makers of solar panels and windmills in the form of subsidies.

    As George Will pointed out on “This Week” yesterday, a Hoover Dam-like public works project is impossible because an environmental group will find a snail darter in the river and shut down the project before it gets started.

  • Randy

    Poor E.J. is still on hopium.

  • Alan DeVincentis

    He does know what to do. It would just have to be a 180 degree reversal of everything he’s already done. And that would make him…conservative?

  • Eurydice

    Obama’s never been shy about his opinions. My guess is the reason we don’t know where Obama stands on economic policy issues and the blue state model is that he doesn’t know where he stands. Up until his election all of this was a theoretical exercise for him, and the subsequent years have been an education in what doesn’t work. Maybe he’ll have an epiphany on the Vineyard, but I think that, given his years of blue model indoctrination and his party obligations as the incumbent in the next election, tweaking around the margins is as bold as he’ll get.

  • Toni

    Obama and his White House engage in magical thinking. They believe “millionaires and billionaires and big corporations” are inevitable, and nothing Obama or his Administration does can impede them.

    The economy refutes them day in and day out, to no avail.

    Obama is indeed in over his head.

  • WigWag

    Professor Mead says he is not sure it would work economically if President Obama set his inner Keynes free. Fair enough, but this thought of Mead’s provides, I think, quite a bit of insight into what Professor Mead gets right and what he gets wrong.

    Mead is right about one big thing and he’s wrong about one big thing. What he’s right about is the fact that technology induced disintermediation is far and away the most important secular trend that will be influencing economic, political and even cultural progress for the foreseeable future. Whining about it changes nothing and lamenting it is a fool’s errand. The trend towards disintermediation is inexorable and those who attempt to stand in the way will be mowed down. Government workers will have to accommodate this powerful historical force just as private sector employees have. Disintermediation of the economy will be accompanied by increasing decentralization of economic power and by a weakening of bureaucracy. The nimble will thrive in this new economy while the not so nimble will struggle.

    What Mead gets wrong is the idea that somehow technology induced disintermediation is in conflict with the laws of capitalism discovered by John Maynard Keynes. Nothing could be further from the truth. Keynes ideas are as relevant, if not more relevant in an era where disintermediation dominates as they were in earlier stages of capitalism.

    Disintermediation makes some aspects of what Professor Mead calls the “blue state” model outmoded while it makes other aspects of the “blue state” model more relevant than ever.

    Disintermediation of the financial industry is ultimately responsible for the recent financial and economic collapse. It wasn’t the policies of Fannie Mae or Freddie Mac that caused the housing bubble any more than it was the “ownership society” advocated by George W. Bush. A far more basic cause was the securitization of mortgage debt and the separation of mortgage origination from ownership of the underlying debt that sparked the irresponsible lending that created the crisis. The disintermediation of the financial industry that had it’s origins as early as the 1970s but really took off after the savings and loan debacle is directly responsible for both securitization of mortgage debt and separating mortgage origination from mortgage ownership. A similar argument can be made about collateralized debt obligations that brought down AIG and various other derivative instruments. The origin of all of this can be found in disintermediation in the American financial system.

    The problem here was not a “blue state” model that sought to impose regulations in a whimsical fashion, it was a “blue state” model whose regulatory scheme was outdated and could not keep up with new financial instruments made possible by rapid technological change.

    In addition to being right about technology induced disintermediation, wrong about the continued relevancy of Keynes and partially right about the “blue state” model, there is an area where the jury is still very much out concerning Professor Mead’s view. Anyone who has read Professor Mead’s books knows that he is extraordinarily optimistic about the English speaking world’s ability to react to rapid change. Mead has argued that various historical, cultural and religious factors gave first the British and now their American offspring a comparative advantage in reacting and adapting to rapid change. This entices Professor Mead to believe that Americans are as well equipped if not better equipped than anyone to turn the inexorable march to disintermediation to our advantage. He believes that if anyone can create a new, more relevant social model out of whole cloth, Americans can.

    Let’s hope he’s right about this.

    It would be interesting to know which presidential candidates Mead thought could most effectively lead us to this new world. Certainly Obama leaves quite a bit to be desired, but would a President Perry or a President Bachman really understand how to make a world where disintermediation rules the day work for most Americans?

  • Luke Lea

    WigWag is interesting. What’s his solution to the problem he calls “technological disintermediation”? [nice phrase, by the way: at first sight the syllables come tripping off the tongue.]

  • Luke Lea

    WigWag thinks it would be interesting to know which presidential candidates Mead thought could most effectively lead us. Lately I’ve been having the devilish thought of crossing out the Obama 08 sticker on my car and mounting a Pahlin one beside it. 🙂

  • jetty

    Meade offers three camps regarding socialism:

    1. Full bore socialism
    2. Reformed socialism
    3. Something other than socialism

    Meade thinks that Obama may be in camp number 2. I think that Obama is in camp number 1. But Obama can not, will not, publicly say this. From time to time Obama’s true ideology slips out with cryptic statements like “fundamentally transform America” or the more blatant “spread the wealth”. To me, it is obvious.

    As cynical as this sounds, everything is going according to Obama’s plan. He will push another stimulus, continue to strangle businesses with regulations and promote class warfare in every public appearance. And like it or not, he has fundamentally transformed America from a prosperous entrepreneurial country to a poor, socialistic one.

  • dearieme

    “the President has no choice but to lead from his gut and speak from his heart”: what if those organs disagree?

  • BillH

    Wigwag left out one little thing: The country’s moral fiber is largely wasted, especially in the financial markets. Until we recognize this, and somehow restore our national character, poking around for mere economic miracles could be fruitless.

  • Scott

    “Technology disintermediation” is a fancy way of saying productivity. It’s why when the country was formed over 200 years ago 90% of the population was engaged in agriculture, and in 2011 barely over 1.5% of the population is engaged in farming. Yet, those farmers not only provide for most of our country’s own food needs, but they are so productive they export much of their bounty to the rest of the world. That has improved all of our lives.

    Technology disintermediation is why it takes a fraction of the number of workers to assemble an automobile, and they do so in a fraction of the time, as it took the workers in Henry Ford’s day. Technology disintermediation is why the U.S. has the world’s largest manufacturing economy, and real output per worker has increased from $19.6K (in 2010 dollars) per worker in 1950, to an astonishing $149K per worker in 2010. That’s how wealth is created and standards of living improve.

    Technology disintermediation is why entire industries disappear and are replaced by new ones. Schumpeter called it creative destruction. When I was a little kid, AT&T had a monopoly on landline communications. It’s stock was considered so safe, it was often held out as suitable to be held in portfolios of “widows and orphans”. How would you like to be in the landline communications industry today? Developing countries have by-passed the landline step altogether and gone exclusively with wireless.

    How would you like to be a retailer of vinyl albums and 8-track tapes today when music is distributed almost exclusively digitally? Would you rather be a retailer who rents movies on videocassette or DVD out of a storefront or Netflix who is adopting a model of distributing movies over the internet? How would you like to be in the business of developing 8mm celluloid film in a digital world?

    Technology disintermediation is not to be feared. It needs to be embraced. It improves the standard of living of us all and prevents the misallocation of capital to outdated industries/technologies. It frees up human capital to create, innovate, and develop new ways that improve the lives of their fellow man.

  • WigWag

    Thanks, Luke, I am glad you found my comment interesting. To be frank about it, the phrase “technology-induced disintermediation” is really quite silly; in fact it’s a redundancy. It’s a little like referring to the technology-induced industrial revolution. The reason I use that term is that while the word “disintermediation” has entered the lexicon, many people are still not familiar with it and may not realize that technology has anything to do with it.

    You ask about “solutions” to disintermediation; there really aren’t any “solutions” any more than there were solutions to the industrial revolution or the scientific revolution.

    Disintermediation will produce winners and losers and during the interregnum from when the trend first appeared to when society fully adapts to it, there will be many casualties. In fact, that is what we are experiencing now. The first wave of this trend has already hit the private sector and caused massive dislocation; public sector employees are just beginning to feel its bite. It all part of the process of “creative destruction” that drives capitalism forward.

    In the end, I agree with Professor Mead that a disintermediated society will be a wealthier and better society. Just as we don’t lament the invention of the train or the car because it resulted in massive job losses for blacksmiths, in the long-run the trend towards disintermediation is a positive one.

    Think about all the ways society has already benefited. We saw the first inklings of what a disintermediated world would look like way back in the 1970s when air travel was deregulated and MCI challenged AT&T in long distance telephony. The result is that air travel is less expensive and more available to average people than ever before. Of course several legacy carriers like Eastern, Pan Am and TWA died in the process and their employees lost their jobs. Some of the new start-up airlines like “People’s Express” didn’t have what it took to survive. But in the end, disintermediation of the travel industry was massively positive for society.

    The same is true for telephony. Before MCI emerged, “Ma Bell” could charge whatever it wanted for long distance calls. New long distance carriers came along and ate “Ma Bells” lunch. AT&T could not survive in the form it previously existed in and has now reinvented itself. What’s the result of disintermediation in telephony? Long distance calls are massively cheaper; in fact if you are a user of Skype or other WI FI telephony products you can make your long distance calls or even overseas calls for free.

    Think about the effect disintermediation has had on the financial industry; 40 years ago if you had any savings at all, the only place where those savings could be invested was the mattress or the bank. Today the investment options open to the average American are dramatically greater and much less expensive than the options available before the era of financial disintermediation. In fact, the opportunities to use investment vehicles like mutual funds and self-directed brokerage accounts for 401Ks and IRAs are possible only because of disintermediation. These vehicles will become increasingly important as more traditional pension plans continue to decline in viability.

    The world of culture has been hit particularly hard by disintermediation. Think about what it cost to buy music 30 years ago and what it costs to procure today. In fact, music is rarely purchased anymore, rightly or wrongly, it is usually available for free. Record Companies are being destroyed by this process; how long will it be before they are completely obliterated and artists sell their wares directly to the public? In the long run, the good to society vastly exceeds the ill effects experienced by record company executives and employees.

    40 years ago, three television networks ruled the roost; they mediated what Americans got to watch. Then a fourth network, Fox, came along. Network power diminished even more when cable became universally available and now cable companies are nervous about their continued viability because of new technologies like “You-Tube” and “Hulu.” How long will it be before television itself becomes an outmoded product and artists offer their wares directly to a plugged in public through their own websites or Facebook pages?

    Professor Mead is right; the idea that the public sector should be immune from this revolution which is still in its infancy, is ridiculous. What Professor Mead is wrong about, is the idea that any of this makes Keynes wrong or outmoded. Professor Mead also goes way too far in his critique of the “blue state” model.

    In fact, a modified “blue state” model is critical to the success of revolutionary disintermediation. Professor Mead never actually defines what the “blue state” model is, but I think it has three critical elements; a regulatory scheme designed to ameliorate the ability of private firms to externalize their costs; a social safety net and a scheme to redistribute income. All of these elements will be as needed in a disintermediated economy as they were in the economy that preceded it.

    One of the most prominent features of the “blue state” model is the involvement of the government in health care delivery, especially on the payment side. In a disintermediated economy this role for government will be more necessary than ever. Professor Mead has himself advocated for value added intermediation as a new career path for young people. Left to its own devices, the private insurance companies will never provide health insurance to what is likely to become a vast individual market. Only government can set the rules which require insurance companies to provide coverage and in the long run, even this is likely to fail. In a disintermediated economy the government itself is likely to end up as the health-insurance provider (as it does in Medicare). This sounds pretty “blue state to me.”

    The recent financial collapse demonstrated beyond any doubt that a disintermediated financial sector is even more in need of regulation than the sleepy old banking industry that came before. All the arcane forms of derivatives that nearly destroyed the economy cry out for adequate regulation; this also sounds pretty “blue state” to me.

    During the coming period of massive economic dislocation that will accompany the transition to a disintermediated economy, a robust social safety net will be more critical than ever. The transition to this new economy is likely to lead to millions of people being laid off and an even greater number having skills that are unsuitable to the new economic reality. Are we supposed to let these people die in the streets? Will we tolerate “Hoovervilles” springing up in American cities? Will we allow the downwardly mobile middle class to morph into a new lumpenproliteriat? During this transition period there will be an increasing call for the services provided as part of the safety net. If government isn’t to provide those services, who is?

    Professor Mead also tends to forget that the income redistribution schemes that form part and parcel of the “blue state” model exist for a reason. Left to its own devices, capitalism leads to increasing concentrations of wealth. This is no less true in a disintermediated economy than in the economy that came before. Americans have historically been willing to tolerate a high degree of concentrated wealth because of the belief that class mobility characterizes the American economy. During the transition period to a disintermediated economy the only class mobility we are likely to see is in the downward direction. We are already getting to glimpse evidence of the social unrest likely to result from this trend. Reasonable income redistribution which characterizes the “blue state” model will continue to be vital if massive social unrest is to be prevented.

    No economic model, including a disintermediated economic model is likely to thrive if anarchy prevails. Without the income redistribution that the “blue state” model facilitates, anarchy is what we are likely to have.

    Luke, doubting Keynes is a lot like watching a hot air balloon ascend and concluding that Newton had it all wrong. Keynes call for countercyclical action both in times of boom and bust has been proven correct over and over again. Now that we find ourselves in a liquidity trap with monetary policy almost useless, following Keynes’ advice is more important than ever. If we don’t, America and the rest of the Western world will end up like Japan during its lost decade.

    What Professor Mead hasn’t seemed to figure out yet is that a modified “blue state” model is critical to the successful implementation of the new disintermediated economy. Without the “blue state” model, the coming social unrest is likely to doom all of us. Not only will it impede economic development, it is likely to make it impossible for America to play its critical role in international relations. I shudder to think what the world would be like without American leadership.

    Thank you again, Luke, for putting me in mind of all of this.

  • Jacksonian Libertarian

    Obama got into office by not being Bush, and blaming everything on Bush. Now that he is responsible, and owns everything wrong in the world, he is desperately seeking a way to blame his mismanagement on the Republicans and the TEA Parties.
    I predict that his jobs plan will be a huge Keynesian Government spending plan (as if they have ever worked), which the Republicans will rightly refuse to even consider. He will then blame them for failing to work together and compromise for the good of the country, and accuse them of playing politics, when that is exactly what he is doing.

  • Luke Lea

    WigWag: Don’t you think a shorter standard workweek might be part of the solution? Higher output per man hour can mean more stuff or more time. There’s a case to be made that working parents today need more time, not more stuff. A six hour day (with time-and-a-half for overtime) would be a boon to them and their children. It would also spread the work around.

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