Barack Obama’s election on November 4, 2008, marks an enormous opportunity for the United States to redefine itself, both with respect to its economic and social models, and in how it relates to the outside world. It is in this capacity for periodic reinvention that America’s greatness lies. The chief task of the President-elect is not merely to make use of the shift in political power that has occurred, but to reformulate what America stands for in the realm of ideas, as did Franklin Roosevelt after 1932 or Ronald Reagan after 1980.
This task is made urgent by the evident failure of many of the ideas of the period just past—that is, of the Reagan era. The Reagan revolution when it first occurred was an important and broadly beneficial development. By 1980 there had been a steady increase in the power and scope of modern states ever since the Great Depression, the most extreme expression of which were the communist countries then populating the world. But in developed democratic countries as well, excessive government regulation and bloated state sectors were holding back growth and creating a crisis of stagflation. After the deep recession of the early 1980s, the United States and the global economy experienced a remarkable three decades of virtually uninterrupted economic growth—until now.
There are three core Reaganite ideas that need to be reformulated or discarded altogether if the United States is to navigate the current crisis and restore its credibility in the new era. The first has to do with deregulation and the role of the government in the economy more broadly.
The Wall Street collapse and the big recession we are heading into occurred for reasons intrinsic to the Reagan model: the U.S. government permitted the emergence of an enormous, wholly unregulated shadow finance sector under the belief that it would be self-correcting. Financial market liberalization had proven highly dangerous in any number of earlier cases, most notably the Asian economic crisis of 1997–98 and the Swedish banking collapse of the early 1990s, but these warning signs were ignored; no one imagined that such a crisis could strike the United States. In this the Democrats were fully complicit, not just in their support for loan expansion by Fannie Mae and Freddie Mac, but in Clinton-era Treasury Secretaries who pushed financial market liberalization on the developing world. The current crisis has many other causes, of course—such as the more than $5 trillion of excess savings pouring into the country from China and other Asian countries after 2002—but the idea that history was on the side of ever-expanding deregulation was ultimately an important cause of the collapse. The Reagan-era joke, “Hi, I’m from the government and I’m here to help you”, doesn’t sound so ironic in light of the Fed and the Treasury’s heroic efforts to keep the economy from tumbling altogether off a cliff.
The trick in redefining the model is not to overdo it on the regulatory side. The financial sector is very different from other parts of the economy because failure there imposes enormous spillover costs on everyone else. That is why Congress ended up having to vote for the $700 billion bank bailout in September. Labor market deregulation, by contrast, has had very beneficial effects in driving down unemployment rates and permitting much more rapid adjustment to changing conditions. American income distribution has indeed become excessively skewed toward the wealthy, but we don’t want to fix that problem by returning to a trade union-dominated labor market.
The second Reaganite idea that needs rethinking concerns taxes and spending—namely, fiscal policy. Reagan introduced the notion that tax cuts would be self-financing because all taxes smothered growth. He was also responsible for promoting the idea that virtually all new government spending outside of defense would necessarily be wasteful. While there is some rate of taxation for which this is true, the actual tax cuts enacted both in the 1980s and in the early 21st century have deepened fiscal deficits and further skewed income distribution to the wealthy. The impact of these deficits was masked for many years, however, by the fact that foreigners were wont to hold their ever-mounting reserves in dollars, a phenomenon that put off the final reckoning but ensured that the fiscal crisis would be much more severe when it finally arrived.
This attitude toward taxes and spending has rendered the American political system incapable of confronting, first, the looming entitlement crisis over Social Security and Medicare, and second, our energy policy paralysis. The single best thing we could have done for ourselves in the past generation would have been to impose a stiff carbon tax during periods when energy prices were relatively low; this was also something that no politician had the courage to take on. No one will be proposing tax increases until we are out from under the current recession, but in the long run Americans will have to learn to pay their own way.
Reaganism reinforced American exceptionalism in many respects. The United States is the only developed democracy in which a proposal to slightly increase the progressivity of an already progressive income tax, as Obama suggested, can be denounced as “socialism”, or where a proposal to create a common health insurance pool, as we have already done with regard to automobile insurance, can be attacked as “socialized medicine.”
The third Reaganite idea that needs rethinking has do to with foreign policy and the uses of American power. Reagan’s foreign policy was based on a big conventional military buildup and sharper “moral clarity” in the ideological struggle between democracies and dictatorships. This was the right policy for the time, and Reagan was extraordinarily lucky in that the Soviet empire unexpectedly and peacefully collapsed shortly after the end of this watch.
To this day many conservatives assert that the Soviet Union collapsed because of the Reagan posture, an attribution of causality that is at best only partially true. The neoconservatives, in particular, hoped that this chain of events—overwhelming U.S. military dominance followed by the total collapse of America’s enemies—could be replicated in other parts of the world. George W. Bush’s great tragedy was to be persuaded that, after September 11, he could be Churchill standing up to Hitler, or Reagan at the Berlin Wall, by using American military power in the Middle East. He gravely overestimated the threat facing the United States, and in the process took actions that made all of the actual threats of nuclear proliferation and terrorism worse. In the process, he undermined America’s moral authority, which in the long run is one of our most enduring sources of power.
In addition, modern American conservatism is built around a prickly defense of sovereignty and distrust of international institutions. Only a country that thinks it is hegemonic can try to get away with this. But that hegemony was always an illusion—witness our inability to pacify Afghanistan without help from allies—and in non-security spheres it was nonsense from the start. We have played the major role in creating a globalized world that produces a huge demand for global public goods like macroeconomic coordination, security, dealing with failed states, health and safety standards, disease control, carbon abatement and so on. But far from investing in institutions to manage these problems, the United States has been busy eroding existing international structures for its own short-term foreign policy goals, from the undermining of the ABM Treaty to the nuclear deal with India and foot-dragging on global warming.
One of the big unanswered questions about the November 4 election is whether it constitutes a realignment of the American electorate, one that will lead to a prolonged ideological shift, one lasting a generation or two, as did the 1932 and 1980 elections. Conservative commentators such as Karl Rove have asserted that the United States remains a “center-right” country and point out that, in the end, 46 percent of voters voted for John McCain. It may not stay a center-right country, however. The more pain that this recession inflicts and the longer it goes on, the more likely it will be that the American people’s attitudes toward the role of government will shift toward greater interventionism. For working class voters in particular, their economic interests will trump cultural concerns as they once did when they were part of the New Deal coalition.
Whether a realignment materializes will depend on at least three things. First is the depth of the emerging recession. If, as seems likely, it proves to be at least as deep as the one that began in 1981, Americans will remain focused on economic issues and their solutions for a long time to come.
Second, President Obama must been seen as effective in dealing with the economic crisis and foreign policy in the early months, avoiding a prolonged transition and putting into place bold policies that restore confidence at home and abroad. The extraordinary skill with which he organized his campaign bodes well for an equally effective early start to his Administration (and suggests that being a community organizer may be a good qualification for being president after all). But we will have to see.
The third factor will be whether Obama can clearly articulate the broad ideas that will define the new age, ideas that will become the consensus points of reference in the coming years. The Clinton Administration never did this, accepting instead most of the core ideas of Reaganism and simply shifting policies somewhat to the Left. In fifty years, no one will refer back to the “Clinton era”, but they may talk about the “Obama era” superseding the “Reagan era” if the new President can formulate a clear definition of what the United States stands for domestically and in foreign policy. In the realm of ideas, things are up for grabs in a way they haven’t been for decades. That is what makes the present moment both an anxious and an exhilarating one.