How the Crisis might turn out

That the United States is now in the midst of the third great crisis in our national life no longer seems in doubt. President Obama faces problems on the same scale as Abraham Lincoln and Franklin D. Roosevelt, and the political stakes for which we are now playing--the future, and possibly even the survival, of the United States as we know it--are just as high. His own approach to the crisis--which I would characterize as far more Lincolnesque than Rooseveltian--is also becoming clear. The question of whether it will work remains open, and probably will be for at least another three years, until he stands for re-election. All we can do now is to speculate about scenarios and assess probabilities.

As in every great crisis, the problems we face are not merely ones of mood, or national disunity--they are real problems requiring real solutions. The two that stand out, clearly, are our collapsing economy and our need to live at peace with the Muslim world, while maintaining the solidarity of the industrialized world that has now lasted for more than sixty years. Simultaneously we face a serious political problem at home: the total alienation of at least a third of the population--by and large, the least educated and affluent white portion of the population--from the Administration. The solution of the political problem, in my opinion, depends on the solution of the first two. The solution of the first two depends--once again, in my opinion--in abandoning business as usual, and that is where the Administration, to date, is not inspiring as much confidence as it might.

For the past thirty years, and especially during the past sixteen or so, the financial sector has fueled our economy. By making what turned out to be irresponsible loans--to consumers holding credit cards, to mortgagees, and, through derivatives and credit-default swaps, to each other--they generated the new wealth that spread demand through the economy. Because we were in the meantime de-industrializing more than any other major economic power, much of that demand fueled the economic growth of other nations, especially in Asia, more or less forcing Asian nations to lend the money back to us and finance our trade and budget deficits. When the impossibility of making good on trillions of dollars of those loans became apparent about 18 months ago, the economic crisis began. Unfortunately--in my view, at least--President Obama picked a mainstream economic team, led by Larry Summers and Timothy Geithner, who were heavily implicated in the policies of the last 18 years. As far as I can tell, their economic prescriptions have not yet attempted to undo any of the fundamental causes of our predicament. When they get around to proposing the restoration of something like the Glass-Steagall Act, which separated investment banking and commercial banking, I will be convinced that some one has grasped the nature of the problem: to put the awesome, inevitably destructive power to create new assets at will back within prett severe limits.

The equally important issue that has not been faced, to put it bluntly, is whether we need a largely new economy. Even as unemployment threatens to pass the 10% figure nationwide, and even as much of the American auto industry goes under for all time, the Administration, from the President on down, grasps at straws, arguing for instance that a decline in the acceleration of unemployment means that we are in some sense on our way to recovery. Such claims are, actually, only marginally more sophisticated than the arguments we heard in the 1990s that the Dow was destined to continue increasing steadily until it reached at least 36,000. It suddenly occurred to me last week exactly what they mean, mathematically: that employment could be expressed as a quadratic equation, with t (time) as the only independent variable. (Less mathematical readers can skip the rest of this paragraph.) Such an equation might postulate that in any given year t from here on out (the 1st year, the second, the third, etc.), the delta, or change in the unemployment rate(let's call it DE, since I don't know how to insert a delta into html), would look something like this:

DE = t² - 3*t

Resurrecting my high school calculus, the slope of this line, over time, would be the derivative of the equation, which would be 2t - 3 . In the first year(next year, until July 2010), the change in the rate would be -2--an additional two per cent unemployment. At the end of the following year (year 2), DE, measured from this moment, would be -4 -- the rate would not have changed. But by the third year unemployment would at last be steady (3² - 9 = 0), and in the fourth year employment would increase 4%, and so on. At any point in time the slope of the curve representing the change in unemployment would be 2t - 3--starting at -3 right now, it would fall to -1 in a year (the exact kind of decline in new unemployment claims upon which everyone is eagerly pouncing on now), and finally get over 0 -- that is, to a point of rising unemployment--in two years.

The problem is that we really don't have the slightest idea whether current increases in unemployment reflect such an incredibly simple equation--there is every reason to believe that they do not. During the Great Depression the unemployment rate did not increase and decrease smoothly. The increases in unemployment accelerated from 1930 to 1931 and again in 1932, before coming to a sudden halt in 1933, whereupon employment began to rise again. Both Paul Krugman and Bob Herbert of the New York Times have consistently argued that the stimulus wasn't big enough and that it would be necessary to ask for a lot more. It will also be necessary, in my opinion, to sell the next stimulus as, if you will, a defensive rather than an offensive measure--a way to prevent the loss of further jobs, particularly in state and local government, rather than to create entirely new ones. Meanwhile, the Administration will have to be able to make a credible case--certainly by 2012, if not by 2010--that new sectors of the economy, such as green energy projects and infrastructure, are providing hundreds of thousands of genuinely new jobs and can provide millions more. That is what Roosevelt managed to do by 1936, leading to his massive re-election. Roosevelt experimented with planning the economy during his first two years, but put a huge emphasis on public works. Not until 1935-6 did he pass the most enduring reforms of his Administration, the SEC, the Wagner Act (legalizing unions), and Social Security. Obama is beginning with his major long-term reform, health care. We do not know whether this sequencing will work--although the way in which the Democratic majorities in Congress are pushing health care along is an encouraging sign.

On the foreign scene, things will, I am afraid, get somewhat worse in the Middle East. Iraq will lapse into a more or or less violent civil war. No surge, no amount of American help, and no decline in violence (a trend that owed a lot to the completion of ethnic cleansing in much of Baghdad), has managed to undo the basic fact that Iraq is at least two, if not three, nations. The Kurds are moving more rapidly towards Independence and asserting claims to disputed territory and oil. There is good reason to believe that the Sunnis will be violently reasserting themselves within a year. I am not optimistic, as I made clear last week, about the results of the surge in Afghanistan. Iran is going to hold resolutely to its course, although I suspect that Iran, like Israel, will not actually test a nuclear weapon. A US-Israeli deadlock over settlements seems likely. That will enrage certain elements in the media and the foreign policy establishment, but I am not sure that it will have much importance politically. The public seems as sick of our Middle Eastern adventure today as the it was of the Vietnam war by 1973 or so. The real political danger is at home.

Obama, like Lincoln, is moving slowly at home--as rapidly as the political traffic would bear. Just as Lincoln spoke in to the South in terms of friendship right up until Fort Sumter, he began hoping for Republican cooperation. He has compromised on many issues already--including climate change--without getting any. Perhaps the situation at home will have to become more desperate, like the Union military situation in 1862, before he can move more decisively on various domestic fronts. But in any case there is only so much that he can do alone. Lincoln won the conventional conflict that the South chose to wage, but after his death the will was lacking to do more than enshrine legal black equality in the Constitution while allowing white supremacy to return in the South. After three decades of free market consensus, we may not have the intellectual capital to do what needs to be done for the economy, either. But it is still, as the British would say, early days. On this day in 1861 the first Battle of Bull Run was still more than a week away. This will be a long struggle--and that, perhaps, is the rhetorical change I would recommend most strongly to the President. We have been on the wrong track for a long time, and it will take ten to twenty years to rebuild a more just America. The Democrats, sadly, may have lost their only chance to repeal the 22nd Amendment during the George W. Bush Administration--which means that Obama's successors will have to carry on the work to complete it. Meanwhile, let us not, like the northern abolitionists in 1861, despair of a leader who probably has a better sense of what is and is not possible just now than we do.