Lincoln or Hoover?

As the year draws to a close it has become clear that President Obama, our sixth crisis President (after Lincoln, Andrew Johnson, Hoover, FDR, and perhaps George W. Bush), is not the new Franklin Roosevelt that many of us dreamed he might be. For reasons to which I have often alluded here, that is not really his fault. FDR came into office in conditions of completely unprecedented distress and desperation, possessed of huge majorities in both houses, and even enjoying some bipartisan support. He also could draw on a cadre of progressive reformers--many with backgrounds in social work--to transform the federal government's role. Our problems today are the most serious we have faced since then, but one party remains in complete denial, and the other--the Democrats--are significantly split. In addition, President Obama seems to have come into office with a reformist rather than a transformative agenda. His health care proposal, the centerpiece of his agenda this year, drew on long-established ideas. The stimulus was a one-shot emergency measure that the Democrats and the White House show now signs of wanting to repeat. And the President, as I wrote last year, has not, as his initial speeches suggested he might, transformed our foreign policy. He is winding down the Iraq war--something the feelings of the Iraqis themselves might well have made necessary in any case--but he is doubling down in Afghanistan and Pakstan, about which I may have more to say as I sit here snowbound tomorrow.

President Obama would never have reached the White House without acute political sense, and he has been dealing, daily, with current political realities for some years. Sad to say, he may have been pushing as hard as anyone could. Yet he may be suffering from a real misconception about the state of the nation. His policies, particularly in the economic sphere, seem to suggest that we do not in fact need fundamental reforms parallel to those of the New Deal and the immediate postwar era. In Larry Summers, in particular--who declared last week that everyone knows the recession is over, thus going Herbert Hoover, who talked of good times just around the corner, one better--he has a man who obviously refuses to recognize that there is anything wrong with the freewheeling financial institutions that he, in the Clinton Administration, helped to create, that a few hundred billion dollars of government funds will not cure. If Summers is right, employment will start to grow, albeit slowly, by the second half of next year. If he is wrong, and we are suffering from long-term structural problems that need to be addressed, the consequences will be both politically and economically disastrous. Indeed, it is not inconceivable that such an approach could turn the Obama Administration into the new Hoover Administration.

Hoover was, as I indicated years ago, a very different kind of man that Obama. He was, in generational terms a Prophet, not a Nomad, and he suffered, like George W. Bush, from an excessive faith in his own instincts and opinions. Yet he was neither a fool nor a knave. He had an impressive record as a businessman and an administrator. He took steps to deal with the depression, one of which, the Reconstruction Finance Commission--a kind of institutionalized TARP, but one that lent money to industrial enterprises rather than to banks--remained a pillar of the New Deal all through the Roosevelt Administration. But he also had firm principles, including an unshakable prejudice against any direct or indirect government assistance to the unemployed. Had the economy rebounded during his last two years he might have been vindicated--but it did not. By the beginning of 1932 Hoover in his State of the Union address was reduced to complimenting the American people for not having resorted to revolution or violence, unlike other nations. The people completely lost faith in him and his approach, opening the way for the Roosevelt revolution.

Sadly, it does not seem to me impossible that a similar fate could befall the current Administration. While I have been writing this post Senator Ben Nelson, the most powerful man in America this week, has announced his support for a health care bill. It will evidently do little or nothing to cut costs and break the power of the insurance companies (which some are beginning to compare to the utility companies of 80 years ago, for which the New Deal provided both competition and regulation), and it is thus unlikely to cut costs. But in any case it will do nothing to help the average unemployed American for at least a couple of years, and even then, the help will be marginal. Shockingly--and this really is a provision I do not think the Administration can afford politically--it will not even end the denial of insurance based upon pre-existing conditions until 2014. It gives those without employer-based insurance the right to buy US-government sponsored plans (like my own), but it is not yet clear to me who will pick up the employer's share and make them affordable. I have just read that the bill includes another awful provision, one allowing companies to sell any plan anywhere in the United States, and thus to evade stringent regulations and appeals processes in tough states, just as credit card companies already do. The White House seems to think that the mere act of signing the bill will project an image of effectiveness and accomplishment and create some momentum leading into the mid-term elections. It is true that the public, by substantial majorities, supports health care, including far more radical options than are going to pass--but it is simply not the most pressing concern, I would suspect, of those on the lower end of the economic spectrum. They need jobs. (Earlier this week, Arianna Huffington expressed these same fears rather eloquently, pointing out that Larry Summers is sounding more and more like Chauncey Gardner in Being There promising growth in the spring.)

The Lincoln Administration offers a different parallel, one which may become critical to President Obama's success. Like Obama, Lincoln came into office hoping to re-establish a minimum of consensus within the United States--which at that moment meant avoiding the break-up of the Union. For the better part of two months his policies successfully persuaded Virginia and North Carolina, at least, not to secede--but when the firing on Fort Sumter led to open war, he lost them as well, and began a military response. He used martial law to keep Maryland in the Union after Virginia and North Carolina left, but he most certainly did not, however, take any serious steps against slavery. Just as Obama is now a hostage to the progress of our economy, he was a hostage to the progress of the Northern armies, and particularly of the Army of the Potomac and General McLellan. Because McLellan's invasion of southern Virginia ended disastrously and because the North was still not solidly behind the war, the Democratic Party began doing very well in elections during 1862. (Elections in those days were held at different times throughout the year in different states.)

Lincoln's short-term response was to move in a more radical direction. First, the Emancipation Proclamation, while formally emancipating slaves only where Lincoln had no power to do so--inside the Confederacy itself--put him definitely in the abolitionist camp. Secondly, he fired McLellan because the general evidently lacked enough offensive spirit to actually crush the southern armies. Thirdly, he increased the pace of mobilization, to include even the very controversial draft. It took another two years for all those steps to pay off, but by late 1864 victory over the South was clearly in sight, and he was overwhelmingly re-elected.

We shall not see such dramatic events over the next three years, but the President needs a significant, if incomplete, economic recovery, such as Roosevelt enjoyed by the end of 1936, in order to regain momentum and perhaps even to make sure he is re-elected. Many of the younger voters who put him in office will surely vote next time based upon their economic situations. Meanwhile, if--as I believe--the financial system is still fundamentally unsound, then the danger of another crisis remains present. It will be devastating to whatever Administration is in power when it occurs.

Like Lincoln in his early years, President Obama seems to me to be suffering from a serious inhibition. He wants to avoid confirming his enemies' image of him. Nowhere is this more apparent than on the issue of taxes. The President is now also taking political heat because of the size of the deficit, which as a percentage of the GDP is higher than at any time since the end of the Second World War (although a long way from being as large as it was during that war.) Republicans, of course, are acting as if this problem first emerged on January 21, 2009. The following graph, produced by the Center on Budget and Policy Priorities with the help of data from the Congressional Budget Office, very usefully tells us where our current woes come from.



This table seems to leave no doubt that the Bush tax cuts were, and remain, the principal cause of our financial crisis. Had the Bush Administration maintained the existing tax code, the then-existing surplus would have been eaten up by the recession of 2001 and the wars that Bush began, but the country would have been in far better financial shape to meet the current crisis. Tax increases on the highest brackets, it seems to me, would be an obvious political winner right now, particularly since the highest incomes--those enjoyed by investment bankers--are recovering so much more quickly than those of average Americans. Yet Obama in his first two years is teaching taxes the way Lincoln initially treated abolition, as the third rail that he does not want to touch. This is all the more serious since, as I have argued many times, low tax rates on the wealthy have done so much to strengthen the financial sector of our economy relative to the industrial sector, and to promote irresponsible financial practices that have already led to several crises and, I think, will inevitably lead to more.

It is, of course, because our situation is nowhere near as serious as it was in 1933 that the response has been so much more measured in its consequences. History, as Tocqueville wrote, is full of such paradoxes. And we face a truly new problem this time around. Never before, either in 1861 or in 1933, has Washington been inhabited by such a powerful army of lobbyists dedicated to the preservation--and indeed the growth--of an old order that has become dysfunctional. Had the southern states not seceded in 1861 and left their representatives in Washington, slavery could easily have been maintained where it existed for decades more. Ironically, white southerners destroyed the institution by deciding to make war over it. (So inconclusive were the results of the war, however, that they managed to re-establish white supremacy within two decades--another interesting lesson.) Our evils today are not nearly so grave as in 1861, and our economic situation--at least so far--is nowhere near as bad as in 1933. Because of this, most of those at the highest level--including in the White House itself--still believe that a modified form of business as usual is all we need. I am not convinced.