Obama and the Crisis: What Does the Future Hold?

Tr@nsit Online

The rise of populist, xenophobic and nationalist parties has been attributed to tensions arising from the financial crisis in Europe. While these tensions have erupted in some regions of the United States as well, ironically at the national level, the steep downturn delivered a democratic victory with the election of Barack Obama.

This is not an unprecedented turn of events. When we look backwards at previous financial crises in the U.S., especially those that were accompanied by extreme inequality, we see a familiar pattern. Franklin Roosevelt , the liberal architect of the American welfare state, came to power in the midst of the worst economic calamity we have ever experienced. Hence it isn’t inevitable that financial crises produce right wing reaction.

Obama and the Crisis: What Does the Future Hold?
Dorothea Lange (1936): “The windshield of a migratory agricultural laborer’s car, in a squatter camp near Sacramento, California” (U.S. Farm Security Administration / Library of Congress)

Yet these progressive victories in the United States come about on the wreckage grounds of what previous conservative governments have left behind: rising unemployment, crumbling infrastructure, a weakened tax base and, in some instances, rising crime. These conditions create tremendous challenges for progressive government when it finally comes to power. Accordingly, Obama’s election follows from the disaster that was the Bush administration: the highest levels of income inequality since before the Second World War, a deep recession, catastrophic bank failures, and total implosion of the housing markets.

Public patience – how long voters will wait to see improvements – is very much an unknown quantity, especially in the United States. In Roosevelt’s time the crisis was serious enough to permit a new total transformation of the State and a development of our welfare state weak as it is, but which nonetheless strengthened social protection.

The New Deal was not without debate, it was not without division and it certainly wasn’t perfect. African Americans were largely excluded from its benefits. Mexican immigrants in the west became targets of suspicion (and deportation) because of the perception that they were becoming dependent on the public purse. Nonetheless relative to what went before Roosevelt, it was a triumph that we are still coasting on. In Obama’s case, that triumph is not yet clear and perhaps has faltered in ways that will be hard to address in a kind of paradigm breaking fashion that we remember from the 1930s.

We are seeing cracks in social solidarity that are worrying both because tension is rising now and because long term consequences may follow those particularly hard hit. First profound generational divides in the

US are becoming pronounced, and here we echo some of the ills of the European economies as well. We have rising youth unemployment, a broken labour market entry system such that millions at the low skilled end of the spectrum are facing almost permanent unemployment. The scaring effects of rising youth unemployment are a particular concern. If this economic crisis goes on for another three or four years, we will have a whole cohort of young Americans who are at risk for near total exclusion from the labour market.

When we look backwards to the Great Depression and ask what happened especially to the young men who came of age in the early 1930s, we see that scaring lasted the rest of their lives. They never caught up. Their wages remained lower for the rest of their lives. They failed to marry at the same rates. The data from the 1980s recession suggests the same durable consequences. And hence even if we recover from this crisis, which I am sure we will at some point, we are going to have an entire generation facing a compromised future.

This will be especially the case because the very engines of training and of human capital development are eroding. We have catastrophic down turns in our state economies which are pushing our public higher education system to the crisis point. In the University of California, the best public university in the nation, some would say in the world, faculty no longer have telephones on their desks any more. If we move downward to the training engine that the working class depends on — our nation’s junior college system — we see an enormous flood of people being turned away because these institutions are oversubscribed. The same state budget crisis is stripping their budgets, making it impossible for them to perform the role they need to perform which is that of human capital training.

We have seen a loss of eight million jobs in the United States and an unemployment rate that is pushed up to ten percent. And we have only begun this descent. We are going to see massive lay offs in the public sector. Last year, the stimulus bill helped to blunt those lay offs for a period of time, but it has run out now and without a second injection we will see the shut down of many state functions, rising fees (which are regressive forms of taxation in another guise), and a degradation in the quality of services, especially education.

The gyrations in the stock market wiped out the wealth that millions were depending on to retire. Those losses are producing pressures for older people to stay in the labour market, which means opportunities for young people to find jobs are reduced accordingly. Stronger welfare states are making it possible for older workers to retire at ever younger ages. But in the US, we are seeing rising rates of workers in their 70s coming back into the job market because their resources are diminished.

A massive erosion of wealth as the housing markets have fallen into foreclosure, fourteen trillion dollars lost in a period of only about eighteen months is making matters much worse. It is particular damaging in the United States context because of the special role that housing occupies in a weak welfare state. It is our personal bank account. If the state does not provide free higher education, parents borrow against the equity in their homes to provide educational benefits for children. If the state or the private industry fails to provide a robust retirement system, older Americans borrow against their homes to finance retirement or sell those assets off in order to finance retirement. Those who lack public health plans or access to private health insurance borrow against their homes in order to fund your health care in old age. This implosion in the housing market then has a particularly debilitating effect on the American people. It is unprecedented to have a recession develop in this way. And not only has this affected those who have lost their homes, the foreclosure epidemic spreads through neighbourhoods to depress the value of the housing even of those who are not in danger of foreclosure. So there has been a huge loss of wealth even for those who have been relatively secure in their homes.

At the same time, and this is where the class element comes in, the spectacle of bonus payments to bankers who lead their institutions to rack and ruin and expected the rest of us to bale them out stands there as an example of exactly the kind of class divide that, in theory, doesn’t exist in the United States. We do not even speak in terms of class in public discourse. Nonetheless we have seen very visible demonstrations that “the haves” have more and the “have-nots” sink without a trace. The organized efforts of insurance firms and the health care industry to block reforms that extend insurance benefits to the uninsured stand as another spectacle of the ways in which the “haves” often turn their backs on the have nots. In that instance, moderate Democrats prevailed, but we will see how long the opponents of extended health care try to derail it through the courts.

There are also pronounced racial and ethnic divides in the United States which echo the difficulties we see in Europe with respect to the immigrant population. We actually saw a huge upturn in the growth of the minority middle classes in the United States and that is threatened by this crisis. The last arrived are the first to fall. And that is happening not only in terms of their employment but with respect to the housing crisis which affected the minority middle class more powerfully than anyone else. So the wealth gap has affected new entrants to the middle class more profoundly than anyone else.

We have solved some of our problems in recent years by containing a huge population in our nation’s prisons. The United States is actually somewhat unique in this respect, in the way we have incarcerated millions, especially of minority men. This may actually be the only good news I can deliver: We can’t afford to keep them incarcerated anymore. So the State of California has been releasing thousands of prisoners that they cannot afford to keep in jail anymore: released them into an economy in which they have absolutely no prospective employment. And back into neighbourhoods they were already severely depressed.

It is not a very good picture. So what does the future hold? One thing I am worried that it doesn’t hold in the United States is a revival of the democratic left. It is not at all clear where the left is going in the United States. We all had very high hopes for President Obama. They have not been fully realized and it’s unclear if we are going to hold to the kind of progressive vision that animated the New Deal. It is also unclear where the engines of growth are going to come from that will jolt the capitalistic system like ours back to life. We have very, very high levels of debt to the Chinese which creates a political dependency that we have not yet faced, and it could be extremely destabilising. One thing seems clear enough: there are no new buffers available to us, and this I think is going to create extreme distress as we go forward. For decades we have handled the declining wage problem by sending more and more members of our households into the labour market. Declining wages for men were met by rising labour market involvement for women. Well, we have already been there and done that. Women are already working. The vast majority of women with children under the age of one are in the labour market in America, and in fact women who have stayed in the labour market more successfully than men did so because they are in the industries with lower wages. The wages of men have been hit hard during this “mancession,” and wages of women have declined less precipitously. Yet households are sinking because they have already deployed that labour and they don’t have more labour to give. We have an enormous consumer debt problem which is only about to roll into a credit card crisis after we have finished of the housing crisis. So the secular declines we were seeing in wages are accelerated by this crisis and we have run out of buffers. We have a very big generation on its way into the labour market – the biggest generation we have produced yet, the Echo Boomers — my children’s generation. They have been filling the universities, they have been filling up every institution that they have touched, and they are about ready to head into a labour market that simply can’t absorb them and won’t be able to absorb them any better in times to come because my generation is going to have to stay in the job to recover retirement that we have lost.

One thing that we definitely need to do is to remember the lesson of 1937. The early Roosevelt years were almost miraculous in the way which they depressed unemployment nearly by half by virtue of the public employment programmes and the strong stimulus pills of the early New Deal. But in 1937 Roosevelt saw that the unemployment decline he was able to bring about was costing money. He pulled the plug on government spending, and in 1937 we saw those unemployment rates sky rocket once again. This is precisely the dilemma we face in the United States right now. If we can keep the political will to continue with a second stimulus and try to keep ourselves moving ahead of this crisis as best we can we may see some sort of system recovery. If we don’t, we are going to see 1937 again and this time, we are already at ten percent unemployment. That is why I began by arguing that the only source of optimism I could muster came from the ways that our crisis actually did bring us a progressive government for a change. Whether or not its promises are sustained, however, is I think the more serious question we face. And the erosion of social solidarity in between — by generation, by class, by ethnicity and race — is quite a profound problem which we are going to face for generations to come.


Katherine S. Newman is the James B. Knapp Dean of The Zanvyl Krieger School
of Arts and Sciences. She is a widely published expert on poverty and the working poor who led major interdisciplinary initiatives at Princeton and Harvard universities. Recent books: The Missing Class: Portraits of the Near Poor in America (with Victor Tan Chen), Beacon Press 2007; Chutes and Ladders: Navigating the Low Wage Labor Market, Harvard UP & Russell Sage Foundation 2006.

This contribution is based on a paper delivered at the IWM conference On Solidarity V:
Social Solidarity and the Crisis of Economic Capitalism, held in October 2009. A German version will be published in TransitEuropäische Revue nr. 40 (Solidarität in der Krise, Autumn 2010).

Tr@nsit online, 2010
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