Democrats appear united on what to do about the nosediving American economy. But underneath, divisions remainby James Crabtree / December 20, 2008 / Leave a comment
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At Barack Obama’s press conference to announce his dozen-strong transition economic team, the faces behind him had a distinctly Clintonite look—including former treasury secretaries Robert Rubin and Larry Summers. Dotted among them were a few faces from the party’s left, including Clinton’s Labour secretary Robert Reich. But they looked isolated amid the centrist economists and big-name CEOs. Was this, some liberals asked, the change we voted for?
The appearance of Rubin and Summers at the heart of Obama’s economic team brought to the surface an old split in the Democratic party, often obscured during the campaign, between economic centrists and liberals. At the beginning of the 1990s, Rubin and his allies worried that excessive public spending and a ballooning deficit would lower American savings and, ultimately long-term growth. The victory of “Rubinomics” came when Clinton sided with Rubin over liberals like Reich, and prioritised deficit reduction over public investment.
But the economic crisis has forced deficit hawks to put their concerns aside. Republicans and Democrats alike understand that the US economy is heading for a very serious recession. And with little scope for further cuts in interest rates, the priority will be to pass the second major fiscal stimulus package in under a year, which Obama wants finished before his inauguration. The only debate is how big it should be. Obama wants $175bn. Martin Feldstein, a top Reagan economic adviser, thinks he should double that, while Goldman Sachs say that it may take up to $500bn to stave off a slump.
Whatever the size of the boost, Obama will soon find money tight in other areas. The recession will claim new victims, with America’s lumbering “big three” car giants especially vulnerable. The housing market continues to plunge, and mortgage relief for struggling homeowners will be a priority. Expensive plans to reform the nation’s healthcare and energy systems come next, and will be politically difficult to delay. All of these will probably push up borrowing further.
Facing this economic crisis, Democrats have called an economic truce. The day before the election, Rubin co-authored a New York Times article with respected liberal economist Jared Bernstein, also an adviser to Obama. They argued that the crisis should allow Democrats to move beyond “false” disagreements between their two economic camps. But, underneath, their agreement reflects a deeper rethinking of the old Rubin consensus. Both…