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Fundamentally Different

My colleagues Frank Foer and Noam Scheiber have written a compelling account of the Obama administration’s approach to economic policy. And although I don’t pretend to know the president’s mind, I might agree with their summary statement that “Obama has no intention of changing the nature of capitalism.” Still, I want to make what may seem to be a paradoxical argument: that regardless of the president’s intentions, he will change American capitalism in fundamental ways--in particular, he will alter the relationship between the government and the economy. My argument rests on what he has actually proposed to do and how his proposals, if enacted, would situate his administration in the history of American economic reform.

Americans have been notoriously loath to undertake reforms that increase the role of government. That goes back partly to our Lockean liberal heritage of minimal government that marks us off from Europe with its absolutist past. The only times that Americans have permitted major changes in government’s role have been during economic crises, social upheavals, and war--that is to say, during the Civil War, the Progressive Era and World War I, the New Deal and World War II, and the Sixties (circa 1961-1974). If you look at these periods, and at the intervals between them, you find certain patterns that may help explain what is going on today.

Reform and reaction: Periods of major reform have invariably been followed by periods of reaction: the Civil War by the era of Robber Barons and Social Darwinism; the Progressive Era and World War I by the Twenties of Calvin Coolidge and Andrew Mellon; the New Deal and World War II by the Robert Taft Congresses and the Eisenhower presidency; and the Sixties by Ronald Reagan, Newt Gingrich, and George W. Bush.

The limits of reaction: In these periods of reaction, attempts were made to undo and reverse prior reforms, but the efforts always fell short, and the reforms were preserved, if in weakened form. The Robert Taft Congresses failed to eliminate collective bargaining; Eisenhower, to the distress of conservative GOPers, kept social security in place; Reagan, Gingrich, and G. W. Bush tried, but failed, to eliminate the regulatory reforms of the Sixties. In addition, during these periods of reaction, the government’s share in the gross domestic product never fell below the plateau established, except during the world wars, by the prior reform era.

Reform builds on reform: Each of the reform eras picked up on the unfinished agenda of the prior era, and in some respects, went beyond it and into uncharted waters. The New Deal nationalized the state reforms of the Progressive Era (such as unemployment compensation), but also radically expanded the sheer quantitative role of government in the economy. The Sixties expanded social security and added Medicare and Medicaid, but it also radically widened the definition of what government could do to include things like worker safety and environmental protection (which is different from Progressive Era conservation).

Now how does this apply to the Obama administration? Its relationship to the Sixties is similar to the Sixties’ relationship to the New Deal. It is reviving and expanding the regulatory state of the Sixties, particularly in the areas of the environment, consumer protection, worker safety, and financial regulation. It is attempting to make good on the promise of universal health insurance that failed in Congress in 1971. It is also committed to tax reforms and social programs that will redress post-Sixties inequality. The Obama budget, for instance, contains $100 billion in tax increases on the wealthy and tax cuts for everyone else. It would also make college more accessible to lower- and middle-income students.

But the Obama proposals also go well beyond the Sixties in certain respects. First, they pick up on an approach to industrial policy that began circulating among Democrats in the early Eighties, but has never been successfully implemented. That is, its proposals seek to change not merely the pace of production, investment, and consumption, but what is produced and consumed. Most notably, it is using the budget to shift the locus of industrial production toward “green” jobs and products. It is making dramatic changes in transportation with its intervention in the auto industry and in its funding of high-speed rail.

Of course, the Eisenhower administration invested in transportation through its massive highway program, but there is a subtle difference here. The Eisenhower administration’s intervention was largely in response to pressure from the auto, construction, and real estate and developer (suburban housing, malls) lobbies. Obama’s proposals aim to alter and reverse existing trends. They are an effort at national planning. And it doesn’t matter, incidentally, whether the administration tries to get its way through manipulating the market or through outright control of investment; what matters is that it is using its governmental power to change the American economy in basic ways.

Finally, there is the sheer size of Obama’s intervention. Obama’s stimulus program and its budget are going to lift overall government spending from the 30s to well over 40 percent of GDP. Its 2009 budget, along with other public spending, could reach 45 percent of GDP. That’s in response to a crisis, but as has happened before, the extent of government intervention is likely to remain permanent .

At the least, the Obama budgets will shift even more dramatically the balance of economic power away from the private and toward the public sector. The American relationship of state to economy will begin to look more like that of France and Sweden, whose non-crisis budgets total over 45 percent of GDP. And our politics may change accordingly--shifting public opinion on regulation, spending, and taxes well to the left. On the relationship of the state to the economy, European “conservatives” (say, Nicolas Sarkozy) are well to the left of our “moderates” and even occasionally our “liberals.” It’s hard to imagine, but the Republicans of the next decade could begin to sound like moderate Democrats today when discussing certain domestic policies.

Of course, what I have described are largely proposals rather than accomplishments. Obama has the perverse benefit of a crisis to spur reform, but not to the extent that, say, Franklin Roosevelt did. Roosevelt took office after four years of a Depression, with unemployment nearing 25 percent and with bankers, businessmen, and their Republican backers thoroughly discredited. Obama is being forced to battle bankers and corporate execs; and the Democratic leadership in Congress faces filibusters from irresponsible or deeply ignorant--take your pick--Republicans and even from some so-called centrist Democrats.

It won’t be easy for Obama to get national health insurance or to finally put the financial sector in its place. And if his opponents are victorious or if he is too timid, the United States could head in an entirely different and more unpleasant direction than it would head if he were successful. There will probably be a return to deregulation and capital gains tax cuts--but when they don’t work (and they won’t), we might be forced to venture even deeper into the dark recesses of the American right.

John B. Judis is a senior editor of The New Republic and a visiting scholar at the Carnegie Endowment for International Peace.