Robert Kuttner and Obama's economic appeasement policy

There may be groans from the zombies, but this is not a return to life for the economy. Robert Kuttner makes the point that the crisis and Great Recession are the verdict on a political and economic strategy that has failed.

"Go back and read books from the debate of the 1980s," he says in this piece, "like Barry Bluestone and Bennett Harrison's The Deindustrialization of America, or Steve Cohen and John Zysman's Manufacturing Matters, and they look prophetic. They lost the political argument, but they were right all along. Now, with the economy facing a prolonged stagnation, a second stimulus should not just be a shot in the arm to restore flagging demand in 2010. It should be a down-payment on serious investment in American manufacturing for a generation."

Hard Labor
by Robert Kuttner

On this Labor Day, about the best the Obama Administration can say (over and over again) is that the unemployment picture would be a lot worse without the Recovery Act. Sorry, that's not good enough. It won't be good enough for the Democrats to hold onto swing seats in next year's midterm election, or for President Obama to persuade increasingly skeptical voters that he represents a solution to economic woes.

In August, the unemployment rate rose to 9.7 percent, and most forecasters think it will be in double digits before year end. In an ordinary recession, employment rebounds last because firms are reluctant to make new hires until they see a substantial pickup in demand -- and this recession is far from ordinary.

The depth of the true unemployment picture has been disguised by large numbers of workers who are on part-time furlough, who have taken pay or benefit cuts, or who are working full-time for part-time pay. The number of workers who had been working for six months or more rose to one unemployed worker in three, the Economic Policy Institute reports. So the economy is stuck in a vicious circle where weak consumer demand is inadequate to power a recovery, and government stimulus spending is not sufficient to make up the difference.

There are three parts to the woes of American workers -- falling wages, rising unemployment, and insecurity about the future. More robust policies could improve all three. For starters, we need a second stimulus bill. It could begin with emergency federal aid to state and local governments that are laying off workers and cutting services in a recession. We also need policies to create more jobs and raise wages for the long term.

Twenty five years ago, I was part of a debate on industrial policy, and I was on the losing side. Neither Democratic presidents nor Republican ones accepted the idea that it mattered whether the United States had world-class industries. After all, we were becoming a service economy, and services were just as good as products. Most economists ridiculed industrial policy on the ground that government was not competent to pick winners and that free markets would make the appropriate investment.

Well, a quarter century later, most of those services turned out to be financial services, and a lot of that sector turned out to be a bubble. The free market made one blunder after another. And ever since the financial collapse that began in the spring of 2007, government has been picking winners with taxpayer money, except that most of them are failing banks. A reading of American history reveals that the U.S. has had industrial policies all along, beginning with Alexander Hamilton's "Report on Manufactures." World War II, the Cold War, and government investment in biotech were one big industrial policy.

Go back and read books from the debate of the 1980s, like Barry Bluestone and Bennett Harrison's The Deindustrialization of America, or Steve Cohen and John Zysman's Manufacturing Matters, and they look prophetic. They lost the political argument, but they were right all along. Now, with the economy facing a prolonged stagnation, a second stimulus should not just be a shot in the arm to restore flagging demand in 2010. It should be a down-payment on serious investment in American manufacturing for a generation.

One piece of good news is that Ron Bloom, the longtime trade unionist and union-friendly investment banker who brought the rescue of GM and Chrysler to a speedy resolution, has been promoted by the Obama Administration to be a kind of manufacturing policy czar. Bloom will have his work cut out for him. For starters, he will be up against an iron consensus favoring "free trade," and an article of faith of the free-trade crowd is that there should be no efforts to promote domestic manufacturing, never mind that every modern industrial power from Brazil to Korea, Japan, and China does precisely that.

Good domestic manufacturing jobs would pay decent wages, but there is a lot more that the government needs to do, since most jobs will still be service sector jobs. As I write in a forthcoming special report of The American Prospect, government has immense unused leverage to hold government contractors to high labor standards. During World War II, the War Labor Board made sure that no employer got a war production contract unless it treated its workers decently. Henry Ford managed to hold out against unions throughout the labor organizing of the 1930s. It was the War Labor board that finally compelled him to settle with the United Auto Workers. Ford was the Wal-Mart of his day.

Later, in the 1960s, before there were the votes in Congress to pass the landmark civil rights acts, Presidents Kennedy and Johnson used the power of federal contracting to demand that any company bidding on a government contract have an affirmative plan to overcome the effects of past racial discrimination in hiring and promotion. This policy was the origin of affirmative action. If government can use its contracting power to promote equal employment for minority workers, then government can surely use that power to insist on decent wages for all workers.

Vice President Biden has made a good start with his Task Force on Middle Class Working Families. President Obama has issued some promising executive orders promoting project labor agreements and making it a bit harder for contractors to bust unions. But the task force is understaffed and does not represent a major administration initiative. To be serious, it needs to be a priority of the President, not just a project of the Vice President.

The Obama administration is on the defensive on health care in part because it is promoting an ambiguous and ultimately feeble health reform bill, but partly because health insurance has become a lightening rod for larger economic fears. Voters are not yet convinced that this president is on their side in the battle for economic security. Major steps to improve job opportunities and wages would be a good place to redeem the popular good wishes that accompanied President Obama as he took office.