America’s Economy Needs to Restructure in Order to Recover

The news that the growth of America's Gross Domestic Product (GDP) slowed in the second quarter to an anemic 2.7 percent, from its barely adequate first quarter performance of 3.7 percent, helps make the case for building what President Obama  terms a "New Foundation" for the country's economy. The president should use NDN's analysis of the root causes of our current economic difficulties to explain to the American people why this restructuring  is needed and how all of his legislative accomplishments-not just the auto company interventions he rightly touted in Detroit last Friday-- are putting in place a New Foundation for a 21st century economy, built on much more solid ground than the flawed and failed economics of the era America has just left.

The continuing high unemployment rate this far into the Great Recession should  demonstrate to all but the most stubborn partisans that expecting the contours of our economy to suddenly snap back into the shape that they were  in before the financial meltdown of September,  2008 is wishful thinking of the worst kind. It ignores the fundamental weaknesses of the consumer-driven economy of the last decade and leads to policy prescriptions that fail to deal with the root causes of our economic malaise. Besides, that economy, built on the sands of using the value of one's home as a personal ATM, led to a lost decade in real income growth for middle class Americans, so no one should be hoping it comes back anytime soon. 

The last time the country experienced the prolonged economic pain it is experiencing now was during the Great Depression. Thanks to the decisive interventions of President Obama's economic team and the Federal Reserve the country is fortunately not experiencing anything quite that painful this time around. But the economic downturns of the 1930s and of this decade have more than just the ironic adjective "Great" in common.

Both occurred as a new, civic-oriented generation was coming of age. In the 1930s it was the GI Generation, what many now call America's Greatest Generation.  Today it is the Millennial Generation, a cohort many expect to be our next great generation.  The unity and size of both generations gave first President Franklin Roosevelt and then President Obama the margin of electoral victory and mandate for change that underpinned political support for long-term, structural changes in the economy. In both cases, the dire circumstances in which ordinary Americans found themselves provided  the impetus for the creation of major new social programs-Social Security in Roosevelt's  first term and health care reform in Obama's. 

But many current observers fail to realize how similar the controversies surrounding these changes also are.  Just as Republicans today, and some moderate Democrats, seek to impose a new round of austerity on the nation's economy by attempting to stop the funding for such basic programs as extended unemployment insurance,   FDR, during his first term, dodged and ducked an onslaught of advice to scale back the New Deal from both the opposition and from many within his own party. The debate continued right through the 1936 election, when his Republican opponent, Alf Landon, campaigned on a platform of repealing Social Security, arguing, as those seeking to repeal health care reform do today, that it represented an unwarranted "socialist" intrusion into individual paychecks by an out-of-control federal government. 

But during the entire debate, Roosevelt stuck to his guns and insisted on the need to fundamentally overturn the laissez faire economic policies of the Roaring Twenties. As Pulitzer Prize winning historian, David M. Kennedy wrote in his book Freedom from Fear:

The New Deal's premier objective, at least until 1938, and in Roosevelt's mind probably for a long time thereafter, was not the economic recovery tout court but structural reform for the long run. In the last analysis, reform, not simply recovery, was the New Deal's highest ambition and lasting legacy.

And just as President Obama's health care and financial regulatory reform efforts are not the second coming of socialism that opponents tried to make them out to be, Roosevelt's  structural solutions avoided the heavy-handed notion of government control that so many in his party favored and so many Republicans accused them of being.  The FDIC (Federal Deposit Insurance Corporation) created a feeling of security among depositors, not a government bank.  The SEC (Securities and Exchange Commission) gave stockholders new information upon which to base their investment decisions, but didn't restrict their investment opportunities.  The FHA (Federal Housing Administration) provided more safety to lenders and new mortgage terms for home buyers, but didn't attempt to have government build the houses people needed.  The National Labor Relations Board (NLRB) and the Fair Labor Standards Act set new, fairer rules for both employers and workers to follow, but didn't impose the kind of price controls and work rules that were part of the earlier, ill-fated National Industrial Recovery Act. As Kennedy correctly observes:

To be sure, Roosevelt sought to enlarge the national state as the instrument of the security and stability that he hoped to impart to American life. But legend to the contrary, much of the security that the New Deal threaded into the fabric of American society was often stitched with a remarkably delicate hand, not simply imposed by the fist of the imperious state.

It's also important to remember that, with the exception of the FDIC, none of these long-lasting, deep changes in the rules and structures by which the American economy operated were enacted in the initial year of Roosevelt's first term. Social Security, for example, didn't pass until 1935, after the 1934 midterm elections. By that chronological measurement,  President Obama's New Foundation is actually being built ahead of schedule.

Nor did any of Roosevelt's structural reforms restore the country to full employment immediately.  When FDR uttered his famous line "I see one-third of a nation ill-housed, ill-clad, ill-nourished" in his 1937 inaugural speech, he was speaking about the progress the country had made in his first term and warning his audience not to become complacent with what had been accomplished to that point.   Just as President Obama must walk a fine line between noting the positive impact his initial efforts to stop the economic bleeding have had without suggesting there is nothing more that can or should be done, so too did FDR want the country to understand that, as he put it in the same address, "Such symptoms of prosperity may become portents of disaster!"

To avoid that result this time, President Obama needs to make it clear that much more needs to be done to restructure the economy, and that a stock market recovery without a recovery in middle class incomes is not the goal of his administration. Among other things, the president must emphasize that until all American schools have won the "Race to the Top," until our economy is built on a lower carbon infrastructure, until every American worker has the skills they need to compete in the global economy for jobs with good wages and good benefits, and until America's tax structure rewards work and innovation and not financial manipulation, the New Foundation for the nation's economy will not be complete.  

The restructuring of our economy is and will be painful. America's tolerance for change will be as sorely tested as it was during the Great Depression.  President Obama's leadership skills will be put to the same stern test that FDR had to pass. 

But Democrats should welcome the opportunity that the 2010 midterm elections present to argue for the need to undertake a fundamental restructuring of the nation's economy and to brag about the steps they have already taken to produce that transformation. Rather than ducking or attempting to explain away the economic difficulties the nation faces, it's time to build a strong foundation of political support for the economic New Foundation the President seeks to put in place. As NDN's recent survey research shows, a majority coalition already exists for just such an economic and political program. It's time to make sure the voices of America's 21st century constituencies are heard in November.