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Week of 11.28.08

Transcript: Obama's Challenge

BRANCACCIO: There's one little bit of economic good news for President-elect Obama this holiday season; it seems that when the Bush administration leaves office, they'll leave behind about half of the 700 billion dollar Wall Street bailout for the new president to spend.

Other than that, the current economic landscape looks pretty bleak. But that in itself might be an opportunity to usher in the most sweeping reforms of government and finance since the new deal, assuming President Obama is willing to take on the challenge.

So says Robert Kuttner, the co- founder and an editor of the American Prospect magazine. His new book is called Obama's Challenge.

BRANCACCIO: Robert Kuttner, good to see you.

KUTTNER: Good to be with you.

BRANCACCIO: Hey, nice gamble, old boy, on the title of the book.


BRANCACCIO: You wrote this in advance, right?

KUTTNER: Yeah. It was a double gamble. I gambled that if I was right, that the economy was in for big trouble, Obama was probably going to be elected, and he'd probably face a Rooseveltian moment. So I decided to write it and publish it before the election.

BRANCACCIO: So you see this financial horror as—as really like a teachable moment? How?

KUTTNER: Well, we've had 30 years of ideology that says government can't do anything right, markets can't do everything wrong. That ideology just had a very unfortunate collision with reality. So now, we need government big time to prevent this from becoming Great Depression two. Which means that it's an extraordinary teachable moment in the sense that—you can explain, if you are Barack Obama, why free markets sometimes go crazy, why they need to be regulated, and it's an opportunity to get back to something like what we had in the New Deal, Great Society era, but tailored to the 21st century. And it just happens, this is a president who is exceptionally good at—at teaching.

BRANCACCIO: But some of those ideas are almost outside the mainstream at this juncture in our history. The notion of spending a lot of money became—by the government—is supposedly a dirty word.

KUTTNER: Well, they have been outside the mainstream. But I looked at other transformative presidents. And what's interesting in the case of Lincoln, with the Civil War, Roosevelt, with the Great Depression, Lyndon Johnson with civil rights, each one of them took something that was outside the mainstream and made it possible, and then made it inevitable.

So when Lincoln starts, he's hoping to save the union. Two years into that project, he frees the slaves, something that was deemed inconceivable. Roosevelt campaigns on the premise that we need to balance the budget. He's against deposit insurance. He's against large scale public works. By 1933, the world has changed I think reality is gonna force Obama to be a more radical, transformative president than he was a candidate. If he doesn't, he will fail. He will either be his own version of Roosevelt, or he will be his own version of Hoover.

BRANCACCIO: If Obama's people happen to be watching this right now, they're getting a headache, because what I'm hearing you say is that their administration, the Obama administration, needs a big win on the economy in the first year, in 2009, because 2010, there's more Congressional elections.

KUTTNER: Well, to—to be more precise, by about June of 2010, the economy at least has to have bottomed out and be on the mend. If that happens, and this happened with Roosevelt, you know, the norm is that a president's party loses seats in the first mid term election. Roosevelt turned things around. He—he picked up seats, in 1934. I think if Obama turns things around, he—he will pick up seats in 2010.

BRANCACCIO: Now you work over at Demos and—edited and helped found The American Prospect. What is an authentic progressive? Do you think that President elect Obama is one of those?

KUTTNER: Well, it's very interesting. On the one hand, he's got the most liberal voting record in the Senate. McCain kept hanging that around his neck. It's true. On the other hand, he fancies himself—a bridge-builder, and he's got a wide range of advisors, representing different points on the spectrum—within the Democratic party and—and maybe some Republicans—as well. But I think it's possible to be a bridge-builder and a progressive. You—you lead as a progressive and bring other people to that position. The fact that America's leading businessmen today—and women are calling for a huge economic stimulus. That's indication of how you can lead as a progressive. The auto industries are asking for government to get involved. There ought to be a quid pro quo. Government ought to say, "If you want us to come in and help you, you have to deliver fuel efficient vehicles that people want to buy."

It's possible to be both a progressive and a bridge-builder. Johnson was amazing at this. He would use the Southern Democrats to pass Medicare, and then he would use the Republicans to pass civil rights.

And so I think—Obama's admirers, myself included, believe that he has these traits. I'm a little nervous about who he's listening to. I'm a little nervous about whether he has the nerve. But I think he has the capacity to lead the country to where it needs to go.

BRANCACCIO: Because the world has shifted so much. Let's just remind ourselves for a moment what it was like a year, two, three years ago, in just, for instance, the mortgage market.

"Mortgage Mess" clip - NOVEMBER 16, 2007

BRANCACCIO: Mortgages that explode in people's faces after two years, some cities dotted with closed up houses in foreclosure. How does that help the goal of home ownership?

PFOTENHAUER: Look, to be sure, there is an appropriate policy question about what's a socially acceptable foreclosure rate. And there's a clear reason for the government, to get involved in drawing some lines around how far this lending can go. But keep in mind that the trade-off for that is the removal of options. It's the removal of freedom. It's the removal of the freedom to fail. And with that comes the removal of the freedom to succeed.

"Real Estate Boom" clip- AUGUST 26, 2005

BRANCACCIO: Remember when you used to have to dress up in a shirt and tie and schlep down to the bank in person and beg for a mortgage? Welcome to the world of mortgages, 2005 style.

Barney Aldridge is the founder and CEO of Benchmark Lending group —one of Northern California's fast-growing mortgage companies. No necktie necessary. You don't even have to show up in person: Benchmark sells and arranges almost all their mortgages over the phone.

BRANCACCIO: Aldridge says this talk about lowered lending standards is bogus.

ALDRIDGE: I'm not sure if there's anything worse than being a renter for the rest of your life and never having an opportunity to get into a house.

BRANCACCIO: Well, there's an example of the world as it used to be.

KUTTNER: Right. And—and there are some things worse than being a renter for the rest of your life, like—losing your home in a foreclosure. Or haven't to live through a Great Depression.

I think it's really important to place the mortgage meltdown in context. It was one big piece, possibly the biggest single piece of a whole way of life. And the way of life was free markets can invent anything they want. By definition, innovation is good for the economy, even if it's insane. And regulators should just stay out of the way.

You had a whole bubble economy of which—inflation in housing prices was only one piece. You had the stock market bubble of the 1990s, followed by the housing bubble—of the 2000s. You had this lethal combination of very low interest rates and no regulatory standards.

That's why Henry Paulson is trying to figure out how to get banks to take his money, our money, the taxpayers' money, and then, when they take the money, they're now so traumatized they're not even sure they want to lend it.

BRANCACCIO: A couple of more weeks, though, it's not gonna be Hank Paulson's problem any more. It's going to be the Obama Administration.

KUTTNER: Indeed.

BRANCACCIO: And is that administration going to be equipped with the thinking necessary to help people who are on the wrong end of some of this housing stuff?

KUTTNER: Well, that is Obama's challenge, to coin a phrase. And I think—there are four things he has to do. First of all, he's got to get this bank recapitalization done properly. Paulson's view has been throw money at the banks—assume that you don't have any leverage over what they do, and—just hope they do something useful with it. That has been a complete failure.

It's interesting. There's a contrast between the way he viewed the wor—views the world, and the way Sheila Bair, the head of the FDIC, views the world. When she takes over a failed bank, she takes it over. She purges the bad actors along with the bad assets. She puts people from the FDIC in to run it.

One of the things she's doing with Indy Mac, which is a big, failed savings institution in California, she's using her temporary ownership of this bank to refinance mortgages. And that brings me to the second thing they have to do. We've got to put a floor under housing prices. Then we have to regulate the whole thing going forward, so that the next generation of con artists doesn't do it all over again.

BRANCACCIO: But there's regulation and there's regulation. And money still drives politics, and Wall Street gave a lot of money to politicians who will draw up the new rules. What gives you any sense that they're gonna be strict this time?

KUTTNER: Even Roosevelt got only about half of what he wanted to get, because the residual power of Wall Street, even at its moment of greatest disgrace, is still very potent. And one of the people behind the scenes who's been—advisor to—Obama, many of whose protégés have senior positions—Bob Rubin. Bob Rubin—

BRANCACCIO: Former Treasury Secretary, former chief of Goldman Sachs.

KUTTNER: Quintessential Wall Street Democrat. And Bob Rubin was part and parcel of this whole rush to deregulation. So the question of who Obama listens to is crucial.

BRANCACCIO: This week, President-elect Obama ended the mystery on just who he will listen to. The new Obama economic team includes Rubin associates Tim Geithner and Lawrence Summers, and there's talk of a major recovery plan.

OBAMA: We need a big stimulus package that will jolt the economy back into shape, and that is focused on the 2.5 million jobs that I intend to create during the first part of my administration.

BRANCACCIO: But the President-elect declined to say how much he would spend, and Kuttner argues that the country needs much more than just a one-time stimulus. He advocates spending six to seven hundred billion dollars per year over several years to fundamentally change the economy.

KUTTNER: You need a stimulus package to head off a depression. But to really have a recovery, that addresses the needs of some of the people who've been sandbagged for 30 years, in terms of their income, their opportunity, their security. You need public spending at a higher level, to rebuild some of these public systems, to give people greater security, greater opportunity. And you need to pay for most of it. You need to pay for it by reforming taxes, so that very wealthy people—pay taxes again.

BRANCACCIO: Pay for it, but not right away. Higher taxes on the wealthy to help pay down the monster deficit would have to wait for the economy to recover. And it is one monster deficit that's proposed here.

KUTTNER: Now, you hear a lot about, oh my God, the deficit. And—this is a kind of mantra you hear from most of the press, that we can't do this. It would increase the deficit. Now, which is the lesser evil? A bigger deficit for two years, or Great Depression two? Not even a close question. And the important statistic here—is the ratio of the national debt to the gross domestic product. How much of a debt burden do we have relative to the actual output of the real economy?

At the end of World War II, it was 125 percent. That is the accumulated wartime debt, was 125 percent of one year's output. And yet, if you think about it, the end of World War II ushered in 30 years of prosperity. Well, you say, how could that be? And the answer is, look what that debt went for. During the war, we recapitalized industry, we invested in science and technology.

Today, the debt to GDP ratio is only 40 percent, if you look at the debt held by the public. So that has to go up to 60 percent. If we have to have deficit spending for two years of ten percent of GDP and that's what it takes to prevent this from becoming a depression, that's not even a close question. And also, by the way—

BRANCACCIO: It still seems short of shocking. Ten percent of GDP? I remember when Clinton came to office, the—

KUTTNER: It was about six.

BRANCACCIO: Was it that high? And remember—the treasury secretary at the time—reportedly said, "That's way too high, Mr. Clinton. We can't actually spend money—"


BRANCACCIO: And now—you're talking about ten. It's like trillions of dollars. A trillion dollars.

KUTTNER: But in normal times, you know, the deficit ought to be one or two percent of GDP. It doesn't have to—budget doesn't have to be absolutely balanced, because the economy is growing faster than the debt is. But these are not normal times.

The trick is to get ahead of this, so that you don't do what Herbert Hoover did and chase a deepening depression downward. In January of 1930, the air had not yet gone out of the rest of the economy. We had a stock market crash. But we didn't have high unemployment. We didn't have failed banks. It takes a while, for the whole economy to collapse, if you go outside. People are going to stores. People are going to restaurants. People are going to work. Unemployment's still only 6.5 percent. We have time to get out ahead of this, but we don't have time to waste.

BRANCACCIO: So if we do spend all this money, all right, maybe it'll help out some of the homeowners who are so distressed, some sort of floor underneath home prices with some of that money. What else should we spend it on?

KUTTNER: Well, okay, there's two—there's two parts to this story. One, we have to spend it just to compensate for the collapse in household purchasing power, in small business purchasing power, in the purchasing power of local governments. Local governments are laying off people in a recession. That's the worst possible thing—you could do.

But then it also turns out that there are lots of things the country needs that have been starved for the past 30 years. We have a $1.6 trillion dollar shortfall in basic public infrastructure according to the American Society of Civil Engineers. Water and sewer systems that are 19th century systems. Bridges, tunnels, harbors, roads, buildings. The—the public sector for 30 years has not gotten the money it needs just to maintain basic services. We need to become energy self-sufficient in this country. That's gonna take some public investment. We need energy efficient—transportation systems. And look at public education. Working-class kids have been priced out of the ability to go to public universities without incurring exorbitant debts unless they happen to have affluent parents. Why? Because state budgets have been balanced on the backs of public universities.

BRANCACCIO: What about health care reform? I mean, you must have watched some of those presidential debates. It does come up. People are expecting something.

KUTTNER: Well, I'm the dissenter on this point as well. I think the urgent thing he has to do, quickly, is prevent the economy from heading into a depression. Then, when you've acquired some political credibility, then you take on the really hard stuff. And health reform, if you want true universal health coverage, not just adding more public spending to a dysfunctional system, that's a really heavy lift. Look what happened to Bill Clinton. He tried to do that right out of the box.

BRANCACCIO: He had a Democratic Congress.

KUTTNER: Yeah, but he fell on his face. And I think he fell on his face because he underestimated how hard it would be. And he also fell on his face because he didn't work very well with Congress. If you want to completely change the way health care is delivered in this country, you're gonna be stepping on some toes. You're gonna be stepping on the toes of the private insurance industry, the drug industry. Build up a little bit of capital first. Establish yourself as a great president who has some credibility with the public, and then try to climb Mount Everest. Because health reform is the Mount Everest of—political accomplishments on Obama's plate.

BRANCACCIO: One of the things that's just not talked about, amidst all the new people who are losing their jobs right now, because of the economic crisis, is something that we've seen around the country, that even before this economic crisis, even when home prices were rising, there were a lot of desperate Americans out there, people who were feeling very insecure anyway.

KUTTNER: There was a hidden depression, for the bottom two-thirds of—of Americans. That's why people used consumer borrowing as a substitute for income, 'cause their paychecks were not keeping up with—inflation. And also, risks that used to be born either by the government or by large stable corporations have been shifted onto individuals. The risk of not having health insurance or not being able to afford health insurance. The risk of not having a pension. The risk of losing your job.

BRANCACCIO: There is some very interesting data about incomes that—University of Michigan has been gathering for a bunch of decades. And it shows that what you make this year is really not much of a predictor now, of what you're going to make next year. Wild swings of income is the way many Americans live their lives. But this wonderful man in Kentucky a few years ago, when we were doing a story, John Ryan, did all the right things to be a solid, upper-middle-class American. He went to law school, became a corporate lawyer. No fault of his own, he loses a job. Out of the job, finds something else. His income zigs up, zigs down, in a way we never thought possible.

"Risky Business" clip - APRIL 8, 2005

BRANCACCIO: How do these uncertainties in your career make you feel?

RYAN: More vulnerable than a person wants to feel. Particularly when you're brought up with the idea that the male is the breadwinner. I'm not a sexist. I live with all women. But, it's made clear to me when my father suggested some time out of my first layoff, that when he found it necessary to remind me that I'm the man of the family. That I need to provide the income. And be the breadwinner. And that even if that meant going out and selling refrigerators at Sears, that I had to be prepared and able to do that.

BRANCACCIO: Now John Ryan is a very capable guy, and he's kept at it. But you never would have thought a person with his training, at his income level, would also feel the same thing that many poorer people feel.

KUTTNER: The trick in this economy is to get back to something like full employment at decent wages. So if somebody loses a job, they can get trained for a better job, not a non-existent job, but a job where workers are in demand, that pays decently. In spending public money to prevent this from turning into a depression, we can also make this a more secure society. We can also make the economy more balanced for ordinary people.

We ought to make every job in the human services a professional job that pays a living wage, so that the people who take care of our kids, who take care of our parents. Our professionals who are well-trained, who are not seven dollar an hour minimum wage workers with high turnover. And that will also make this—a fairer and more equal society.

There is a possibility of running the economy in a very different way, one that benefits regular Americans. But only a president, it seems to me, can define the moment, can define the choices, can explain why the world has changed, can explain the opportunity that we have. And—this is his challenge.

BRANCACCIO: Robert Kuttner, economics writer, one of the founders of The American Prospect and a senior fellow at Demos, thank you very much.

KUTTNER: Thank you.

BRANCACCIO: You can dig deep in to the current economic situation and watch other views on what President Obama should do. Search, browse and view all of now's shows on the economy free and in their entirety. It's all on our website.

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And that's it for NOW. From New York, I'm David Brancaccio. We'll see you again next week.

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