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Wednesday, Jan 14, 2009, 1:49 pm

Weekly Audit: Filling FDR’s shoes

By Zach Carter, Media Consortium blogger

The Great Depression permanently changed the government's role in the U.S economy, and it appears increasingly plausible that the current recession will have an equally lasting policy legacy. The bailouts orchestrated by the Bush administration have been an absolute mess, but they present an opportunity to create new consumer protection-oriented economic programs the likes of which we haven't seen since the days of Franklin Delano Roosevelt.

As Mark Schmitt explains in a piece for The American Prospect, establishing a government entity in any sector—banking, health care, education, etc.—that serves as a gold standard for consumer protection will force the private sector to offer similar services to compete with the attractive government program.

In essence, the goal is to align private sector profits with public benefits, not unlike what FDR did with housing during the Great Depression, when the government started offering people radical new 30-year mortgages at affordable interest rates. In short order, banks switched from five-year loans to long-term loans, and a new class of homeowners was created.

President-elect Barack Obama's economic stimulus legislation looks to make the same kind of bold economic overhaul, and while the proposal has some real problems, it seems clear that Obama is going to take serious action to reverse the economic slide.

Writing for The Progressive, Matthew Rothschild applauds virtually every policy point Obama has presented in making the case for his first major piece of legislation, from financial regulation to expanded broadband access.

This is not to say that significant hurdles are not ahead. Rothschild echoes economists of varying ideological stripes by expressing concerns that the bill is too small and will not be enacted fast enough. Congressional Democrats are already voicing uneasiness over the potential effectiveness of some of Obama's proposed tax cuts, and the stimulus bill itself is not likely to tackle every policy priority Obama has advocated (Congress is likely to tackle regulatory affairs in separate legislation, for instance).

But as Steve Benen articulates for The Washington Monthly, the current policy debate is very different from the political bed-wetting among Democrats that we have grown accustomed to over the past eight years. Democrats are actually governing.

"It's important for policy makers to act as quickly and effectively as possible, but there's nothing wrong with a collaborative process in which an administration and leading lawmakers engage in some back-and-forth," Benen writes.

In at least one sense, the stimulus bill has already notched a meaningful victory. Namely, everyone from CNBC to The American Prospect is talking about economics as a realm in which the government can play a constructive role. The victory is not total: there are still nay-sayers on spending over at the Wall Street Journal's editorial page, and members of the reality-proof economics department at George Mason University will be quoted extensively in AP-style newspaper reports for the next few weeks to give stories illusory ideological "balance." Nevertheless, there is a general consensus for aggressive government action the economic front, and the public discourse is now focused on which courses of action are appropriate.

Josh Marshall offers one such critique over at Talking Points Memo. Marshall notes that while the debate between Congress and the Obama administration has been constructive in some ways, the negotiating strategy remains something of a gamble. Obama is starting small—Paul Krugman, for instance, believes Obama's proposed $775 billion bill will only close about one-third of the economy's output gap. Obama may be hoping to allow the legislative process to build the bill into something large enough to withstand the current economic headwinds. But if that is the case, Marshall contends, Obama also risks loading the package down with politically damaging and economically unproductive pet projects.

"If you get deep into a lot of bidding and horse-trading you get more parochial interests in the mix," Marshall writes.

Over at The Washington Independent, Mike Lillis details problems with various tax cuts Obama has rolled out for the stimulus. Major losers include a $3,000 incentive for companies not to lay off current employees, which appears unlikely to change any HR habits, and a corporate "net operating loss carryback" extension, which results in a huge giveaway for companies that take losses this year—notably banks who have already been bailed out (at least) once in recent months.

There can be no doubt that the economy is getting worse. The U.S. lost 524,000 jobs in December, bringing total yearly job losses to 3.6 million, and boosting the unemployment rate to 7.2%. New America Media highlights a report by Hispanic Business detailing how minorities have been disproportionately affected by the downturn. The unemployment rate among blacks soared to 11.9% in December, while 9.2% of Hispanics looking for a job didn't have one.

The unemployment rate covers one of the most damaging aspects of the recession, but it's also important to remember that Wall Street's success in pushing workers into the sham 401(k) industry has also decimated the retirement savings of millions of Americans who were about to leave the workforce voluntarily.

In a 401(k) account, a worker pledges a certain amount of his wages every paycheck to a fund managed by an investment manager. Over time, these investment experts are supposed to maximize the returns in this fund, to provide better-than-market growth in the employee's retirement account.

But 401(k) plans almost never actually work like that--they consistently score lower returns than broad market indexes like the S&P 500. You'd be better off in many cases just betting on the Dow than turning over your money to these guys. What's worse, you pay them a fee to screw you over. As Dan Solin puts it for The Huffington Post:

"The 401(k) system is a disgrace. Employers get paid off in the form of subsidies to select brokers and advisors who control the investment options in the plan. They, in turn, get paid off by fund families and insurance companies which limit employees' investment options to costly, under-performing funds."

None of the major 401(k) managers saw this year's stock declines coming, and as a result, most people whose retirement is bundled into a 401(k) plan can't retire any time soon.

The current economic climate leaves very little room for forgiveness on almost any policy, which makes living up to FDR's economic standard an extremely difficult task. Fortunately, Obama seems to recognize there is no other choice.

This post features links to the best independent, progressive reporting about the economy. Visit Economy.NewsLadder.net for a complete list of articles on immigration, or follow us on Twitter. And for the best progressive reporting on critical health and immigration issues, check out Healthcare.NewsLadder.net and Immigration.NewsLadder.net. This is a project of The Media Consortium, a network of 50 leading independent media outlets, and was created by NewsLadder.

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