Obama’s New Strain of Capitalism struggling to be born

By Philip Fernando in Los Angeles for Lanka Guardian

(February 06, Los Angeles, Sri Lanka Guardian) British economist, John Maynard Keynes first proposed it during the U S recession of the thirties. The modern version of that demand-driven economic boost, now dubbed the Obama strain of capitalism is causing sleepless nights to the new administration in Washington D.C. President Barack Obama and congressional Democrats were on a direct collusion course during intense encounters with their antagonists, the Republicans. Tax cuts versus more spending became the issue. The 900 million dollar stimulus package faces a close vote in the Senate next week. Cash strapped state governors are also claiming a stake in it adding to Obama’s woes.

Keynes even in his dreams would not have imagined that his economic theory would touch off such a frenzied debate among interest groups eager to claim their share of the expanding stimulus pie. The profusion of requests from transportation groups, big bankers, environmental activists, business organizations, dispossessed home owners and state governors is spawning fears that the package could be loaded with provisions that satisfy important Democratic constituencies but fail to provide the jolt needed to pull the nation out of a deepening recession.

Obama advisers have been quick to respond that they were keenly aware of the potential pitfalls and had focused on funding ideas that would quickly pump money into the sagging economy, fulfilling Obama's promise to preserve or create 3 million jobs by 2010. A significant tax cut for the middle class was added during the debate in the House of Representatives. US Senate vmight re-hash some of those and what ultimately emerge may be anyone’s guess. The package could also include tax credits to companies that create jobs,

Keynes’s deficit based, government stimulus spending and strong regulation of markets took place when the accepted economic model failed in the thirties. State intervention including government social programs, infra-structural spending and even partial state ownership became fashionable. Inflation with slow growth called stagflation set in the seventies coupled with low profits and high military spending combined with aging capital stock. Economic distress emerged. So things went back to the good old capitalism until the bottom fell out of the system under George W Bush’s tenure.

Following the concepts of Austrian economist Friedrich Von Hayek, Ludwig Von Mises and Milton Friedman had opposed state intervention as what the cat brought. In the ensuing years, the role of workers and trade unions were diminished. Wages were kept to a minimum. These neo-economists thought that lower taxes and non-regulation were better. The supply side economics became the norm. They ignored the bad omens when the lower economic returns arrived by 2001 followed by the dot.com bubble that got busted. Recovery under George Bush was based on a grossly inflated housing bubble backed by subprime mortgages which destabilized the financial markets. So we are at the threshold of the Obama strain of capitalism. The return to Keynesian economics with a sprinkling of tax cuts became accepted with a vengeance.

Suddenly the debate took another turn. Now the Republicans are pressing hard to get a bigger share of tax cuts and also reduce spending on a large scale. Is Barack Obama losing the argument on the stimulus package? Some believe that he might not even get all the Democrats to vote for it unless the package is changed drastically.

The stakes became high when massive spending was lobbed into the bill by the House Democrats during the House debate. That spending was denounced by some as non-job-creating spending, such as the $50 million for the National Endowment for the Arts and $726 million for an after-school meal scheme, according to the Republicans.

But Obama’s bigger difficulty is with what is being seen and heard on TV everyday. Perception is every thing in politics. Everyone is calling the bill a stimulus package, and not a recovery plan. According to Keynes, a stimulus would boost the economy immediately. So some of the long-term spending or a down payment on future growth is viewed differently. Those wanting to start spending on health care and education are now wondering whether there would be enough money in the package for all that. The so-called the American Recovery and Reinvestment Act (TARP) is not resonating. It does not fit the purpose and doesn't make for a good acronym.

Bush administration had failed to stop the earlier $700 billion bailout of Wall Street from being called a bailout (which it was). Now Obama has to make a good PR job to get this TARP passed. Obama needs to win the headline war if he wants to have his bill passed intact. Most probably it would get changed beyond recognition.

The new strain of capitalism is struggling to be born because no one knows what it should be. The administration has proposed too many things in too short a time period. It has bit of everything in it and not too much of “pork” for everyone to claim ownership of it, according to one observer. The president may ultimately have to make some compromises. Or he may have to get a good mid-wife to assist in the delivery of the brand new baby christened as the 21st century capitalism. Some say that Senator John McCain would most likely be that deciding vote in the Senate.-Sri Lanka Guardian