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.

Shuttting Detroit Down

Once upon a time, not so long ago, in a city at the heart of the American continent, General Motors produced cars, like Pontiac’s “Little GTO,” celebrated in Beach Boys songs that captured the thrill of driving Detroit’s latest creations. Today, as GM struggles to appease the government’s auditors just to stay alive, Kris Kristofferson, with a little help from Mickey Rourke, curses the financial wizards from Wall Street that are “Shutting Detroit Down” while “livin’ it up in that New York town.”


Never has the inherent tension between the investor class and the country’s manufacturing sector been more pronounced or the stakes in this particular poker game higher for the future of America. Chrysler may have been forced into bankruptcy first, but it’s GM's downfall that represents the true mid-American earthquake.

Back in the late 1950s, General Motors so dominated the American automobile market that its corporate goals were focused on achieving a 60% market share. The hubris of its executives led them to decide to pick up more and more costs for medical insurance, pensions and retiree benefits, beginning GM’s slide down a slippery slope of poor financial performance

This posed a huge but not initially recognized risk to GM. By taking on these obligations that didn't show up as a cost or balance-sheet liability until the government changed its accounting rules in 1992 and required companies to show the cost of “other post-employment benefits” (OPEB) on their books, General Motors lit a ticking time bomb that has now exploded in its face. In 1972, as GM came the closest it would ever come to achieving its sixty-percent market share goal, GM was paying the entire health insurance bill for its employees, survivors and retirees, and had agreed to "30 and out" early retirement that granted workers full pensions after 30 years on the job, regardless of age. Its world then began to come apart.

In 1973, OPEC’s embargo tripled the price of oil. GM failed to respond quickly enough to the consumer’s sudden demand for fuel-efficient cars. At the same time, the Japanese with their then superior, lean manufacturing techniques stepped into the vacuum, gaining a foothold in the North American car market that they have continued to expand. Ironically, thirty years later the very same inability to shift product offerings during a spike in oil prices precipitated GM’s current difficulties.

GM’s reluctance to go green is often cited by its new government owners as the reason it’s in so much trouble now, but the crux of GM’s problems really go back to those heady days of market domination and financial profligacy.

In the 1960s GM’s annual operating margin (profits divided by revenues) averaged 8.7%. The turmoil of the seventies and the pressure from Japanese competition drove those average margins down to 5.5%. Margins fell by about half to an average of 3% in the 1980s, and about half again to 1.3% in the 1990s (not counting the $20 billion hit GM took when the new accounting rules for OPEB took effect.) Finally, in this decade the slide has actually taken the company into an average of negative margins. Now only the government’s suggested radical restructuring seems to offer a way to stop the bleeding.

It is estimated that the cost of OPEB, essentially GM’s retiree pension and health care programs, have cost the company about $7 billion each year since 1993 and are probably around $10 billion per year now. The bargain auto company management made back in the 60s with labor to provide generous off the balance sheet benefits has now become an albatross that threatens the manufacturing jobs for the Big Three’s own current workers and suppliers across the Midwest. It’s the kind of problem only government can solve.

But the Obama Administration’s early efforts to do so have been far from promising. First it selected Steve Rattner as its “car czar”, a politically well-connected private equity investor and turnaround artist from “that New York town,” someone with no significant automobile industry experience. In addition, the government's demands that GM dismantle more brands and shut down more dealerships suggests the process may get a lot uglier by the May 31 decision deadline.

Luckily the United Auto Workers remain on watch to try to ensure that whatever concessions are demanded of GM’s current and retired employees reflect an equitable shared sacrifice with the company’s bondholders and investors. The kind of GM that emerges from these negotiations will have a huge impact on these workers and on the many industrial towns that depend on the car business for their basic existence.

Ultimately, the decision on how best to “rescue” GM may turn out to be the most difficult call President Obama will make in his first year in office. He will be pulled by pressures from the green gentry left to force GM’s future products to conform to a pre-determined environmental agenda. He also will face predictable Republican calls to let the market work its will, even if it means the end of the company.

President Obama will need the wisdom of Solomon to recognize that today’s workers no more deserve to be punished for the mistakes of prior management than CIA agents do for carrying out the orders of their equally arrogant Republican counselors during George W. Bush's administration. To paraphrase the President’s words, it’s “time to move on” and offer GM the support it needs to “Catch a Wave” and start producing more “Good Vibrations” for America’s hard pressed, but still very critical manufacturing sector.