Change

Why did Barak Obama win? In essence, it was because the American voters wanted a change in government (see my piece “Elections in America”). That is what democracy is for: if one party or policy produces no results or, as is the case now, leads to a crisis – the voters give someone else the mandate. Any Democratic candidate would have probably defeated the Republican candidate. The election analyses confirm this – a major shift of voters to the Democratic side occurred (see Andrew Gelman’s blog  „Statistical modeling, causal inference, and social science“). This is basically true for all voter characteristics – regional, financial, educational, ethnic and so on (see „Dissecting the Changing Electorate“, in the Sunday edition of The New York Times). This confirms that main issue of these elections was change; the voters have expressed distrust of the current President’s party and politics.

The immediate cause of McCain’s and the G.O.P.’s defeat is a deterioration of the financial crisis. The voters gave the mandate to Obama and the Democratic Party, believing that they’ve got a better plan and a more skillful team for resolving the crisis. The Republicans still enjoy the support of the wealthy and white people, but what is interesting is that the wealthiest, those earning more than $200.000 a year, have overwhelmingly voted for Obama. This is interesting because throughout his campaign Obama kept repeating that those are the only people whose taxes he would raise, while McCain promised them the tax cuts which they got during the Bush administration. Why is that? A partial answer follows.

What is the plan for change? For the most part it is being written. The circumstances changed dramatically in the last couple of months so a program for stabilization and taking care of the job market are clearly a priority. One part of Obama’s plan – the one about the reduction of wealth inequality – has already been achieved by the market: the market decline and the widespread downturn in the housing market are such that the percentage of wealth owned by the wealthiest few will decrease significantly. This, probably, explains their support for Obama and the Democrats, because it is more important to provide profit through a general economic improvement than to save money on taxes when the recession is deepening. This also makes the debate about capital gains tax pointless, because right now there would be nothing to tax – the losses are being distributed.

Another problem will come into focus. Some sort of stabilization is needed in the housing market, and this calls for doing something about the mortgage loans. Whether debtors or creditors will be subsidized or whether loans will be guaranteed or all those things together, this will depend on the negotiations in Congress. There is also no doubt that certain steps will be taken to stabilize spending. Taxes will be cut and social spending will increase. There will also be an increase in public investments, which was planned beforehand. Finally, something will have to be done to stop the rise in unemployment. The problems of the auto industry are being discussed, but that is just the beginning.

It is hard to say how much ideology will influence the stabilization plan. Pragmatic reasons will probably prevail. Proof of this can be found in the recently published paper „The Political Economy of the U.S. Mortgage Default Crisis“ by Atif Mian, Amir Sufi and Francesco Trebbi (NBER Working Paper 14468). It shows that American lawmakers have already taken a very pragmatic, political approach to the requests for government intervention in trying to prevent the consequences of the crisis. The one exception were the conservative Republicans, who were largely driven by ideological reasons. Therefore, we should expect that the deciding factors will be the depth of the problem and the feasibility of the solution and not the liberal or conservative preference.

We should, however, keep in mind that this is a case of political and not of technocratic pragmatism. So it is not unimportant whose interest will be considered greater and whose demands will be louder. There was a major power shift. In the last twenty years the voice of Wall Street was very influential, so American presidents and lawmakers had to keep their interests in mind. This is no longer the case. The representatives of what is called Main Street, that is, the real economy, will be much louder.^[1] Generally, Obama will have more power than his predecessors, because his party controls the Legislature, and the influence of many lobbies has greatly diminished. The problem is that this concentration of power is the result of crisis, or general helplessness , and therefore limited by problems, that is real economic and social interests.

The suggestions of people like Bob Rubin, Larry Summers and Paul Krugman, all of whom are close to Obama or can influence his advisors, are influenced by Roosevelt’s policy known as The New Deal. Regardless of that, it is clear that now, just like back then, a great number of new public services and agencies are needed to implement all the programs necessary in this time of crisis. Apart from that, not everything can be settled with money, because the main problem is precisely in lack of it, so regulations will have to be established and the government’s regulatory role will be greater. Finally, the relationship between the federal and state power could be dramatically altered, since the budgets of the latter are in poor condition and significant help from the central government is needed.

What are the odds for success? Based on the ambition with which Obama asked for voters support, it is expected that he and his team will come out with a comprehensive plan and a long-term strategy for stabilization and progress, not only for the American economy but for the American state. The chances of success are not small, simply because a mandate was attained and the opposition will have to cooperate. Besides, America’s leading role was reinforced, most importantly because relations with the European Union will be significantly improved, and other important participants in world politics are experiencing even greater hardship than America. America will go back to multilateralism, which suits her better than unilateralism. Especially because the solution to today’s crisis cannot be found if globalization is not strengthened, above all in trade and then by the renewal of the world’s financial system.

So, there will be change. Exactly what this change will look like will largely depend on whether the new American president will come up with a program to change the course of current financial tendencies or whether he will continue, like his predecessor, to conform to these tendencies. The voters have done their part – the mandate for change was granted.

 
Translated by Ivica Pavlović

Peščanik.net, 13.11.2008.