Barack Obama's victory speech inspired confidence and raised expectations. His victory was historic not just because it had brought a coloured man to the White House for the first time in US history. It also signaled that the more than three-decade old neo-conservative turn in economic policy making in the US is discredited and challenged. In more ways than one, Obama’s later campaign made clear that a change from that policy was required, raising expectations that the President-elect will seek to redirect capitalism in new directions. The question on everyone’s mind, at home and abroad, is: Will Obama ensure that the Golden Age of 20th century capitalism, the high growth, welfare-statist years of the 1950s and 1960s is not the exception that it seems to be, by launching a new era of creditable growth, higher employment and lower inequality?

That question is based on an obvious interpretation of Obama’s comfortable mandate. As has been repeatedly noted, the political tide turned decisively in his favour because of the financial crisis and the popular anger against a private sector that engineered the crisis and an administration that supported and rewarded these private sector entities and individuals. The victims of that anger directed against the Bush administration were the Republicans and McCain. Obama did not fail to use the evidence that the Bush administration had helped precipitate this crisis through partisan policies, which favoured Wall Street vis-à-vis Main Street, the rich as opposed to the poor and middle classes and the banks and financial firms rather than homeowners facing foreclosure. Not surprisingly, economic circumstances and that campaign have increased expectations that he would turn the economy around rather quickly. It is his ability to address the crisis and trigger a recovery that would ensure that he can protect the high popularity ratings he now commands.

The contours of the crisis are now well known. It has questioned the solvency of many financial institutions including some banks, necessitating a $700 billion-plus bail-out, which includes a bank recapitalization financed with tax payer's money. The restructuring of the financial sector is expected to result in a loss of a further 70,000 jobs in the US alone, on top of the 150,000 jobs estimated to have been lost in the financial sector worldwide. This is already triggering a massive slow down in the retail market, the services sector and real estate in the financial centres of the world. The financial crisis has also led to a contraction of credit, not because of a lack of liquidity which the Federal Reserve has injected in sufficient quantities, but because of uncertainties surrounding the ability of counterparties to meet future commitments on any credit provided. A consequence was the curtailment of debt-financed consumption and investment, which were already affected adversely by the wealth-erosion ensured by the collapse of house and stock prices. The resulting recession, has taken the unemployment rate to 6.5 per cent with job losses in September and October alone exceeding half a million. This in turn, is expected to intensify the recession even further, and the resulting downward spiral is seen as threatening a depression comparable with the 1930s.

The implication of all this is obvious. Support for the private sector through lower interest rates, financial bail outs and the like are unlikely to stop the downward spiral, because of insolvency and the collapse of business confidence. Nor would tax cuts spur demand, because they may be used to bolster savings and compensate for the erosion of paper wealth and home equity. It is necessary for the government to also intervene with expenditures in forms varying from an unemployment dole and prevention of housing foreclosures to large scale infrastructural investments. It is another matter that Obama can seek to combine his commitment to combat climate change and promote sustainable technologies with the need to expand demand through a fiscal stimulus.

These circumstances have encouraged comparison with the situation when Franklin Roosevelt took office in 1932 in the middle of the Great Depression. Roosevelt with his New Deal and much else showed that he was not going to be cowed down by the prevailing conservatism. He declared his commitment to intensified bank regulation, insurance of smaller bank deposits, public works programmes and Social Security. This meant that he sought to stall the downturn, by substantially increasing regulation of the financial sector and providing a fiscal stimulus to the economy. However, capitalism in crisis is not easily saved. Whether, it was, as some argue, the fact that Roosevelt did not go far enough in terms of the money he committed to the fiscal stimulus, or because when the damage is severe even state intervention cannot easily repair a system driven by private initiative, FDR’s initiatives did not deliver the expected expansionary results and unemployment was high even at the end of his first term. By all accounts it was the Second World War that delivered the recovery from the Depression.

This has lessons for Obama, defined by circumstances. The so-called lame-duck, Bush administration has already chosen to drain the Federal Reserve and the Treasury to save an economy it has helped damage. The programme to restructure troubled assets, which is slated to absorb $700 billion of tax payers’ money, is only a part of the rescue commitment. And this occurs after the Bush team had widened the fiscal deficit to finance its misadventures in Iraq and Afghanistan and to cover its tax concessions for the wealthy. According one estimate, when the financial rescue is added on, the US budget deficit could more than double next year to almost $1 trillion. This would not only make it difficult for Obama to deliver on his promises to allocate sums between $60 billion and $110 billion for universalising health insurance and $150 billion to alternative energy, but also to find the much larger sums needed for a fiscal stimulus that may prevent a recurrence of the FDR rupture between rhetoric and reality. He will have to fight much opposition to even try this option, to find out whether it works or not. Unfortunately for him, he cannot easily conjure up a war. He has as his legacy not just an economic crisis but a United States that is weary of war, even if in isolated theatres across the world. And his call for change had more than a hint that he would substitute diplomacy for war.

Yet comparisons with the Roosevelt era are rife. To quote Clive Crook of the Financial Times (November 7, 2008): "Is Mr Obama an FDR for the new century? A president has many ways of ruining his reputation, and this is a different world, yet the idea looks plausible. Like Roosevelt, Mr Obama inherits a crisis not of his making. Like Roosevelt, he is brimming with energy to get things done. Like Roosevelt – happy days are here again – he has given the country a jolt of optimism just by turning up. FDR understood that his greatest strength was not being Hoover; he emphasised (and exaggerated) the differences. Mr Obama gets it and does not have to try so hard. Could he be more different from George W. Bush?"

Thus, the historic election of the first black President in the US in the middle of a crisis that is acknowledged to be the closest to Great Depression, is indeed seen as one more Roosevelt moment. The question is: will and can Obama rise to the occasion, not just by emulating FDR, but by going beyond him. Obama made clear his intentions in his very first press conference after his election as President. "We are facing the greatest economic challenge of our lifetime, and we’re going to have to act swiftly to resolve it," he reportedly said. “I’m going to confront this economic crisis head-on by taking all necessary steps to ease the credit crisis, help hard-working families and restore growth and prosperity.”

If Rahm Emanuel, appointed the next chief of staff by Obama is to be believed, the President-elect is serious. His team would put in place a comprehensive programme of social and economic reform, treating the "financial meltdown as an historic opportunity to deliver the large-scale investments that Democrats had promised for years." Even before he takes office Obama is expected to push for immediate assistance to an automobile industry that is near bankrupt.

Thus, there is a hint that the Obama team would use the FDR moment to make a break. But there are indications to the contrary as well. To start with, his choice of advisers. If still-speculative reports are to be believed, the likes of Lawrence Summers, Robert Rubin and Paul Volcker are to be leading members of his economic team. As Mark Ames notes in The Nation (November 10, 2008), Summers, the most-favoured candidate for Treasury Secretary, was brought to Washington in 1982 by his then dissertation advisor Martin Feldstein, “to serve on Ronald Reagan's Council of Economic Advisors. Those first years in the Reagan administration were crucial in the right-wing war against New Deal regulation of the banking system and financial markets--a war that Reagan's team won, and that we're all paying for today.” As for Volcker, we cannot forget that as Chair of the Federal Reserve he sought at the end of the 1970s to deal with inflation by raising interest rates sharply – the "Volcker shock" – resulting in the devastation of a number of developing countries exposed to external debt.

Candidates like these do not inspire the confidence that they will be willing to try what needs to be tried. While circumstances may force them to wear borrowed Keynesian hats, they would balk at spending that is not financed out of additional taxes. But they would oppose taxes on the rich on the grounds that it would erode confidence. Obama may use the fact that world governments are looking to the US for new leadership to combat a global crisis that originated in the US. He can also use the fact that some like China have chosen to put a huge $586 billion into the global kitty aimed at financing a fiscal stimulus. Moreover, financial commitments by governments in the United Kingdom and Europe to prop up their financial sectors makes clear that they too see the need for pro-active state policy. These factors make it possible for the incoming Presidency to lead a globally coordinated Keynesian-type stimulus that has more chance of working than many other plans that are on offer.

However, global Keynesianism without a global economy and global government presumes the existence of national economic policy space, so that trade diversion, capital flows and currency movements do not undermine the effort. With uneven development being an abiding and visible feature of capitalism, not all regions can successfully reflate while being fully integrated with more developed centres. Differences in inflation rates would have implications for exports and imports that would affect capital flows, currency values and interest rates, leading to very different growth and distribution effects. A reversal of globalization may therefore be a requirement for successfully combating the current crisis. That reversal can come in a "competitive" environment that revives memories of global war or it can come in a cooperative environment in which all countries realize that “coordinated” protectionism, however limited, is the best option. This, however, does involve a degree of painful restructuring of capacities and structures created during the globalization phase.

There are bound to be vested interests opposing such restructuring. The fear is they may be part of the Obama team. But the situation calls for global leadership of a kind that the US is currently least well placed to deliver. That makes Obama’s mission even more difficult. But then, till quite recently few suspected he would be in the seat where he can face such difficulties. Being in that seat he has the power to overcome them. And the enthusiasm and the tide that brought him to power may take him further. The message is, "Yes he still can."

November 18, 2008.