What Obama needs to do

The 1970s marked the end of two eras, the gold-backed monetary system (which ended between 1971 and 1973) and the era of cheap oil, which ended in 1973. The dual crisis, poorly understood at its inception, ushered in several painful years of stagflation, in which scarce energy was coupled with monetary policy mismanagement to produce both high inflation and economic contraction. Jimmy Carter was dead right about the long-term energy challenge, but he was mocked for his efforts, which were abandoned after he left office.

Reagan misdiagnosed the stagflation, and put the United States on a disastrous long-term course. Reagan and his colleagues argued erroneously that the problems lay in government regulation, excessive taxation and welfare handouts rather than on the need for a redesign of monetary policy (which Paul Volcker painfully accomplished) and a sound long-term energy policy.

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They proceeded to dismantle much of the social safety net, building an underclass in America that is shocking by the standards of other advanced economies and leaving America, for example, ranked 24^th in the world in life expectancy and 25^th in infant mortality. The great myth in America is that capitalism demands such brutal neglect of the poor, a point that is disproved daily by the high incomes, low poverty and social cohesion of other advanced economies.

The Reagan tax cuts led to a generation in which we've been unable to invest in basic infrastructure. And the Reagan era began the massive financial deregulation that brought us to today's calamities.

The Clinton era reversed some of the excesses of the Reagan era but was basically a compromise with it. During the 1990s, tax revenues as a share of GNP were kept low, and Washington continued to dismember the social safety net (by "ending welfare as we know it" and abandoning any major efforts in housing, child care or public education) and accelerate financial-market deregulation.

Foreign assistance in the 1990s fell to rock bottom, a miserly 0.1% of GNP, allowing the AIDS pandemic and an African hunger crisis to build. Then, as now, Americans failed to understand that unattended hunger, disease and deprivation are the breeding grounds of extremism and conflict that threaten our national security and lead to vastly larger costs.

Big money further infected the political system, as well. Both Democrats and Republicans made peace with vast wealth by linking up with the high-flying innovators on Wall Street, the ones who have now crashed to earth.

Yet the supplication to the bond market was taken to mean the end of ambitions to solve great challenges of energy, climate, poverty or infrastructure. Universal health care remained essentially the only area of remaining progressive commitment, and that, of course, went unfulfilled.

Karl Marx famously said that history comes first as tragedy, and then as farce. Yet under Bush we've had both tragedy and farce. The Bush administration made shopping and tax cuts the official macroeconomic policy of the United States. Households were to borrow against their housing wealth to keep the consumption machine going. Financial deregulation, building on the precedents of the 1980s and 1990s (and the savings-and-loan and dot-com bubbles they helped stoke), would keep the housing market in fine fettle.

Continued: Dishonesty and shortsightedness abound

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