In his masterful address before Congress on February 23, Barack Obama summoned “an America that does not quit.” His words inspired a great deal of hope. But they were also premised on a great deal of hope. The president predicts that the stimulus package will revive the economy by next year. He expresses confidence that moribund banks can be reinvigorated and kept in private hands with further injections of government capital and a public-private partnership to buy up toxic assets. He believes his economic team can use the leverage of federal loans to force U.S. auto companies to make enough reforms to keep the industry and its vital chain of suppliers alive.

In this issues cover story (“No Return to Normal“), economist James K. Galbraith provides a darker picture of whats in store. He begins by questioning an assumption held by nearly all modern economists, including those around Obama: that economies are naturally self-stabilizing, and therefore that economic slumps can be righted with relatively modest, short-term nudges from government. That idea fits the experience of every postwar recession. But what if the current crisis is less like those downturns and more like the Great Depression, when the economy famously failed to return to normal? In that case, the actions that official Washington has taken are bound to be woefully inadequate to the challenge.

If Galbraith is rightand I fear he isit means that tens of millions more Americans will be out of work in a year or two or five, even if the stimulus creates all the jobs the president expects. It means that the big banks really are “zombies” that will neither resume normal lending nor grow their way out of insolvency regardless of how much money the Treasury pours into them. It means that the auto companies will burn through every dime the government lends them and still not turn a profit.

And it means that the federal government will face some stark choices: put millions of Americans on the dole, or give them government jobs. Place half the nations big banks into federal receivership, or face financial Armageddon. Let the domestic auto industry go bankrupt, or take it over, too.

These are choices that most elected officials can hardly bring themselves to contemplate, for understandable reasons. Even many liberals would have serious doubts about government controlling so directly what has traditionally been the domain of the private sector.

Yet the truth is that the government has a surprisingly impressive record of stepping into that domain during emergencies. The Federal Deposit Insurance Corporation routinely takes over insolvent banks and turns them around. If the FDIC is too small to manage the reconstitution of so many Wall Street behemoths, as critics suggest, then Washington could build new agencies to handle the task, as it did during the savings and loan crisis when it created the (quite effective) Resolution Trust Corporation. Attracting talent shouldnt be a problem. There are plenty of unemployed Wall Street bankers looking for meaningful work, not all of them tainted by scandal.

Running insolvent banks is at least in Washingtons “wheelhouse,” as the consultants like to say. But a government takeover of the automobile industry? Certainly that would be a disaster, right? Well, consider the tale Phillip Longman tells of another major transportation enterprise that went into federal receivership (“Washington’s Turnaround Artists“). In 1976 Washington took over Penn Central and five other bankrupt railroads and folded them into a government-sponsored entity, Conrail. New management was recruited, federal dollars pumped in, major structural reforms instituted. A decade later, a thriving Conrail was sold off in what was, at the time, the largest IPO in U.S. history.

A fluke? Hardly. During World War I, Woodrow Wilson put the entire railroad industry under government control, and later placed it back in private hands in much better shape than when he got it.

Stories like these dont fit the paradigm that most of us, after listening to antigovernment conservatives for thirty years, have in our heads about what government can and cannot do. But as Charles Peters notes in Tilting at Windmills, there are plenty of such stories. In November 1933, FDR directed his relief administrator Harry Hopkins to start a new agency, the Civil Works Administration, to provide useful government jobs to the unemployed. Four months later, Hopkins had four million Americans on CWAs payroll. And he managed the whole operation with nary a hint of scandal.

Like most Americans, I would much rather see Barack Obama lead this country out of recession in the next year and avoid having the government take over key industries or create millions of public-sector jobs. But he, and we, should know that if necessary, government has the capacity to do these things, and do them well. That, to me, is a real source of hope.

This site and all contents within are Copyright 1969-2009 Washington Monthly
Editorial offices: 1200 18th Street NW, Suite 330, Washington, DC 20036

Paul Glastris

Paul Glastris is the editor in chief of the Washington Monthly. A former speechwriter for President Bill Clinton, he is writing a book on America’s involvement in the Greek War of Independence.