An Economy on the Rebound
When President Barack Obama took the oath of office on January 20, 2009, the U.S. economy was in free fall. During the preceding year and half, some of the nation’s largest and most important financial institutions went bankrupt, including Bear Stearns, Countrywide, and Lehman Brothers, as risky loans and other investments failed. Many other large banks were on the verge of collapse. The downfall of the financial sector had been preceded by a spectacular end to a massive speculative housing bubble that almost instantly wiped out trillions of dollars of Americans’ net worth. When Lehman Brothers and AIG went into bankruptcy during the same weekend in September 2008, panic ensued all across the economy. It felt like 1929 all over again. The Troubled Asset Relief Program (TARP), which was signed into law by President George W. Bush and was implemented by President Obama, stopped the bleeding in the financial sector, but the damage to the broader economy had already been done as other sectors of the economy continued to rapidly deteriorate. The stock markets plummeted, losing more than half of their peak market capitalization just six weeks after Obama took office. Many retirees and workers nearing retirement saw their investment portfolio lose much of its value. Millions of people lost their jobs due to no fault of their own after the U.S. entered a recession in December 2007. Over 1.2 million Americans were laid off between the election and Obama’s inauguration. All told, the Bureau of Labor Statistics estimates that 8.7 million jobs were lost due to the Great Recession. No president since Franklin D. Roosevelt has begun their tenure in the White House under such dire circumstances. An evaluation of each segment of the economy around the time Obama took office compared to now shows that we are definitely better off four years later.
After being sworn in, the Obama administration went to work right away with Congress in devising an economic stimulus measure that would put a floor on the recession. The American Recovery and Reinvestment Act of 2009, which became known as the Stimulus Act, was signed on February 17th, less than one month after Obama took office. The $787 billion measure was much smaller than most economists felt was needed given the much greater drop in GDP, but a larger stimulus measure was simply not politically feasible given Republican opposition. Notably, Governor Romney told CNN in January 2009 that he believed there was a “need for economic stimulus” that included investment in infrastructure and energy technologies as well as tax breaks for businesses to help make up for the loss in GDP and believed that “government can help make that up in a very difficult time.” The Stimulus Act spent money on a wide array of measures designed to help the economy. Approximately 38% of the stimulus act’s $787 billion went towards tax credits, deductions, and rebates aimed primarily at the middle class and small businesses; nearly everyone benefited from at least one of these tax provisions. For example, the average American household saved approximately $1,130 per year because of the 50% temporary cut in payroll (Social Security) taxes that were enacted as part of the stimulus package. President Obama understood that more money in middle class wallets meant more spending on American businesses, which would encourage hiring. Because of Obama’s (and Bush’s) tax cuts, federal income taxes on middle-income families are currently lower than they have been at any point during the past fifty years. The Stimulus Act also helped struggling states to avoid massive public sector layoffs by helping to pay teacher and other public servant salaries, and provided states with extra funding to handle the burgeoning unemployment and food assistance requests. Finally, the stimulus measure also helped fund many infrastructure projects, although it certainly did not go far enough. Much more spending is still needed to repair and modernize our decaying national infrastructure.
When President Obama took office, U.S. businesses were shedding nearly a million jobs a month. The unemployment rate was skyrocketing; it was 7.8 percent the day he was inaugurated and jumped to 8.2 percent the next month. By October, unemployment peaked at 10 percent.
Obama transition team’s miscalculated the severity of the economic situation. Information available to the transition team at the time showed the economy receding more slowly than what was actually happening. Obama’s advisors ended up making overly-optimistic projections on how much the Stimulus Act would impact the unemployment rate, and those initial projections have been exploited by Republicans ever since. It’s worth mentioning that making accurate employment rate projections for more than a year out is highly difficult. Nonetheless, the unemployment rate has steadily decreased since its peak, hitting a near four-year low at 7.8 percent last month. The last 31 months, which have consecutively delivered private sector job growth, affirm the durability of the jobs recovery. And just last week, first time jobless claims hit a four-year low.
Republicans have been quick to claim that the employment recovery has not been quick enough (they cite the administration’s flawed initial projections about the recovery) but fail to point out how their obstructionism in Congress has prevented an even greater drop in unemployment. Independent economists, including those at the forecasting firm Macroeconomic Advisers and the chief economist at Moody’s Analytics, estimated that had President Obama’s American Jobs Act been passed by Congress last fall, it would have added 1.3 to 1.9 million jobs, reduced the unemployment rate by at least one percent, and boosted GDP by over one percent. The president’s proposed measure won praise from prominent economists as well as top business leaders, including the CEOs of Pimco and Citigroup. In addition, the American Jobs Act proposed to spur hiring by helping states hire more teachers, police officers, and first responders. It proposed investing in making major improvements to deteriorating roads, bridges, airports, railways, schools, and other infrastructure. It had tax cut measures that target small businesses and continued the payroll tax break, which benefits nearly every working American. Senate Republican Leader Mitch McConnell, who previously announced that his party’s number one goal was to make Obama a one-term president, denounced the President’s proposal as a “charade that’s meant to give Democrats a political edge” in 2012. And it would have: Think about how different the current election would be if we had a 6.8 unemployment rate.
However, President Obama did manage to get bipartisan support for a small but important bill that was designed to increase employment among veterans. The Vow to Hire Heroes Act of 2011 expanded education and job training programs for veterans and gave tax incentives to businesses for hiring unemployed veterans. It’s also important to note the unemployment rate always lags behind other economic indicators in a cyclical recovery after a recession.
It’s worth mentioning that one significant contributor to current unemployment is a significant decrease in government employment. Public-sector employment in the U.S. is at its lowest level in over 30 years. After the expiration of public sector employment stimulus measures, many state and local governments were forced to slash their budgets and cut their work force. Since the recession ended in August 2010, total government employment has dropped by over 580,000 jobs when it would normally grow in proportion to population growth. These layoffs have hit critical areas including education, law enforcement, and air traffic control. While the opposition charges that government is bloated and needs to be trimmed, big government has actually shrunk under the Obama administration, largely because of the effects of the recession.
Continuing this look at the bigger picture, it appears that the economy is moving in the right direction in other areas. Over the past month, U.S. stock indices have soared to five-year highs. When Obama was inaugurated on January 20, 2009, the Dow Jones stock index was in free-fall, with its value at 8,280. It bottomed out six weeks later at 6,470. Yesterday, it closed at 13,343, an increase of more than 100 percent. For anyone who owns stock, including most people with investment retirement accounts, your portfolio has increased dramatically since Obama took office.
Many businesses have performed impressively over the past few years. In fact, many corporations have reported record profits during the last four years, with corporate profits for the Fortune 500 companies reaching an all-time high in 2011. Indices that measure consumer confidence are currently higher than they have been at any point since 2007.
While at the time the move was incredibly unpopular, President Obama’s decision to step in and save General Motors and Chrysler has been a resounding success. Many industry analysts believed that the U.S. auto industry would not have survived had the federal government not stepped in to give emergency loans. The loss of any of the automakers, especially GM, would have led to millions of additional layoffs. The layoffs would not only have included autoworkers, but all upstream auto-parts suppliers, as well as businesses that supported communities where autoworkers lived. The result would have been catastrophic to the states where American auto factories exist. GM and Chrysler have repaid a significant portion of their loans, with interest. GM is now making a profit again with strong sales in the U.S. and in many parts of the world. Most importantly, millions of autoworkers and employees in related fields kept their jobs.
Housing Market Turn-Around
Another segment that suffered profound losses was the housing market. Approximately 40 percent of middle class wealth vanished during the last two years of the Bush Administration due to the housing collapse. Since middle-class families typically have most of their net worth in their homes, the middle-class suffered tremendously as a result of the real estate crash. However, there are many indications that the housing market is on the rebound. Home prices are rising, sales of existing homes have been picking up, and new home construction and sales have jumped significantly. In many areas of the country, housing prices have recovered significantly, albeit not completely, since the crash. Thus in a very tangible way, many Americans are significantly better off than they were when Obama took office. In addition, sales of newly constructed homes are currently at a two-year high. The U.S. housing market is making a comeback.
About 1.5 million Americans with underwater homes (where the value of the home is less than the mortgage principle balance), myself included, have been able to take advantage of historically low interest rates by refinancing their mortgages and lowering their payments because of the Obama administration’s Home Affordable Refinance Program (HARP). Hundreds of thousands of potential foreclosures have been prevented by HARP. One criticism I have of the Obama Administration is that they were not initially aggressive enough in trying to help troubled homeowners while Wall Street banks got bailed out. However, HARP eligibility rules have been considerably expanded and now millions of additional homeowners are eligible for the program and the rate of HARP refinances has significantly accelerated in 2012.
Debt and Deficit
The national debt has undoubtedly increased under Obama’s tenure. However, when Obama took office in 2009, he inherited an annual federal budget deficit of $1.4 trillion from the Bush administration. The Congressional Budget Office recently projected the fiscal year 2012 federal budget deficit to be $1.1 trillion; the deficit under Obama went from 10.1% of GDP in 2009 to 7% of GDP in 2012, a significant improvement. And in the fiscal year 2013, spending is scheduled to fall by 1.3%. Republicans’ accusations of out-of-control spending by the Obama administration are patently false. Our current and projected debt is primarily explained by lost revenues caused by the recession, the Bush-era tax cuts, and the wars in Iraq and Afghanistan. Any prudent approach to our budget deficit must address these factors and thus new revenues must be part of the equation. That’s why the Obama administration’s proposals during the budget negotiations during the summer of 2011, and Democrats’ proposals in the super committee last fall were sensible. They offered a deficit reduction plan that was more conservative than the plan offered by the bipartisan Bowles-Simpson commission, proposing a six-to-one ratio of spending cuts to tax increases over the commission’s two-to-one ratio. However, to a Republican caucus that had almost universally signed a pledge to prominent conservative Grover Nordquist never to vote to raise taxes, that six-to-one offer was not good enough. If Obama is re-elected and if Democrats make even the modest projected gain in the House and hold onto the Senate, they will likely have the political capital to enact a grand bargain on deficit reduction. Republicans will no longer have to worry about trying to make Obama a one-term president.
Nonetheless, it’s worth noting that few macroeconomists would recommend austerity measures during a severe recession. The concept of deficit spending as a tool for combatting economic downturns is well established in the field of economics and has a proven track record. Even my macroeconomics professor at right-leaning Brigham Young University instructed us on the importance of this budgetary tool. A few conservative governments in Europe, most notably in the UK and Ireland, have enacted austerity measures as a response to the recession, to their own peril. After the UK government significantly cut back its budget, the country sunk into a double-dip recession. This is why despite all of the right-wing criticism of Obama’s stimulus measures, his deficit-spending action was needed to turn around the economy. Numerous economic studies have confirmed that many of President Roosevelt’s stimulus measures in the New Deal helped to restore economic growth and end the Great Depression. The Obama administration is right to focus on deficit-reduction that includes entitlement reform in the medium and long term while looking at ways to spur job and economic growth in the near term. One of the most important ways to combat the deficit is to grow the economy.
Morning in America
All across our economy, indicators are showing a recovery from the most severe recession since the 1930s. At the recession’s climax, the economy shrank at an annualized rate of 6%. Now it is growing at approximately 2%. More progress is needed in all areas, but we are moving forward. Unemployment is declining and is lower now than at any point during Obama’s term in office. The stock market has recovered. Corporations are seeing record profits while consumer confidence is up. The housing market is on the rebound. Wages and salaries, which fell as a result of the recession, are starting to pick up. The Federal Reserve’s actions, including its quantitative easing and maintenance of low interest rates have been critical to the recovery; improvements in the housing sector can be largely attributed to the Fed’s low interest rate policy. The low interest rate environment has also helped businesses to obtain capital and has greatly contributed to Wall Street’s recovery. America is clearly better off today than it was four years ago.
While the Obama administration’s economic policies do not deserve all, or even most, of the credit for the recent economic improvements, and his team should have been more aggressive in helping the economy in some areas, they deserve recognition for their policies which have contributed to the recovery, and which have been outlined in this post. From federal government actions such as TARP, the Stimulus Act, and the numerous tax credits to individuals and small businesses to the state aid measures that prevented even further teacher and public worker layoffs and the public works bills, President Obama has implemented numerous measures to help mend the economy during a turbulent period. His team also deserves praise for applying a myriad of relief measures that aided those most deeply affected by the recession, including relief to the unemployed. The data clearly show that the U.S. economy is on the right track and moving forward.
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