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.

Stimulus Program

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.

Jobs

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.

Source: CNN Money

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.

Business Rebounding

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.

5 Replies to “An Economy on the Rebound”

  1. Thanks for the tweet that lead me to your site. I grew up in an LDS family that happened to be democrat. My first recollection of politics was watching the 1960 Democrat primary fight between Kennedy and Johnson. I walked as a 11-12 year old boy campaigning for my father who ran for the AZ legislature and served one term as a democrat. Redistricting changed everything and before he ran again the district took a right lean and he lost. My first Presidential election I voted for McGovern and my second I voted for Carter. In between I walked neighborhoods with others in my community collecting signatures with Ceasar Chavez and the United Farm Workers group to try to unsuccessfully recall the Republican governor, Jack Williams. But when I listened to Ronald Reagan in 1980 a light went on in my life and I changed parties and I am now a moderately conservative Republican and have been ever since.

    Of course the Pres gets any credit for any rebound while he is at the helm but then he should also take responsibility for throwing gas on the fire with his policies that have delayed any real recovery. What appears to be a recovering economy is most likely an economy hovering and waiting for economic sanity to return before it goes anywhere. The exception to that would be if sequestration is allowed to go through and thousand and thousands of defense related jobs are lost and we continue to drive over the financial cliff of debt. The economy will certainly move then but in the wrong direction. I understand that this is a time of heightened political rhetoric and we of course will go to great lengths to justify our support for our candidate. However, for me the very most interesting part of this process is watching the growing number of people, many of which are high profile people, that voted for Pres Obama in ’08 but are voting for Romney in this election. Our economy certainly needs a boot kick but the blame game the left likes to play is an anchor to any real growth. Romney could certainly have worded his 47% statement differently, and he has admitted as much, but the truth of what he said is that we are becoming a victim society. Not all, by a long shot, are part of that but all too many want to blame others for their plight rather than take control and make something of themselves. We remain in tough times. As a very small business owner with my wife, we have had to make some hard decisions to keep our business growing during this time. What has hurt us more than anything else is the high price of gas since we have to drive a fair amount in the course of our work week. Potential profits are taken before they are earned both from the products we buy that cost more because of shipping and the cost of delivering them at our end. In our business we are not in a pass along position but have had to be smarter about how we conduct our business to stay open.

    I hope that the recent trend holds up and Pres Obama is a one term president since I don’t see how we can sustain more of the left’s economic policies. I know all too well the blame game of the left about Bush, the rich, tax cuts and all but the real harm has been done by their sadly divisive rhetoric pointing blame without assuming any personal responsibility.

    Go Mitt.

    Jary

    1. Jary, thanks for reading, commenting, and sharing about your background. It’s nice to hear about your politically diverse past.

      What I find most ironic about your post is the implicit criticism of Obama for his stimulus policies, which saved millions of public sector jobs, but then you attack him for the sequestration, which will cut public sector jobs. Conservatives don’t even know that they support gov’t stimulus. But they’d rather lavish the $$ on the over-bloated Defense Dept over spending it to prevent layoffs of teachers, police officers, fire fighters, etc- jobs that in reality have much more impact on the margin on our well-being. Now don’t get me wrong, I’m all for a strong defense. But when we look at the fact that the U.S. spends more on defense then the next top 17 countries, combined, we should pause to consider whether all of this money we’re throwing at defense is making us any safer. As President Eisenhower warned, “we must guard against the acquisition of unwarranted influence, whether sought or unsought, by the military-industrial complex. The potential for the disastrous rise of misplaced power exists and will persist.”

      You said: “For me the very most interesting part of this process is watching the growing number of people, many of which are high profile people, that voted for Pres Obama in ’08 but are voting for Romney in this election.”

      I’m not sure who you are referring to, but why should we care about which celebrities or pundits are supporting which candidate? Obviously Obama got enough support from moderates and independents to win re-election. Notably, Republican Colin Powell re-endorsed Obama. But even if he didn’t, we should look at the candidates on their merits and records and ignore the celebrities. Let’s stick with the cold, hard facts.

      As I noted in the article above, there are many important economic indicators that are showing a sustained recovery. We have a ways to go to recover from the deepest recession we’ve had since the 1930s, but by any rational measure, our economy has moved forward dramatically since 2009.

      You mention being hurt by the high price of gas, but do you realize that presidents have practically zero control over the price of gas? The price of gas has climbed back up close to where it was at its peak during Bush’s term, but that has a lot more to do with increased global demand than presidential politics. You should blame India, China, and Iran for higher gas prices, not President Obama. Neither Romney nor Obama can do anything substantive in the short term to bring down gas prices. But I applaud you and your wife for adapting, being self-reliant, and making the hard choices to ensure your business stays afloat during difficult times. I agree with you that perhaps too many Americans feel some sense of entitlement or at least do not exhibit enough personal responsibility in their personal finance choices. To be clear, we must recognize that entitlement programs did not cause the recession – it was as Elder Christofferson said, “widespread dishonest and unethical conduct, particularly in the U.S. housing and financial markets.” There is no evidence, however, that we are not becoming a ‘victim’ society. Republicans like to cite the number of people on food stamps as evidence of this but they are confusing cause and effect. A major effect of the recession was millions of layoffs- which occurred largely due to no fault of the people being laid off. Thank goodness we have a safety net in this country to prevent such people and their families from starving. They have been slowing getting back to work as the economy under Obama has added private sector jobs for 32 consecutive months.

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