Four years ago, the American economy was in recession even though the worst was still to come during the fall of 2008. The threat of a depression was averted in October of 2008 when the TARP program was passed, but we suffered through a deep recession nevertheless. When president Obama took office, the decline was just about complete although the jobs picture still worsened as the labor market caught up to the economic cataclysm. A few months into Obama's term, however, the jobs picture brightened and the recovery began. This recovery was just the result of the normal business cycle; Obama does not deserve credit for the turn in the direction of the economy, but it is fair to view how he handled the growth period. The truth is that if one were to grade Obama's handling of the "recovery", he would receive either an "F". Let's look at why this is.
1) Obama's first big move regarding the economy was his stimulus bill. Obama got Congress to spend $800 billion to promote economic growth, at least that is how it was billed. We were all told by the government economists that the Keynesian multiplier would take that $800 billion and turn it into at least $1.2 trillion of additional GDP. That is an increase of over 8% in GDP, and the same economists told us it would keep unemployment from ever getting above 8%. Indeed, under their analysis, by now, unemployment was supposed to be around 6%.
We all know that the stimulus failed. GDP growth never picked up substantially; unemployment soared to more than 10%; we have not had a month with less than 8% unemployment since the stimulus was passed; and right now there are over 15% who are unemployed, forced to work only part time, or dropping out of the work force entirely. This is a situation that has not been seen since the Depression of the 1930's and it has persisted for over three years now.
But how can this be? How can the economists surrounding the president with all their degrees from prestigeous universities have been so wrong? One part of the problem is the decision to misuse theories to achieve political aims. After the 2008 election, the Democrats had the presidency and huge majorities in Congress for the first time in nearly 50 years. That meant that for the first time in ages, the Democrats had the ability to pay off their interest groups with federal money, and they ran to do so. Keynesian theory does not just call for government expenditures during an economic downturn; it calls for government investment through expenditures. In other words, building a new bridge will result in hiring workers, buying steel, and all sorts of growth which can combat the downturn, but once growth starts again, that bridge will help promote new economic activity. On the other hand, sending funds to allow states to pay for health care premiums for state workers for another year has no lasting impact. Once the year is over, it is as if the spending never happened. Similarly, if the federal government pays for research into the sex lives of coeds at Syracuse, it may provide work for some professor for a year, but it will have no benefit for the economy after that. On the other hand, federal research into new methods for extracting domestic oil or gas that was previously unreachable would, if successful, pay dividends for many decades. The problem, of course, is that the state and local workers unions are among the biggest interest group in the Democrat party; the stimulus devoted fully one-quarter of its total funds towards making sure that these workers did not suffer any ill effects from the recession and did nothing to promote economic growth. Academia is another strong interest group to which the Democrats are beholden. Accordingly, the stimulus spent enormous sums funding all sorts of research, most of which led only to employment for various professors and grad students with no lasting value for the economy. Even the "shovel ready jobs" component of the stimulus which normally fits the profile of a proper Keynesian expenditure was distorted by the Democrats. No goal was set for the expenditures. During the Depression, the government used these funds to build bridges, roads, post offices and major improvements like the dams of the Tennessee Valley Authority that brought hydropower to a huge swath of the country. The lackluster management of Obama and the Democrats with the stimulus let the shovel ready jobs morph into just another subsidy for local and state governments. Over 80% of the projects funded were items already scheduled for construction that were mostly maintenance and which just transfered the cost from the local to the federal government. Then there were the stimulus funds that went towards paying unemployment benefits. This may have been cash that helped people get past a difficult time, but it was hardly true Keynesian countercyclical spending.
Surely, the economists surrounding Obama must have known all this, or so you would think. But consider this: Paul Krugman who won the Nobel Prize for economics has recently called for the federal government to spend a trillion dollars to prepare for humans to meet extra-terrestrials as a way to stimulate the economy. Krugman, of course, was kidding about the project, but his point was that any spending would do the trick. He is wrong, even though he won the Nobel Prize. Maybe the other economists around Obama were similarly wrong. But I doubt it. Instead, I believe that Obama and the Democrats have been told for so long that government spending is good, that the did not care where the money went. They figured it would be better to use it to pay off their supporters and it would still help the economy. They were wrong, and in the process they squandered nearly a trillion dollars. They also saddled the federal government with an additional trillion dollars of debt which will drain funds from the economy for decades to come.
2) The second big move regarding the economy was Obamacare. Few folks look at Obamacare as an economic decision, but it was an enormous one. It took almost all the attention of the government for about a year and a half. During that time, structural changes that could have been made to help future economic growth were ignored. Indeed, instead of looking at the budget, the tax structure, trade policy, labor policies or anything like that, Obama just appointed the Simpson-Bowles Commission to look into many of these items. Of course, once the Simpson Bowles report came back, Obama just ignored it. To make matters worse, the enormity and unknow result of Obamacare cause a bit of paralysis in the economy. For a year and a half, businesses did not know what was in the bill and if it would pass. Would they be hit with huge new costs for employees? Would they be forced to undertake major efforts regarding healthcare that would limit flexibility into the future? Many businesses waited before moving forward with new investments so that they could see what their true costs would be. And then, the Obamacare bill passed and most of the requirements for businesses were left to future regulatory rulings by the bureaucracy. In other words, there was still more uncertainty.
3) Another big economic move was the Dodd Frank bill. This bill was supposed to limit the likelihood of future economic meltdowns like the one that occured in the fall of 2008. Too big to fail was to be consigned to the garbage. Never again were the people of the United States going to be required to shoulder the cost of Wall Street's folly. Or, at least, that is how it was sold. In reality, the bill did none of this. It did place all sorts of regulatory burdens on lenders with the result that only the truly large banks could manage the costs easily. Small and mid sized banks were forced from some lending markets rather than incurring the enormous costs of meeting the bills requirements. In other words, rather than ending "too big to fail", it reinforced the position of the biggest banks by removing much of their competition. It guaranteed that "too big to fail" would be with us for years to come. It also reduced the availability of loans for small businesses which mean a reduction in economic growth.
There are many other items which could go on this list, but the point is made nonetheless. Obama and the Obamacrats completely mismanaged the recovery. Rather than taking steps that might promote stronger economic growth, they did a whole series of things that worked in the other direction. Rather than having a recovery that saw economic growth of 4 or 5%, we have been limping along with growth of 2% or less. Rather than having an economy that had regained most of its strength, we have an anemic economy that may soon get pushed back into recession by events in Europe or China. Rather than having an economy where "the private sector is doing fine" as Obama claimed the other day, we have one where misery is still everywhere. Indeed, if we sink back into recession, millions will suffer severe consequences since they will have no savings left to fall back on. Obama wants income equality, and he has done his best to make us all poor.
The big new story line in the media is how the economic problems are coming from Europe; Obama cannot do anything about that. It is wrong. If we sink into recession, Obama will have to take the blame for all that happens. Indeed, the current press story line is much like having a squirrel that does not save up food for the winter who then blames the weather of December for his hunger rather than looking at his own past conduct. Downturns, like the winter, are inevitable. What we do during the better times, however, helps determine both the severity and the duration of those downturns. On this score, Obama has failed.
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