COMMENTARY Since this is an election year, the annualgives President Barack Obama an opportunity to convince voters that his economic policies have helped bring about the recovery that is currently underway, and to highlight his plans for the economy from this point forward.
What does Obama need to do to defend his economic policies?
First, he needs to convince voters that his economic policies have been directed first and foremost at the problems the recession has caused for working class households. The perception is that saving the bankers came first. Some see the financial bailout as little more than a way to make the already rich even richer, and with Wall Street recovering much faster than Main Street that sentiment is understandable. Why weren't job-creation, mortgage relief, and other policies to help those struggling due to the recession higher priorities for the administration?
I think Obama can answer the question about why a financial bailout was
necessary, as follows: The situation would have been much worse for the working class if the
financial system had been allowed to melt down entirely, and the financial
bailout prevented that from happening.
A harder question is why it was necessary to bail out the very people who caused the problems in the first place. Why weren't the high rollers in the financial sector asked to pay a higher price? Why couldn't we, for example, have nationalized troubled banks temporarily, kicked out the financial executives, repackaged the assets, and then resold them back to the private sector? That's what we do, in essence, when traditional banks go bad, so why not do it here, too?
Here again there's an answer: The administration did not feel it had the
legal authority to do the bailout any other way. The troubled institutions
were non-traditional "shadow" banks, and they did not have the necessary legal
powers -- and not doing it at all would have been a disaster. There is
disagreement about what they had the authority to do, but I think the
Obama administration is sincere in making this argument.
In any case, Obama should take this opportunity to point out that the financial reform implemented under the Dodd-Frank law fixes the problem of the government lacking legal authority to do anything but throw money at troubled "too big to fail" institutions. He should also underscore that some of the key provisions of Dodd-Frank took time to hammer out and are just now being instituted. But the main point to emphasize is that the recovery we are finally starting to see took a long time to germinate, in part due to the political obstacles the administration faced. And crucially, it would have been even worse had the administration been less aggressive in its attempts to save and re-regulate the financial sector.
But if the point was to help the middle class rather than bankers, what evidence is there that this has happened? This brings up the second thing Obama needs to do: Explain how his 2009 stimulus package helped working class households. The general perception is that it didn't do much at all. In making his case for the stimulus, he also must explain his plans for getting people back to work as soon as possible. In other words, what does he plan to do between now and November?
The case for the stimulus is a tough one, and it's partly the
administration's own fault. The White House's initial projection for the
severity of the recession was far, far too rosy. As a result, the administration predicted that unemployment would recede more quickly than actually turned out to be possible given the misfiring economy. When the economy turned out to be much worse than forecast,
actual levels of employment fell short of projections, making it appear that the
stimulus did little or nothing.
For example, suppose the prediction is that the unemployment rate will be 8 percent with no stimulus and 6 percent if you put a stimulus in place. Thus, you tell everyone exactly that -- that the economy is likely to go to 8 percent unemployment if we do nothing and to 6 percent with the stimulus. However, if the actual no-stimulus outcome is 10 percent rather than 8 percent, then even if the stimulus brings unemployment down to 8 percent it will look like it did nothing. You predicted 8 percent without the stimulus, and 8 percent was the outcome.
Ample evidence from both academic and business
economists show the stimulus policies worked. In 2011, for instance, the Congressional Budget Office estimated that the American Recovery and Reinvestment Act (as the stimulus was formally called) created between 400,000 and 2.4 million jobs as of September. In other words, the nonpartisan CBO concluded that ARRA succeeded in mitigating the economic damage during the worst of the recession. Although critics of the administration, including several Republican candidates for the presidential nomination, contest the idea that the stimulus worked, other economic data further buttresses the case that it succeeded in boosting economic growth.
Still, the president finds himself in a tough spot advancing the case for the stimulus. How can he do it? I think the answer is to say exactly what happened -- the original projections were far too optimistic -- and emphasize that things would have been much worse without the stimulus package.
But more important politically is what Obama plans to do next, in
particular between now and November. Simply, he must emphasize a strong
commitment to job creation. The chances that a Republican Congress will go along
with the president's proposals are very low, and he should not be shy about
pointing to the political barriers that stand in the way of his policy
initiatives. But he must make it clear that he won't stop trying to do whatever
he can on behalf of the working class -- that he'll keep pounding Congress on
this issue at every opportunity.
The actual performance of the economy around election time is what will matter most; clearly, if things are on the upswing, that will make a big difference come November. But it's very unlikely our problems will be completely over by the time the election rolls around, and whatever Obama can do to make it clear that he is doing his best to help working class households despite the obstruction he faces will aid his election chances.