"Just as scholars continue to debate how close we came to nuclear conflict during the Cuban missile crisis, they will continue to debate just how close the American financial system and economy came to all-out collapse in the six months between September of 2008 and April of 2009."
- White House economic counselor Larry Summers, Dec. 13, 2010
President Obama must take some comfort that the latest economic forecasts are becoming more optimistic about 2011 and beyond. The more upbeat of these (from, say, Richard Berner of Morgan Stanley) have the economy's growth accelerating next year to about 4 percent from less than 3 percent and the unemployment rate dropping from the present 9.8 percent to 8.6 percent by year-end. Though that is still depressingly high, it would begin to dispel the gloomy notion that the economy is permanently stuck with high joblessness and give Obama grounds for boasting that his policies drove the turnaround.
If average Americans agree, Obama's reelection prospects will improve significantly. But public opinion isn't there yet. A few weeks ago, departing White House economist Summers - who is returning to Harvard - made the case for Obama in a valedictory speech. In what he said and what he didn't, Summers mirrored the strengths and weaknesses of administration policies. This suggests a mixed verdict: Obama deserves more credit than his critics concede but less than he claims.
As Summers noted, Obama inherited a desperate situation. The stock market was collapsing; it would lose $3.9 trillion of value, almost a third, from his election to the bottom in March 2009, according to Wilshire Associates. Global trade was spiraling downward; it would fall 12.2 percent in 2009. At their worst, Summers said, these declines exceeded the initial drops of the 1930s. Companies fired millions of workers. Fear and hysteria abounded.
Obama helped stabilize the economy - and psychology. Both what he did and how he did it mattered. He acted with self-assurance and decisiveness. The roughly $800 billion "stimulus" put money in consumers' pockets and certainly saved jobs; it signaled that government would not allow the economy to fall into an abyss. The "stress test" of banks showed that they were stronger than had been thought. If General Motors and Chrysler hadn't been rescued, joblessness would have increased by hundreds of thousands.
True, many of Obama's policies started under President George W. Bush. But it's unclear whether John McCain would have done as well. Without Obama's forceful actions, "we would be looking at a vastly different world today," Summers argued. Something akin to depression was conceivable.
The trouble is that Obama, having stabilized the economy, weakened the recovery. What's missing from Summers's valedictory is any sense of contradiction between the administration's ambitious social and regulatory agenda and the business confidence necessary for hiring and investing. Of course, the connections existed. The health-care law raises hiring costs by requiring in 2014 that all firms with more than 50 employees provide health insurance or be fined. The law brims with complexities and uncertainties that make it hard to estimate the ultimate costs. Will firms with, say, 47 workers eagerly expand beyond 50 if that imposes all the extra costs? It seems doubtful.
Choices had to be made. The administration could either concentrate on promoting recovery or devote itself to more narrow and, usually, partisan objectives. It couldn't do both - at least, it couldn't do both effectively. Obama's solution was to pretend the choices didn't exist. The first hints of this occurred in the "stimulus" package, which provided money for some pet projects that provided precious little stimulus. Until last week, for example, only about 20 percent of the $8 billion committed to high-speed rail had been disbursed. Planning these massive projects takes time.
The same qualities that initially served Obama well (poise, confidence, aggressiveness) became an arrogant disdain for obvious inconsistencies. Neither he nor Summers showed much understanding of, or sympathy for, the practical problems of firms deciding to hire. Obama proclaimed that he was encouraging job creation while pushing measures that discouraged job creation - health-care "reform," action against global warming, restrictions (after the BP blowout) on off-shore drilling, among others. It was not that every proposal was wrong so much as a highly partisan, complicated agenda was bound to sow ill will, create uncertainty and retard recovery. How much is open to question; the direction is not.
Obama has much riding on the economy in 2011. The present modest optimism reflects many factors: the renewal of the Bush tax cuts; pent-up demand for housing and autos; a recovering stock market; debt "deleveraging" by households. Threats loom in Europe's financial problems, higher oil prices and paralysis over America's long-term budget deficits. The outcome may determine whether undecided Americans credit Obama for preventing a depression or blame him for hampering recovery.