As Barack Obama marks his seventh year in office, the resurgent American economy is posing a major problem for his Republican detractors. After years of denouncing the president's supposed "out of control spending," "job-crushing taxes," and "job-killing Obamacare," the pathetic GOP claim that Obama "made the economy worse" can't pass the laugh test. After all, the unemployment rate has been cut in half during his tenure as the private sector added jobs for a record 70 straight months. New jobless claims have dropped to their lowest level since 2007 while workers' ability to voluntarily switch jobs has increased. Even with its recent buffeting from China and the plummeting price of oil, the Dow Jones has doubled. All the while, the annual budget deficit has been slashed by two-thirds and inflation-adjusted federal spending has been lower than the day Barack Obama first took the oath of office.
In response, conservatives can only resort to doing what they always do: Give credit to someone else and declare that Ronald Reagan would have done better. New House Speaker Paul Ryan comically "argued that the Federal Reserve's policies pushed the recovery," despite having opposed them at every turn. Meanwhile, Powerline's John Hinderaker, previously best known for his 2005 assertion that President Bush was "a man of extraordinary vision and brilliance approaching to genius," like "a great painter or musician who is ahead of his time," protested:
So don't let anyone fool you about the economy of the last seven years. Barack Obama was set up for success, as he took office on the heels of a sharp economic downturn that had a limited, specific cause. The economy should have come roaring back as it did under Ronald Reagan, only if anything even more so, since the government errors that gave rise to the 2008 financial collapse were relatively easy to correct. Instead, the Democrats' left-wing policies inhibited economic growth and produced the worst recovery of modern times.
Ryan and Hinderaker aren't merely wrong about the worst economic cataclysm to befall the United States since the Great Depression, but on the tools that were available to recover from it. Reagan massively increased federal spending even as state and local governments did the same. Meanwhile, Paul Volcker's Fed slashed interest rates to jumpstart the economy. Even as GDP was contracting by almost 10 percent as he was inaugurated, President Obama could avail himself of neither: Interest rates were already near zero and draconian spending cuts by states and localities created a drag that exceeded the size of his $800 billion stimulus.
Oh, and one other thing. From literally the night he was sworn in, Obama's Republican opponents engaged in an unprecedented campaign of sabotage designed to derail the economic recovery and his presidency. They didn't just oppose the stimulus (more than 40 percent of which was comprised of tax cuts), but the Fed's quantitative easing program and the White House's auto bailout which saved Detroit—and millions of jobs—as well. Not content to rest there, Republican leaders threatened to trigger a default by the United States by refusing to raise the debt ceiling, something they had routinely done 17 times for Reagan and seven more for George W. Bush.
When President Obama was inaugurated in January 2009, there were two things his White House did not know. First, the economy he inherited from George W. Bush was in far worse condition than anyone realized. "Output in the third and fourth quarters fell by 3.7% and 8.9%, respectively, not at 0.5% and 3.8% as believed at the time," The Economist reported in August 2011. "Employment was also falling much faster than estimated .... In January, total employment was already 1m workers below the level shown in the official data."
But what Team Obama also didn't know is that Republicans were secretly planning total opposition to what would become the $787 billion American Recovery and Reinvestment Act (ARRA)—and just about everything else he would propose. As author Robert Draper documented in 2012, a gathering of GOP leaders on the night of Obama's inauguration resolved to "challenge them on every single bill and challenge them on every single campaign." By early February 2009, Weekly Standard editor Bill Kristol was publicly counseling Republicans to stonewall the Obama stimulus, just as they had done to Bill Clinton's healthcare law in 1993. Days later, the stimulus passed with just three Republican votes in the Senate and zero in the House.
On January 6, 2009, New York Times columnist and Nobel Prize-winner Paul Krugman presciently predicted what would come to pass politically:
I see the following scenario: a weak stimulus plan, perhaps even weaker than what we're talking about now, is crafted to win those extra GOP votes. The plan limits the rise in unemployment, but things are still pretty bad, with the rate peaking at something like 9 percent and coming down only slowly. And then Mitch McConnell says "See, government spending doesn't work."
Krugman was certainly right about the politics—and the perception—of the ARRA. The media largely swallowed the output of the GOP myth-making machine that declared that "Obama made the economy worse" and his stimulus program "did not create a single job." As recently as February 2014, GOP White House hopeful and Florida Sen. Marco Rubio declared:
If you recall five years ago, the notion was that if the government spent all this money—that, by the way, was borrowed—that somehow the economy would begin to grow and create jobs. Well, of course, it clearly failed.
Not according to the overwhelming consensus of economists, including the nonpartisan Congressional Budget Office (CBO). At its peak in 2010, CBO concluded, the American Recovery and Reinvestment Act added up to 3.3 million jobs, cut unemployment by as much as 1.8 percent and boosted GDP by up to 4.1 percent. (It's also worth pointing out that the CBO repeatedly confirmed that aid to the states and purchases by the federal government delivers the biggest bang for the buck, while upper-income tax cuts provide the least.) As the Washington Post reported in June 2012, the House Budget Committee heard testimony from CBO chief Douglas Elmendorf and demanded his answer to a simple question: Did the $787 billion Obama stimulus work? Unfortunately for Republican propagandists, Elmendorf clearly refuted Mitt Romney's claim that the American Recovery and Reinvestment Act (ARRA) was "the largest one-time careless expenditure of government money in American history."
Under questioning from skeptical Republicans, the director of the nonpartisan (and widely respected) Congressional Budget Office was emphatic about the value of the 2009 stimulus. And, he said, the vast majority of economists agree.
In a survey conducted by the University of Chicago Booth School of Business, 80 percent of economic experts agreed that, because of the stimulus, the U.S. unemployment rate was lower at the end of 2010 than it would have been otherwise.
"Only 4 percent disagreed or strongly disagreed," CBO Director Douglas Elmendorf told the House Budget Committee. "That," he added, "is a distinct minority."
And as previously noted, you don't have to take CBO's word for it:
Douglas Holtz-Eakin, a former CBO director who later served as an economic adviser to John McCain in 2008, agreed with his successor. "The argument that the stimulus had zero impact and we shouldn't have done it is intellectually dishonest or wrong," he explained in August 2011. "If you throw a trillion dollars at the economy it has an impact, and we needed to do something." (That "something", by the way, was over 40 percent tax cuts, making the Obama stimulus the largest two-year tax cut in American history.) Mark Zandi, also an adviser to McCain's 2008 campaign, was adamant on the positive role of the stimulus. Federal intervention, he and Princeton economist Alan Blinder argued in August 2010, literally saved the United States from a second Great Depression. In "How the Great Recession Was Brought to an End," Blinder and Zandi's models confirmed the impact of the Obama recovery program and concluded that "laissez faire was not an option."
"We find that its effects on real GDP, jobs, and inflation are huge, and probably averted what could have been called Great Depression 2.0," Blinder and Zandi concluded of federal intervention to save the economy. "For example, we estimate that, without the government's response, GDP in 2010 would be about 11.5% lower, payroll employment would be less by some 8½ million jobs, and the nation would now be experiencing deflation."
The Rescue of the American Auto Industry
The stimulus wasn't the only federal intervention that helped stave off economic disaster. Another was the rescue of the American auto industry. Started by President Bush and expanded by President Obama in March 2009, Uncle Sam's bailout of General Motors and Chrysler saved an industry that today employs 600,000 more people in the U.S. than it did six years ago.
Ultimately, the federal government spent almost $80 billion to save the two companies. But after selling off its remaining shares, the price tag was much lower at $9.3 billion. But as the Center for Automotive Research documented in December 2013, that sum may have been the best investment Uncle Sam ever made:
Had GM and Chrysler failed altogether, the result could have been 4.1 million jobs lost across the U.S. economy in 2009 and 2010, with federal transfer payments and $105 billion in lost income and payroll tax revenue for the U.S. Treasury.
And none of it would have happened if Republicans had their way.
In December 2008, Vice President Dick Cheney beseeched his GOP allies to back the Bush administration's plan to shift dollars from the Troubled Asset Relief Program (TARP) to save Detroit from collapse. "If we don't do this, we will be known as the party of Herbert Hoover forever." Luckily for the American economy, the next month Barack Obama and his Democratic majority took over.
After blocking legislation in December 2008, the leading lights of the Republican Party blasted President Obama over the auto bailout the following spring. While Republican Sen. Richard Shelby branded the administration's lifeline "the road to socialism," Arizona Rep. Trent Franks proclaimed, "the disaster that follows is predictable." Speaker-to-be John Boehner grumbled, "Does anyone really believe that politicians and bureaucrats in Washington can successfully steer a multi-national corporation to economic viability?" And while Texan Lamar Smith called the GM and Chrysler rescues "the leading edge of the Obama administration's war on capitalism," RNC chairman Michael Steele said it was all a political favor for Democratic constituencies:
It is nothing more than another government grab of a private company and another handout to the union cronies who helped bankroll his presidential campaign.
And despite warning that the collapse of GM alone could cost the federal government up to $200 billion in unemployment insurance and other programs, once-and-future Republican White House hopeful Mitt Romney declared, "Let Detroit Go Bankrupt." Then again, the son of American Motors magnate George Romney warned Michigan primary voters in January 2008 that he didn't want to raise "false hopes that somehow we can bring back lost jobs." As he famously put it in that infamous op-ed:
If General Motors, Ford and Chrysler get the bailout that their chief executives asked for yesterday, you can kiss the American automotive industry goodbye. It won't go overnight, but its demise will be virtually guaranteed.
Four years later, Romney the GOP presidential nominee was singing a different tune about the auto industry rescue, declaring, "I'll take a lot of credit for the fact that this industry's come back."
The Federal Reserve and Quantitative Easing
When President Reagan was facing 10 percent unemployment in 1982, the U.S. had a crucial tool at its disposal that the Obama administration lacked in the wake of the financial crash of 2008. As Paul Krugman reminded readers, having first jacked up interest rates to crush inflation and wage growth in 1981, Paul Volcker's Federal Reserve could then slash the double-digit interest rates to incentivize borrowing and investment. But with interest rates essentially at zero, the federal government in January 2009 simply did not have that monetary policy as an option. So, Krugman explained in 2012, Ben Bernanke's Fed had to find another approach:
The Fed's response to this problem has been "quantitative easing," a confusing term for buying assets other than Treasury bills, such as long-term U.S. debt. The hope has been that such purchases will drive down the cost of borrowing, and boost the economy even though conventional monetary policy has reached its limit.
The response from Republicans, as always prioritizing inflation-fighting over expanding employment, was fury. Mitt Romney called quantitative easing (QE) a "sugar high" and argued "we should be creating wealth, not printing dollars." In 2011, Romney's future running mate, Paul Ryan, warned that "the inflation dynamic can be quick to materialize and painful to eradicate once it takes hold." Despite core inflation running well below 2 percent at the time, the New York Times reported:
Mr. Ryan all but accused Mr. Bernanke of devaluing the dollar, saying, "There is nothing more insidious that a country can do to its citizens than debase its currency."
Ryan had plenty of company among the, um, best and brightest of the GOP. In November 2010, Sarah Palin demanded the Fed chief "cease and desist" his "pump-priming," warning that the United States "shouldn't be playing around with inflation." Texas Gov. Rick Perry, the GOP's temporary 2012 White House frontrunner, went a step further:
If this guy prints more money between now and the election, I don't know what you all would do to him in Iowa, but we would treat him pretty ugly down in Texas. I mean, printing more money to play politics at this particular time in America history, is almost treacherous, treasonous in my view.
Sadly for the Republican doomsday prophets, their predicted "massive inflation holocaust" did not come to pass. The inflation bogeyman didn't even rear its ugly head. Markets didn't fear the Fed's QE rounds, but instead that they might "taper" them too soon. As Matt O'Brien pointed out at the time, "The inflation chicken littles were so wrong: The dollar is on a tear." In June 2013, Paul Krugman wrote about "The Always-Wrong Club:"
Aha. Floyd Norris reminds us of the 23-economist letter from 2010, warning of dire consequences -- "currency debasement and inflation" -- from quantitative easing. The signatories are kind of a who's who of wrongness, ranging from Niall Ferguson to Amity Shlaes to John Taylor. And they were wrong again.
For helping fend off the right-wing's "hard money mob," Krugman concluded, President Obama deserves a lot of credit:
There is, however, another sense in which Mr. Obama has arguably made a big difference. The Fed has had a hard time getting traction, but it has at least made an effort to boost the economy -- and it has done so despite ferocious attacks from conservatives, who have accused it again and again of "debasing the dollar" and setting the stage for runaway inflation. Without Mr. Obama to shield its independence, the Fed might well have been bullied into raising interest rates, which would have been disastrous.
Draconian Spending Cuts and Layoffs by State and Local Governments
Barack Obama encountered another obstacle that neither Ronald Reagan nor any modern president has faced during an economic recovery. Steep spending cuts and layoffs of public employees at the state and local level undermined stimulus efforts at the federal level. Call it the "Anti-Stimulus."
It's bad enough, as Krugman noted, that "federal spending adjusted for inflation and population growth is lower now than it was when Mr. Obama took office; at the same point in the Reagan years, it was up more than 20 percent." After slashing 900,000 teachers, policemen, firefighters, and other government workers by 2012, states and municipalities has only now returned to pre-recession spending levels.
But as the New York Times reported a year ago, that fiscal drag finally started to end:
For a long stretch, government spending cutbacks at all levels were a substantial drag on economic growth. Now, finally, relief is in sight.
For the first time since 2011, local, state and federal governments are providing a small but significant increase to prosperity.
"There's not a lot of positive contribution coming from the government sector, but when you're talking about economic growth, less of a negative is a positive," said Chris Varvares, senior managing director and co-founder of Macroeconomic Advisers.
The Times' first chart above does not fully capture just how big of a negative the public sector contraction has been on the U.S. economic recovery.
The tragedy is that what might be called the Obama Economic Miracle could have been even more miraculous if Republicans on Capitol Hill and in state and local governments hadn't stood in his way.
Washington Republicans didn't just block Obama initiatives like the American Jobs Act and infrastructure investment that could have boosted employment when unemployment was mired at 9 percent. They didn't just strangle job creation and consumer confidence with their debt-ceiling hostage-taking. The destructive austerity policies of state and local governments created an "anti-stimulus," with layoffs of public sector workers and cuts to spending that only served to undermine the gains from ARRA (see the second chart above). By May 2013, the Hamilton Project estimated those austerity policies cost 2.2 American million jobs and resulted in the slowest recovery since World War II. In April 2012, the Economic Policy Institute explained:
The current recovery is the only one that has seen public-sector losses over its first 31 months...If public-sector employment had grown since June 2009 by the average amount it grew in the three previous recoveries (2.8 percent) instead of shrinking by 2.5 percent, there would be 1.2 million more public-sector jobs in the U.S. economy today. In addition, these extra public-sector jobs would have helped preserve about 500,000 private-sector jobs.
That March, Paul Krugman expressed the same point, but with some inconvenient historical context for the Party of Reagan. "In fact, if it weren't for this destructive fiscal austerity," Krugman explained, "our unemployment rate would almost certainly be lower now than it was at a comparable stage of the 'Morning in America' recovery during the Reagan era."
We're talking big numbers here. If government employment under Mr. Obama had grown at Reagan-era rates, 1.3 million more Americans would be working as schoolteachers, firefighters, police officers, etc., than are currently employed in such jobs.
And once you take the effects of public spending on private employment into account, a rough estimate is that the unemployment rate would be 1.5 percentage points lower than it is, or below 7 percent -- significantly better than the Reagan economy at this stage.
Yet even with all those barriers erected by his political opponents, Barack Obama is still "out-Reaganing Reagan." And Obama didn't triple the national debt while doing it.
Mercifully, state and local governments are finally getting rid of the economic albatross around their necks. A big driver has been increased spending on construction projects by states and municipalities, which as the New York Times also reported last month, "is finally on the rise again."
Threatening Default over Raising the Debt Ceiling
What was also on the rise was the threat of a new round of debt ceiling hostage-taking by congressional Republicans. And refusing to raise the debt ceiling, as both parties routinely did until 2011, will trigger a U.S. sovereign default—and with it, a global economic cataclysm. And as shattered consumer confidence and stalled job growth when House Republicans first resorted to the unprecedented extortion in the spring and summer of 2011 showed, the American economy paid a heavy price just from the threat of the GOP's debt ceiling blackmail.
You don't have to take my word for it. Just ask Republican leaders like Rep. Paul Ryan, Sen. Lindsey Graham and House Speaker John Boehner. In 2011, Ryan acknowledged that "you can't not raise the debt ceiling." Graham warned "the consequences for the entire global economy" resulting from a first-ever American default "would be catastrophic." Five years ago, Speaker-elect John Boehner issued this dire assessment if Congress did not increase Uncle Sam's borrowing authority to pay bills the federal government had already incurred:
That would be a financial disaster, not only for our country but for the worldwide economy. Remember, the American people on Election Day said, 'we want to cut spending and we want to create jobs.' And you can't create jobs if you default on the federal debt.
A year ago, new House Budget Committee Chairman Tom Price announced yet another extortion scheme, despite Mitch McConnell's promise that "there will be no government shutdown or default on the national debt." Price's debt ceiling threat was all the more irresponsible given the steep reduction in federal budget deficits that even Boehner admitted means "we have no immediate debt crisis" and non-defense discretionary spending as a percentage of the U.S. economy is already down to levels not seen since the 1950s. Worse still, even threatening default, as the experience from the summer of 2011 showed, costs the government money and undermines economic growth.
The GOP's unprecedented debt ceiling brinksmanship that began four years ago didn't just cost the Treasury billions of dollars in higher borrowing costs. American consumer confidence nosedived during a standoff in the summer of 2011:
As Reuters and the Christian Science Monitor explained at the time, the GOP's debt ceiling debacle was the main culprit for sagging confidence and job creation:
Why has the job market cooled so much? An important factor, many economists say, is that signals from government lately have been hurting rather than helping confidence. The protracted talks over the nation's debt ceiling this summer appeared to dampen the spirits of consumers and businesses alike.
On that point, S&P left little doubt in pointing the finger at the kamikaze conservatives in Congress:
A Standard & Poor's director said for the first time Thursday that one reason the United States lost its triple-A credit rating was that several lawmakers expressed skepticism about the serious consequences of a credit default -- a position put forth by some Republicans. Without specifically mentioning Republicans, S&P senior director Joydeep Mukherji said the stability and effectiveness of American political institutions were undermined by the fact that "people in the political arena were even talking about a potential default," Mukherji said. "That a country even has such voices, albeit a minority, is something notable," he added. "This kind of rhetoric is not common amongst AAA sovereigns."
Such voices are indeed uncommon—except among congressional Republicans. That's why in 2011, former Bush Treasury Secretary Paul O'Neill came up with a more appropriate term to describe the clear and present danger presented by his GOP allies:
The people who are threatening not to pass the debt ceiling are our version of al Qaeda terrorists. Really. They're really putting our whole society at risk by threatening to round up 50 percent of the members of the Congress, who are loony, who would put our credit at risk.
That's not all the GOP's saboteurs and terrorists put at risk. In their updated analysis released in October, 2015, Alan Blinder and Mark Zandi showed that the combined federal efforts to rescue the American economy from its greatest collapse since 1929 "dramatically reduced the severity and length of the meltdown that began in 2008; its effects on jobs, unemployment, and budget deficits; and its lasting impact on today's economy." The impact of the measures taken in 2008 and 2009, including the Troubled Asset Relief Program (TARP), the $800 billion Obama stimulus program, Obama's auto bailout and the Federal Reserve's "quantitative easing," is simply staggering. Without those policy responses—almost all of which were opposed by Congressional Republicans—Blinder and Zandi estimate:
- The peak-to-trough decline in real gross domestic product (GDP), which was barely over 4 percent, would have been close to a stunning 14 percent;
- The economy would have contracted for more than three years, more than twice as long as it did;
- More than 17 million jobs would have been lost, about twice the actual number.
- Unemployment would have peaked at just under 16 percent, rather than the actual 10 percent;
- The budget deficit would have grown to more than 20 percent of GDP, about double its actual peak of 10 percent, topping off at $2.8 trillion in fiscal 2011.
Without those measures, they concluded, "we might have experienced something approaching Great Depression 2.0."
Today, the economic expansion is more than six years old -- longer than most expansions -- and we're approaching full employment. It's been a long time coming, but it would have taken much longer without the timely, massive, and unprecedented responses of policymakers.
The corollary is that the recovery could have been faster and more robust had Republicans not stood in the way.
"In general, presidents and their policies matter much less for the economy's performance than most people imagine," Paul Krugman explained in "The Obama Boom," but "times of crisis are an exception." Mercifully, in America's most recent time of crisis, Democrat Barack Obama was in the White House. As for the GOP's best and brightest who either tried to stop him or now seek to replace him, Krugman has a simple message:
Can we nonetheless say that we're doing better than we would be if the other party held the White House? Yes. Do those who were blaming Mr. Obama for all our economic ills now look like knaves and fools? Yes, they do. And that's because they are.
They are knaves and fools. And saboteurs, too.