Ruminations, January 27, 2013
Will the economy recover under Obama?
It’s a political as well as an economic question and before answering, we need to establish a few facts.
Financial downturn. Some economic downturns are the result of pressure on the financial system caused by economic bubbles, currency mismanagement and/or banking crises (as our current recession). Others are caused by business cycles. Economists tell us that it generally takes longer (four to eight years) to recover from financial downturns than from business downturns. To look at it another way, GDP growth has averaged about 2 percent per year since the nadir of the recession rather than the 4.5 percent of business cycle recoveries at a similar stage.
Following the 2009 stimulus, the Obama Administration predicted that unemployment would fall below 7.8 percent within a year. It actually rose to a tad below 10 percent. Did Obama and his economic circle misread the economic climate? Possibly; economists have missed identifying some recessions even when we were in a recession. But consumer confidence plays a role in economics and it’s possible that the Obama economic team intentionally painted an overly rosy picture to increase confidence. Or it may be a combination of both.
How much influence does a president have on the economy? There is no question that a president has some influence, but it is limited.
Consider the following: The United States GDP was estimated at $15, 8 trillion (U.S. Bureau of Economic Analysis) and of that, Washington is responsible for $3.8 trillion or, roughly 24 percent.
So Obama and his cohorts control 24 percent of the budget. Hold on: not quite. Of that $3.8 trillion, some 55 percent is mandatory (Social Security, Medicare, Medicaid, debt interest). Discretionary spending amounts to about $1.8 trillion.
But not all discretionary spending is discretionary. Discretionary spending includes the Departments of Defense, Homeland Security, State, Health and Human Services, Housing and Urban Development, Justice, Agriculture, Education, and Transportation, as well as Overseas Contingency Operations. And more.
This is not to say that the president has no economic power, but his budgetary power is limited. More of his economic power lies in the statutory environment, where via policies, edicts and law he can influence the behavior of the other 76 percent of the economy. For example, were the president to embark on an aggressive debt-cutting program, it would encourage foreign and domestic investment; his signing of the Wall Street Reform and Consumer Protection Act and the Affordable Care Act has discouraged expansion by increasing uncertainty (according to Stanford economists Scott Baker and Richard Bloom and Chicago’s Steven Davis uncertainty has reduced GDP by 1.4 percent).
But that’s all relative economic strength. No president could drive the GDP to zero nor could one double it. This is why, in terms of economic improvements, we talk in terms of tenths of a percent and not measures of ten percent. (But also remember that in an economy as large as ours, a tenth of a percent can mean a lot; 0.1 percent of jobs is 155,000 jobs.)
Can the economy improve under Obama? Heck, yes. It can improve because of him or in spite of him. And therein is the problem for Republicans: If and when the economy improves, Obama will get and take credit for it.
Remember President Bill Clinton? He raised taxes and the economy soared. Was the tax increase a cause of the economic improvement? Actually, it probably slowed economic growth, but the economy was robust enough and the tax increase was small enough to be all but ignored. (In fact, when Clinton submitted his budget that would turn a deficit into a surplus; it was said that deficits extended as far as the eye could see — the Congressional Budget Office estimated that the deficit would decline from $290 billion in 1992 to $200 billion in 1998. Neither Clinton nor the CBO had foreseen the spike in capital gains revenues – which quadrupled — due to the dotcom bubble, and helped turn the deficit into a surplus.) Nonetheless, there are those who see the Clinton tax increases as the cause of the booming economy in the 1990s.
Conclusion. The economy has a momentum of its own. It will go up, down or stumble along regardless of Obama. Obama can slow or speed its momentum, but neither he nor any other president can change its direction; if a president had that much power, we’d never be in recession.
So Obama has raised taxes and, let’s say, the economy improves. Cause and effect? Not really. But for a lot of people, the lessons learned would be that whatever Obama did worked. And the Republicans would look bad as the people who opposed Obama.
Our next Secretary of State
Senator John Kerry (D, MA), our presumed next Secretary of State, had this to say of Vietnam Veterans in 1971: “They told the stories at times they had personally raped, cut off ears, cut off heads, taped wires from portable telephones to human genitals and turned up the power, cut off limbs, blown up bodies, randomly shot at civilians, razed villages in fashion reminiscent of Genghis Khan, shot cattle and dogs for fun, poisoned food stocks, and generally ravaged the country side of South Vietnam in addition to the normal ravage of war, and the normal and very particular ravaging which is done by the applied bombing power of this country.”
Some things you don’t forget. This is one.
Quote without comment
Michael Linden, expert on federal tax policy and budget at the liberal Center for American Progress, in an interview with The Washington Post, July 11, 2011: “I can’t really answer the question about how much Clinton had to do with the economy. He presided over it.”