How Much Credit Can Obama Claim on the Economy?

How Much Credit Can Obama Claim on the Economy?

June 21, 2012

Presidents regularly get the credit or blame for developments beyond their control. Sometimes, they also get no credit or blame for the decisions they do take. Barack Obama fits both molds. A fresh example of the second pattern is the Presidents surprising semi-breakthrough on European debt, at this weeks G20 meeting in Los Cabos, Mexico. For months, President Obama and Treasury officials have quietly urged Eurozone leaders to do what it takes to avoid a sovereign debt meltdown, before they tackle long-term reforms. This week, it looks like it might pay off.

According to reports, Obama emerged from a private huddle with German Chancellor Angela Merkel with her grudging agreement to use Eurozone funds to directly support Spanish and Italian bonds. For the first time since the crisis began more than two years ago, the country with the deepest pockets has tacitly agreed to stand behind the full faith and credit of its member countries. If these reports are true, this weeks agreement should hold off a full-blown debt crisis for a while, and with it, the prospect of a deep global recession this year. Yet, how many Americans will give Obama any credit for all this, come November?

In a similar fashion, Mr. Obama inherited an economy seized by an historic financial meltdown. His predecessor mismanaged the crisis so badly that it drove the country into the worst recession in 80 years. Steeling himself against opponents united only by their partisanship, the President unleashed a flood of fiscal and monetary stimulus to arrest Americas downward spiral towards genuine depression. Six months later, growth resumed and private employment began to increase. Yet, in November, how much credit will voters give the President for avoiding the worst case scenario?

Instead, the President finds his reelection threatened by an economic reality he can do little to change namely, that an economy shaken by financial crisis usually recovers very slowly. In principle, to be sure, his administration might have done more to overcome the economic drag he inherited from Bush. He might have pressed harder to stabilize the housing market with short term loans for homeowners facing foreclosure. He might have tried harder to nail down a grand bargain for long-term fiscal balance.

But the President also recognized the new political reality following the 2010 elections. However hard he pressed or pushed Congress, neither deal was possible with Tea Party members calling the shots in the House, and Tea Party activists threatening to take down any Republican willing to work with the enemy. Obama did successfully block the hard right program of slash-and-burn budget austerity, which almost certainly would have plunged the economy back into recession, as it did in Britain. But once again, come November, how much credit will he get for avoiding another downturn?

This President has shown that he can take care of himself politically. He may not be able to point to the dismal hand he inherited from Bush, at least not without seeming to whine. But he can point voters to the numerous problematic aspects of Romneys economic record in Massachusetts and Bain Capital. Obama also has the political advantage in many policy areas, since the public generally favor his approach to taxes, Medicare and Medicaid, higher education, and the deficit.

Unhappily, however, the economy is still far from safe and sound. This weeks news from the G20 meeting will not settle the Eurozones economic problems. That leaves the Presidents reelection still hostage to the sovereign debt crisis. On top of the Obama-Merkel meeting of minds, the other good news is that Greeces new government should be able to avoid a precipitous default and chaotic exit from the Euro. Eventually, Greece almost certainly will default and leave the Euro, but hopefully not before the Eurozone has prepared for it.

The question remains, then, of what additional arrangements Frau Merkel will accept to reassure international investors that Spain and Italy will not follow Greeces path. Time is short, because Europe is already in recession, and such deals are usually pricey. Moreover, at this moment, European leaders cannot even agree on whether the next step should be uniform banking regulation, a fiscal union, or expanded political authority for the Eurozone. All of these measures are important for the Eurozone to become a stable economic entity. But first, the Eurozone has to survive. That will require what the President has called for all along measures such as Eurobonds or central bank authority to guarantee that after Greece, no other Eurozone country will ever have to default.

An Economic Program for the Fall Campaign and the Next Four Years

June 4, 2012

With the presidential election turning on the economy, the debate has focused on whats right or wrong with the current recovery, and whos responsible. They agree that growth is too slow and deficits are too high; and unsurprisingly, President Obama blames the GOP for both while Mr. Romney blames the President. The Presidents arguments are stronger, especially given Romneys risible claim that he can balance the budget and cut taxes another $5 trillion at the same time. The larger point is that the high deficits and tepid expansion are legacies of the financial meltdown, and resolving them would only allow economic policy to finally move past 20082009. The next stage of the economic debate, then, should focus on the two critical issues that have bedeviled middle-class Americans for more than a decade namely, historically slow jobs growth, and stagnating incomes.

A presidential campaign can accommodate only a handful of big ideas. Here, then, are three new policy initiatives to help reignite job creation and income gains: 1) reduce the cost of creating new jobs by reforming payroll taxes; 2) restore the foundation for middle-class wealth by stabilizing the housing market; and 3) enable everyone to become more productive by providing universal, low-cost access to college education and worker training.

Tax reforms offer the best way to reduce the cost of creating new employment and keeping those already employed in their jobs. The focus of such reforms is not the tax on corporate profits. Yes, the corporate tax is an inefficient mess, but reforming it will do little for those looking for work. The right target for job creation is the payroll tax, because it directly increases the labor costs of every employer. The idea here is to stimulate job creation and employee retention by cutting the employer side of the payroll in half, and on a permanent basis. And we can replace the revenues lost to Social Security with a carbon-based pollution tax.

The second idea could help address slow job creation and the slow expansion, as well as widening inequality. Employers have been creating relatively few new jobs not only because of the cost of doing so. Employers also are not confident about when Americans will begin to spend again like they used to, creating the demand for the goods and services which additional workers could produce. The simplest way to boost demand is more budget stimulus and good luck with that. A more efficient way, however, is to remove any factors holding back normal consumer spending. Its not unemployment, with the jobless rate already down from 9.8 percent to 8.2 percent. Rather, what continues to hold back tens of millions of consumers is the hard fact that the housing bust has left them substantially poorer.?¬¢‚Äö?ᬮ¬¨¬Æ

So far, the bust has cost most homeowners one-third of the value of their homes. This is a big deal economically, because home equity is the main form of wealth or saving held by most of the middle class. Consider the following:The bottom 80 percent of Americans, measured by income, own just seven percent of the value of the countrys financial assets but they also hold 40 percent of the value of all residential real estate. The sharp drop in housing values, therefore, wiped out most or all of the home equity built up by tens of millions of Americans. Before most people begin spending again at the rate required to boost business investment and hiring, housing prices have to stabilize and begin to move up.

Washington spent more than $1 trillion to stabilize the financial markets, which generate most of the wealth of the top one percent to 20 percent of Americans. For much less, we can stabilize the housing markets which generate the wealth of everybody else. The most direct way to do this is to keep people in their homes by bringing down the current abnormally high foreclosure rates. Fannie Mae, which taxpayers now own, could extend low-cost, two-year loans to millions of homeowners facing foreclosure. The funds could be used only for mortgages held by Fannie Mae. And to control the moral hazard lurking in such relief, 20 percent of any capital gain earned from eventually selling those homes would go back to taxpayers.

The third initiative would ensure that everyone can build the skills needed to earn a rising income by providing low-cost access to college education and worker training. First, we could replace student loans with an expanded and upgraded form of national service: Two years of service in the military or the Peace Corps, or three to four years service in Americorps, would earn any young person in-state tuition at a public college or university for four years. Young people considering college would be asked to give something of themselves back in service to the country, and would no longer have to face huge debts that can take decades to work off. In addition, every working American should have access to additional training in the information technologies integral to virtually all industries and jobs. The plan here is one that Mr. Obama supported when he was in the Senate provide grants to community colleges to keep their computer labs open and staffed in the evenings and on weekends, so any adult can walk in a receive free instruction.

This agenda is forward-looking rather than present-oriented, so it does not address the deficit. In truth, everyone knows perfectly well what to do about it. Simpson Bowles, Domenici-Rivlin, the Senate Gang of Six all rely on the same formula: Raise new revenues, reform Medicare and Medicaid, cap discretionary spending, and reduce defense spending. This approach, which President Obama supports, broke the deficit logjams in the 1980s under Ronald Reagan and the 1990s under Bill Clinton. The only thing standing in its way today is the intransigence of extreme conservatives who would rather see the U.S. default on its sovereign debt than consider raising taxes. We can only hope that the public will continue to rally around this balanced approach and convince House Speaker John Boehner and Senate GOP leader Mitch McConnell. Once that is done, we can turn to the real business of restoring jobs and income gains.