Today, we present a guest post written by Jeffrey Frankel, Harpel Professor at Harvard’s Kennedy School of Government, and formerly a member of the White House Council of Economic Advisers. A shorter version appeared on January 13th in Project Syndicate.
At the end of his time in office Barack Obama merits an enumeration of some of his many accomplishments. The recollection should start as he started, on January 20, 2009: the pilot taking the cockpit just when the plane was in an uncontrolled dive.
The circumstances were the most adverse faced by any new president in many decades. He inherited two ill-conceived, ill-executed and intractable foreign wars, which had done nothing to bring to justice the main perpetrator of September 11. He inherited an economy that was in free-fall, whether measured by the seizing up of finance markets, the fall in GDP, or the hemorrhaging of employment. (The rate of job loss was running ran at 800,000 per month.) True, Franklin Roosevelt inherited the Great Depression and Abraham Lincoln took office just as the Civil War broke out. But what other president has come in facing both an economic crisis and a national security crisis?
The rapid policy response to the economic crisis included — in addition to aggressive and innovative monetary easing by the Federal Reserve — the Obama fiscal stimulus (the American Recovery and Reinvestment Act, passed by the Democratic Congress in February 2009) and rescue programs for the financial system and the auto industry. Republicans were near unanimous in opposing the stimulus. And almost everybody was critical of the rescue programs – urging either nationalization of the banks and auto firms, on the one hand, or letting them go out of existence on the other. There was and is insufficient recognition of how the Obama Administration succeeded, against all odds, at making the middle path work: jobs were saved, while shareholders and managers suffered consequences of their mistakes and the government got its money back after the recovery.
Most importantly, the free-fall ended promptly. The timing and clarity of the turnaround is much more visible than one would think by listening to debates on what was the right counterfactual to evaluate the effect of Administration policies. Economic output in the last quarter of 2008 had suffered a shattering 8.2 % p.a. rate of decline and job loss was running at 600,000 per month. The loss in output and jobs levelled out almost immediately after the February stimulus program. The bottom of the recession came in June 2009; output growth turned positive in the next quarter. Job creation turned positive early in 2010 and employment growth subsequently went on to set records all the way through the end of Obama’s time in office, adding more than 15 million jobs.
By the last half of Obama’s second term, the unemployment had fallen by half, to below 5% (2015 and 2016), wages were rising (by 2.9% nominal over the 12 months to Dec. 2016); and real median family income was finally growing too (by a record 5.2% in the most recently reported year, with lower-income groups advancing even more).
It is certainly true that the recovery was disappointingly long and slow. Reasons include the depth and financial nature of the 2007-08 crash and the early reversal of the fiscal stimulus after the Republicans took back the Congress in the 2010 election and blocked Obama’s further efforts. 2011-14 are the years when the economy really could have used infrastructure spending and (the right) tax cuts, but it would seem that Republicans only support fiscal stimulus when they are the ones in the White House — including when the economy is no longer in recession.
Obama’s other two biggest accomplishments in those first two years before the Congress starting blocking everything he tried were the Dodd-Frank financial reform bill and the Affordable Care Act (Obamacare). In both cases, they would have been better without a succession of steps by the opposition party to weaken them, both at the stage of passing the legislation and subsequently. But each of those important reforms nonetheless succeeded in moving the country more clearly in the right direction than most people realize. Dodd-Frank in a variety of ways helped make less likely a repeat of the 2007-08 financial crisis. Among other things, it increased transparency for derivatives, raised capital requirements for banks, imposed additional regulations on “systemically important” institutions, and, per the suggestion of Senator Elizabeth Warren, established the Consumer Financial Protection Bureau (CFPB). Obamacare has succeeded in giving health insurance to 20-million-plus Americans who lacked it (for example, due to pre-existing conditions) and the cost of health care contrary to most predictions and perceptions slowed noticeably.
In the area of foreign policy, he made the tricky decisions that resulted in the elimination of Osama bin Laden (a goal in which George W. Bush lost interest, in his eagerness to invade Iraq). In 2015, just as the press was saying Obama was a lame duck, he achieved a string of foreign policy successes: a much-needed nuclear agreement with Iran, normalization of relations with Cuba, important progress to address global climate change, and agreement on the Trans-Pacific Partnership (TPP).
Needless to say, the man who assumes the Presidency this month has said he will reverse most of these initiatives, if not all. In some cases, he will do exactly that. TPP is certainly dead, at least for the time being. (And four years from now will probably be too late to revive it, as East Asian countries may by then have responded to America’s withdrawal from the region by joining China’s trade grouping instead.)
In other cases, real-world constraints will make it harder to translate crowd-pleasing sound-bites into reality. Repealing Obamacare is apparently top of the list. But the Republicans are likely to be stymied by the absence of an alternative that does not take health insurance away from those 20 million Americans nor raise the net cost. Some important innovations, such as the switch to electronic patient record-keeping and more emphasis on preventative care, are bound to survive. Perhaps the eventual outcome will be relatively minor changes in the substance of the Affordable Care Act, together with a new name – the analog of building a big beautiful wall on a quarter-mile of the Mexican border as a sort of stage set suitable for photo opportunities.
Similarly, it is hard to see how pushing harder on China would produce desirable results. To take the most laughable example of ill-informed policy positions, if the Chinese authorities were to acquiesce to Mr. Trump’s demands that it stop manipulating its exchange rate, its currency would depreciate and its competitiveness would improve.
Similarly, if the Administration tries to carry out its promise to tear up the nuclear agreement with Iran, it will quickly find that US sanctions are ineffective without the participation of our allies. Iran could rapidly renew and accelerate its nuclear program. That is what happened with North Korea when George W. Bush essentially tore up the “agreed framework” upon taking office in January 2001.
Do the voters hold presidents accountable? Bush made other serious mistakes in economic and foreign policy as well in those early years, of course, with the predictable consequences for the economy, budget, and national security. Yet his poll numbers soared in his first term.
Conversely President Obama’s popularity sagged during much of his eight years. Yet he leaves office with substantially higher poll ratings than most presidents at this stage and – unusually – with much higher ratings than his successor, let alone his predecessor at the end. So apparently the person who occupies the White House does eventually receive the credit he is due for the intelligence of his policies and the content of his character, even though it takes longer than it should.
This post written by Jeffrey Frankel.