What Can We Say About President Obama’s Economic Performance in Early 2010?

There’s an argument that we should look less to President Obama for the success or failure of the economy in this Great Recession – especially with the lack of movement on unemployment – and more to Congress and the Federal Reserve, especially as they interact with the Presidency. The role of President as agenda-setter is overrated and maybe even counter-productive, because it increases partisanship in Congress.  The role of President as rhetorician doesn’t hold up in political science literature and is exaggerated because of the way we (and the media) view elections and government generally.

This argument sets the tone in Ezra Klein’s big New York Review of Books piece on Suskind’s Confidence Men and Obama’s performance on the economy.  Discussing it today at his blog, Ezra notes:

My retrospective on the Obama administration’s economic policy, my review of Ron Suskind’s “Confidence Men,” and even my column yesterday on FDR are all efforts to make the same point: The president is not as powerful as we think. If you believe that the state of the economy drives the electorate’s evaluations of our political leaders — and you should believe that — then you have to grapple with the fact that the president is primarily responsible for economic conditions and needs either Congress or the Federal Reserve to join him in making economic policy…I think, from 2009 to 2010, the Obama administration operated on the frontier of the policy possible. They did about as much, and perhaps a bit more, than they could reasonably have been expected to do….Since the 2010 election, however, they have made one mistake after another….

The point of these pieces has been that we systematically overrate the power of the presidency and underrate the importance and autonomy of Congress and the Federal Reserve.

There’s a lot of truth there.  The President’s powers are going to be held in check by Congress – with a dysfunctional Senate – and the Federal Reserve – where liberals haven’t been agitating for more hawkishness on unemployment.  But with that said, it means that everything the President could do by himself is suddenly more important, especially when it comes to government spending.  And the President actually did counterproductive things, things that signaled they were happy with a slow recovery.

Let’s go to the 2010 State of the Union (my bold):

Starting in 2011, we are prepared to freeze government spending for three years.  (Applause.)  Spending related to our national security, Medicare, Medicaid, and Social Security will not be affected.  But all other discretionary government programs will.  Like any cash-strapped family, we will work within a budget to invest in what we need and sacrifice what we don’t.  And if I have to enforce this discipline by veto, I will.  (Applause.) …

Now, I know that some in my own party will argue that we can’t address the deficit or freeze government spending when so many are still hurting.  And I agree — which is why this freeze won’t take effect until next year — (laughter) — when the economy is stronger.  That’s how budgeting works.  (Laughter and applause.)  But understand –- understand if we don’t take meaningful steps to rein in our debt, it could damage our markets, increase the cost of borrowing, and jeopardize our recovery -– all of which would have an even worse effect on our job growth and family incomes. 

A veto threat!  The economy would be strong enough in 2011 to start freezing government spending.  Now there’s been a lot of downward revisions, and they didn’t know how bad the economy would be now.  So to be careful about this, let’s go to the January 2010 Federal Reserve economic projections, which summarizes how leading economists would have thought about how the recovery looked going forward.  Here’s the unemployment rate for 2011 from the point of view of January 2010:

They projected an unemployment rate between 8.2% and 8.5% in 2011. It will turn out to be 9.0 to 9.1%.  But nevermind that – an unemployment rate of 8.3% is still way too high for our workforce.  Why weren’t they sounding alarm bells in early 2010?

It’s clear from the speech:  President Obama announced the freeze and veto threat, and didn’t sound alarm bells, because he believed that the potential risks associated with not signaling to the bond market that deficit reduction was coming outweighed the reality of high unemployment and trying to expand the deficit immediately.  20+ million people not finding full-time work with certainty is bad, but just the possibility of the confidence fairy getting angry is far worse.

This stands in for policy more generally, and it leads directly to all the failures of Grand Bargains and two-deficits cartwheels when it came to plans for dealing with the unemployment crisis.  It splits the party between those who have to argue for bond vigilantes and those who have to argue against.  The deficit hawkery negates the most powerful market indicator we have for what the government should do – the interest rate.  This approach puts boundaries on the range of acceptable ideas on what can be done for the economy – and places getting stimulus out the door through discretionary spending, outside of Congress, out of bounds.  And meanwhile current interest rates have never been lower – they are negative in real terms for 10 years out.  This was exactly the wrong call to make in early 2010.

(Oh, and Mitt Romney is writing that “President Obama has put our nation on an unsustainable course. Spending is out of control.”  He’s very much not mentioning the time Obama dressed down the hippies – “That’s how budgeting works” – with a veto threat in order to curtail government spending with unemployment over 8% – nor will he.)

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19 Responses to What Can We Say About President Obama’s Economic Performance in Early 2010?

  1. Ted K says:

    Mike, this is coming from a Democrat, someone who likes you, and certainly respects your skill with financial numbers, But and this is a big “but”, take a word of advice that would do you miles and miles of good for your self-respect as you get older and might even help your long-term career (Roosevelt Institute or not):

    Don’t just kiss ass to (or overly defend) a Democrat President for the sake of kissing ass to a Democrat. Ezra Klein looks more like a pansy/ninny every day as he does this, as does Melissa-Harris-Perry and even Rachel Maddow.

    “Let’s” see if we can make some self-adjustments and let Mike Konczal’s maturity catch up to his intelligence, shall “we”???

  2. Edwin Herdman says:

    It’s clear that Tea Party activism deserves the credit for sounding an alarm on the debt, and I’ve been thinking that right along. Without any other pressing issue on the table, deficit reduction appears a “sensible” thing to at least look at. At the same time, making it the key issue at a time when the country could ill afford further deadening the economy was either a political gambit or fanaticism in place of thinking. The third possibility, that it was pure visionary thinking, doesn’t make sense – whether or not there were serious arguments that the United States’ deficit position was nearly as precarious as the “PIIGS” nations (I recall a few arguments to the effect that deficit actually stimulates the economy) – we’re still left with a focus on the wrong problem, and the specter of policy moves to lock us into fighting the deficit battle even after we had eradicated it – ‘vigilance’ being the watchword.

    Obama has clearly been a more centrist President than many would admit is needed, but I think his (and the Democratic leadership’s, in general) willingness to be led about by the ever-shifting winds of rhetoric in Washington is worrisome. I can’t fault his not falling prey to the intermittent calls for a FDR-style sustained attack on moneyed interests, but I do wonder why there isn’t at least a sustained focus on accountability and rules changes. The resistance to the President’s policies from Democrats in the House and Senate seem, from the distance that the average voter is to view them, mainly based on individual loyalties; there isn’t a sustained attempt to tie the myriad Democratic positions into anything like a coherent whole. This is easier said than done, but having a President ought to be an asset. The result is that the party with a majority (a slim one, true) in government now appears to be running opposition to the opposition.

    The 99%ers are merely stepping up to make the obvious arguments because the Democrats in power have let their intellectual capital get wasted on trying to score points in the day-to-day shuffle of legislative politics. The problem is that this ends up being merely a fuzzy signal of a broad movement, with an attached ten-volume index of proposed solutions (from “eat the rich” to “It’s wrong to create a mortgage-backed security filled with loans you know are going to fail so that you can sell it to a client who isn’t aware that you sabotaged it by intentionally picking the misleading rated loans most likely to be defaulted on.”)

    The looming battle will be to present what I’ve been hearing called a “Vision for America.” No advertising is bad advertising; you could imagine shades of The Aviator here, with Obama chanting “Way of the Future” repeatedly. Who wouldn’t like the line “Yes, if you want to say I am a maniac, let me be a maniac for the American worker…” A maniacal obsession would get out the story better than the President’s unremittingly low-key monotone, which has been his hallmark in all his public appearances – with the sole exception of the “Pass This Bill” jobs act presentation. That actually had Republicans playing defense for a while; they realized they just needed to sound optimistic about it for a few days and let the optimisim die out before launching the rhetorical arrows they’d nocked before he uttered his first applause line.

    I have to wonder, though, if what President Obama’s people were really responding to was not the actual fact that Americans were (and remain) suffering, but rather the impropriety of Republicans and Democrats having the audacity to play politics at a critical moment, and that their goal was just to swim past the whole icky mess. Obama’s team should remember Rahm Emanuel’s line: “Never waste a crisis.” The point is not to make the opposing party cry uncle; it’s to make them defer to the reality of the situation and to acknowledge where their interests lie, and that you have a principled vision for the future to be respected. Unfortunately, the current trend in politics is for anybody who dares suggest that policies have legitimacy be chucked out of office for roiling confidence (although, to be fair, the Greek PM, Georges Papandreau, had done it rather inelegantly, to say the least.)

    There are a few people of some prominence who are picking at the edges of this conflict – Fareed Zakaria, Paul Krugman, President Clinton come to mind – but all the leading minds of hard-nosed investment in the future will have to work extra hard just to find a bully pulpit taller than the weekly slog of Republican presidential debates. The old-style William F. Buckley conservative and even the Tea Partier are increasingly worried about the crowding out of legitimate policy thinking that we’ve seen. There was, uhh, a third agency here…I’ll get back with you when I remember what that is.

  3. Edwin Herdman says:

    Edit: Looking through the post, I realize that yes, the teeth-grittingly self-centered calls from the financial sector for the Administration to not “send conflicting messages” by having the audacity to prosecute evildoers at investment houses could be said to explain why the President isn’t focusing on that. In any case, the last I heard the Justice Department investigations are being allowed to continue. Other than that, I recognize that I appear to make the wrong argument there – my focus is, of course, on actual stimulus, at a time when it’s needed.

  4. Dan Kirshner says:

    An alternative hypothesis is, rather than Obama “believed that the potential risks associated with not signaling to the bond market that deficit reduction was coming outweighed the reality of high unemployment and trying to expand the deficit immediately,” that it was politically driven. This article certainly supports that view: http://www.nytimes.com/2011/08/14/us/politics/14econ.html. It’s a bit more recent than the period you talk about, but I think it describes the White House’s thinking for some time: “Several of [Obama's] political advisers are skeptical about the merits of stimulus spending, and they are certain about the politics: voters do not like it.” and “Mr. Obama’s senior adviser, David Plouffe, and his chief of staff, William M. Daley, want him to maintain a pragmatic strategy of appealing to independent voters…”

    I’m convinced that most voters really, really hate deficits, especially in a recession — they’re pulling back, why shouldn’t the government do its bit, too? Bad economics, but it appears to be common sense. And American voters have plenty of company — witness all the European calls for austerity.

    OK, Obama was wrong to pander to common sense; however, whether he actually believed he needed to mollify the confidence fairy is an open question in my view.

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  6. I don’t think there is any real hatred for deficit spending among voters – that is, that voters prioratize deficit reduction. Certainly nobody has ever made the case that Bush was hurt by pushing the U.S. from a surplus to a large and growing deficit. Nor did the Republican congress suffer for that – they suffered because the 00s economy sucked. Name one politician who was elected on the pledge to reverse, say, the MMA, one of the biggest adders to federal spending in decades.
    No, the group that is concerned is not the voters in the heartland, but the governing class in D.C. Unfortunately, from the beginning, Obama has spoken in their vernacular. Instead of a bill getting Americans to work, instead of going out to sites and spotlighting the infrastructure that more spending could improve, Obama did nudgery and a ‘stimulus” – and even that was not politically poisonous when first proposed. It was poisounous because of the lack of follow through, and Obama’s penchant for speaking about how projects weren’t ‘shovel ready.’ Poor communications is embedded in poor conceptualization of what was needed in 2009, which was reinforced by a very poor cadre of economics advisors, and a terrible Treasury secretary. In fact, under Obama much was done that Klein doesn’t speak of – for instance, Obama’s treasury department was at least active in promoting the 16 trillion dollar emergency loan program set up by the Fed for the financial sector. At any time, Obama could have pulled back the curtains on that and challenged Congress to do something similar for the 99 percent. He didn’t. He didn’t cause he didn’t want to.

  7. Great post, and also very worrying. If the range of acceptable policy options is progressively (no pun intended) restricted by fear of Market reactions (which are misunderstood and mythologized by politicians anyway), how can we respond to these kinds of economic crises when the real underlying risks are mainly to do with lack of demand and investment and a failure to reform a financial system which is out of control? Just when we most need bold policy making, it seems, even the President is too scared of imaginary investors who will punish anything that doesn’t look like austerity to change the debate and tackle the problem at its root.

  8. browny says:

    Voters may say they hate deficits, but voters mostly care about JOBS. Obama does not understand that and took the focus off the concerns of the 99%- JOBS.

    Obama sold himself as a “Post-Partisan” technocrat, a guy who would listen to all sides and build policy consensus. How well does this work when the 1% control all of government and the voice of the 99% goes unheard? If you don’t stand for something, you will fall for anything. Post Partisanship in 2009 was starting from a position of weakness.

    As Dan Mitchell, of Cato Institute, notes: “I don’t think there is such a thing as post-partisan or post-ideological politics, but there is such a thing as one side being so shell-shocked and/or incompetent that it is incapable of presenting an alternative vision.”

    • eric says:

      “Voters may say they hate deficits, but voters mostly care about JOBS. Obama does not understand that and took the focus off the concerns of the 99%- JOBS.”

      I agree. That has been my concern since as soon as Obama won the presidency. More recently, I have been also deeply disturbed that a Democratic President has offered to cut Social Security. Politically, Jobs and Social Security/Medicare are the two pillars of Obama’s party, and he hasn’t seemed to care.

  9. Dan Kervick says:

    We can go back even further than the 2010 SOA, Mike. Obama signaled right at the beginning of his term that he was going to get very, very aggressive on cutting deficits. This NYT article is from February 21, 2009:

    http://www.nytimes.com/2009/02/22/us/politics/22budget.html

    The guy hit the ground as another “responsible” New Democrat deficit hawk and Pete Peterson acolyte out of the Evan Bayh and Erskine Bowles school of thought. Obama always regarded the recession as just an annoying bump in the road that was preventing him from demonstrating his chops as a conservative Democratic “grown-up” capable of making the “tough decisions.” He couldn’t wait to pivot back to austerity.

    Look at the remarks he made in February, 2010 when he announced the Bowles-Simpson commission. They’re all about making the “tough decisions”, and releasing us from “the stranglehold of debt.”

    When he made the announcement, unemployment was at 9.6%. And yet in his eyes, the big problem was federal government debt.

    These are the same clowns who are still running Europe and are still setting the agenda for the Obama administration. Every time Bill Clinton opens his mouth, for example, I want to step in front of a bus. And Obama still seems to take most of his economic direction from Tim Geithner of the Rubin/Goldman Sachs school of thought. Right now the ECB is buying up sovereign debt but “sterilizing” the purchases by selling the bonds right back. Stupid. Obama did the same thing by promoting a one-time “stimulus” that he never liked, but sterilizing it with a promise of austerity to follow right after.

    But It’s not just Obama; it’s not just Merkel; it’s not just Geithner; it’s not just Clinton; it’s not just Trichet and Draghi. It’s that whole generation of neoliberal Third Wayers. Their era needs to come to an end …. quickly! Obama still has time to get some new religion and change his spots.

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  11. Steve says:

    Obama has lately “pivoted” to jobs and seen a modest reversal in his downward slide. He could ride it to victory, if the economy doesn’t tank. He is hard-wired to suck up to power and follow elite opinion, however, and it is going to be mighty tempting for him to punch a hippie next year, because he really does not believe in a jobs agenda.

    If he is reelected, I’m sure the day after the election, he is going to snatch defeat from the jaws of victory and signal to the one percent that he didn’t really mean anything he had to say to get elected. He will then make the second turn all about redoubling futile efforts at getting a Grand Bargain, which will result in a constant and steady shift to the right.

  12. ZeroInMyOnes says:

    Has anyone looked at voter participation rates by employed vs. unemployed? One could imagine a lower probability of voting for the unemployed. I am not saying, I am just asking. But if it were true, it would explain both parties (cynical) lack of concern about the sad plight of the unemployed.

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  14. beowulf says:

    What Ted K. said.

  15. Ron Alley says:

    The first casualty of the Obama administration was the truth. He failed to encourage Congressional hearings into the misdeeds of the Bush administration and the crony capitalist goings on during the Bush presidency.

    After refusing to hold the Republicans accountable, Obama began a series of actions that you characterize as attempts to reach a bipartisan consensus. That is far too charitable. Basically, on virtually every critical decision Obama had the opportunity to make, you could ask, “What would Dubya do?” and you could accurately predict Obama’s decision.

    Frankly, I’m reluctant to vote for Obama in 2012, but I’ll probably hold my nose and vote for him.

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