Blaise Pascal, PenseĆ© 347: “Man is but a reed, the most feeble thing in nature; but he is a thinking reed. The entire universe need not arm itself to crush him. A vapor, a drop of water suffices to kill him. But, if the universe were to crush him, man would still be more noble than that which killed him, because he knows that he dies and the advantage which the universe has over him; the universe knows nothing of this. All our dignity consists, then, in thought. By it we must elevate ourselves, and not by space and time which we cannot fill. Let us endeavor, then, to think well; this is the principle of morality.”

Wednesday, September 5, 2012

Barack Obama and The Great Recession

President Obama began his presidency with the worst economy since the Great Depression. He inherited the Great Recession at its height, and lately, he has spent a lot of time reminding the public, still mired in financial distress, that he didn't create the problem. On the other hand, the Republicans have been saying: Barack, you've had four years, you didn’t keep your promise to fix the economy, your policies have made matters worse, and now you own it. So the politicians are juggling the hot potato and blaming each other, which reminds me of one of my favorite L'il Abner lyrics:

Marryin' Sam: "Them GOPs and Democrats each hates the other one."
Li'l Abner: "They's always criticizin' how the country should be run."
All together: "But neither tells the other what the other's gone and done, as long as no one knows where no one stands. THE COUNTRY'S IN THE VERY BEST OF HANDS!"

I want to try to do 4 things in this entry:

1. Look at some events and statistics that indicate the size of the United State’s economic problem.
2. Examine the origins of the problem.
3. Try to determine whether Obama's economic policies have made the problem better or worse.
4. See if anything has been done to correct the mistakes that led to the Great Recession.

My conclusion will be that the United States is in enormous economic difficulty; that Republicans and Democrats, in trying to please each party's special interests, collaborated so intimately to produce the Great Recession that it's hard to assign either party a greater share of the blame; that Obama's policies have probably made the economic situation worse, just given the debt increase; that virtually nothing has been done to correct the legislative and policy mistakes that made the Great Recession possible.

I. The size of the United State's economic woes, as of September 5, 2012 (Awaiting this Friday's employment statistics, which I expect to throw a cold bucket of water on Democratic National Convention)

1. The net worth of the median family dropped 40% from $126,400 in 2007 to $77,300 in 2010, most of this in loss of home value. Median family income dropped from $49,600 in 2007 to $45,800 in 2010. Washington Post, June 11, 2012

2. Federal debt is nearing 16 trillion and is projected to hit 20 trillion by 2016. (These figures are so widespread and easy to check, I'm not going to offer a citation.)

3. As a percentage of GDP, the Federal debt is about 67%, the highest since World War II. Wikipedia: United States Public Debt 

4. For the first time in history, the United States had a downgrade in its sovereign debt. S & P Strips U. S. of Top Credit Rating

5. Federal spending is at 25.2% of GDP, the highest since World War II. See the indicated table at this link OMB Table 1.2

6. The budget deficit of 9.9% of GDP is the highest since World War II. History of the United States public debt  The reasons given by Wikipedia for the 2009 deficit show the difficulty of pointing the finger only at the Obama administration: 

"In October 2009, the Congressional Budget Office (CBO) gave the reasons for the higher budget deficit in 2009 ($1,410 billion, i.e. $1.41 trillion) over that of 2008 ($460 billion). The major changes included: declines in tax receipt of $320 billion due to the effects of the recession and another $100 billion due to tax cuts in the stimulus bill (the American Recovery and Reinvestment Act or ARRA); $245 billion for the Troubled Asset Relief Program (TARP) and other bailout efforts; $100 billion in additional spending for ARRA; and another $185 billion due to increases in primary budget categories such as Medicare, Medicaid, unemployment insurance, Social Security, and Defense – including the war effort in Afghanistan and Iraq."

7.  Employment (58.4% of population working) is the lowest since 1983. (Part of this may be the result of an aging population, where the workforce would naturally shrink; but a lot of it is certainly due to the recession.) Seeking Alpha: Reading the Jobs Data

8. The current unemployment rate is 8.3% and according to some calculations, higher. (An “unemployed person” is basically one who has looked for work in the preceding 4 weeks but has not been able to find it.) It does not measure the number of people who have quit looking for work entirely. (i. e., the person who during week five, for whatever reason, quits looking for employment.) Adding in this component raises the rate, according to the Bureau of Labor Statistics, to 9.6%. If you add in the underemployed—people working part-time jobs, even though they want full-time—this increases unemployment to about 15%, and this is where the Romney campaign gets its figure that 23 million Americans are unemployed (the Labor Dept’s U-6 rate) which is about twice the number of 12.8 million calculated by the 8.3% rate. BLS News Release for July 2012  (By the end of this week, we'll have updated figures.)

See also

9. Long term unemployment. If you’ve been jobless for 27 weeks or longer, but you are still trying to find a job, you enter the category of “long-term unemployed.” In July 2012 5.2 million Americans fell into this category, or 40.7% of the unemployment rate. See above "BLS News Release" link.

10. The percentage of income tax filers not paying taxes is about half of Americans (though they do pay other federal taxes, such as FICA.); on the other hand, people receiving one or more federal benefit payments is the highest in American history at 47%. (You'd expect a disproportion, given the unemployment statistics.) For a comment in The Atlantic, see this link, which goes at this statistic from a moral standpoint. I think the important thing is to recognize it as a signal of economic distress: 47% Don't Pay Taxes? No Big Deal In fact, that 47% of Americans don't pay taxes is an extremely big deal as an economic indicator, whatever your thoughts about tax justice.

II. The Origins of the Great Recession

Before Barack Obama became president, the Bush Administration was running up the Federal debt to record levels. You can track this easily, year by year and administration by administration, at the following link: Presidential Debt Year by Year.  But to summarize quickly, the debt was 5.6 trillion when George W. Bush took over from Bill Clinton in 2001. In 2007, on the eve of the Great Recession, the debt had reached 9.2 trillion, and by the end of 2008, 10.7 trillion. The main factors in producing the deficit during the Bush years were the one two punch of expensive wars in Iraq and Afghanistan combined with tax cuts: spend a lot more, take in a lot less. But there was also an expansion of Medicare and the inability to get the program's costs under control. (Controlling Medicare costs and so saving the program is perhaps the single biggest issue in this election.) So during the eight years of George W. Bush's administration, the country added about 5 trillion dollars worth of debt. The Congressional Budget Office breaks down the increase between 2001 and 2011 by category. See the breakdown at Wikipedia's article on United States public debt. United State Public Debt: Change in Debt Position Since 2001 It is interesting that the wars in Afghanistan and Iraq are estimated to have contributed a proportion that is smaller than the Bush tax cuts. 

The point is that, even before we got into bailouts and stimulus packages in response to an economic emergency, we were endangering the economic stability of the country by accumulating astounding levels of debt. I'm sure there's more to say about George W. Bush and spending; very few Republicans would give him an award for fiscal responsibility.

Now let's get personal and look at some of the other contributors. 

Alan Greenspan: Cutting interest rates to rock bottom levels goosed the economy, creating two bubbles, the bubble and the housing bubble. Low interest rates encouraged people who did not have the financial wherewithal to buy homes, to the point that people were getting mortgages even if they had no job, no income and no savings. Greenspan apparently never saw it coming. In 2005, he said "at a minimum, there's a little 'froth' (in the U.S. housing market) ... it's hard not to see that there are a lot of local bubbles." The Economist magazine, writing at the same time, go the magnitude of the problem right: "the worldwide rise in house prices is the biggest bubble in history." (It knocks me out that the Economist saw the crash coming in 2005!)

Frothy quotation: David Leonhardt: Frothy
Economist Article: Global Housing Bubble

Bill Clinton: No kidding. Democrats tout him as the most fiscally responsible President of recent times, but his mistakes just had an 8 year incubation period. Clinton agreed to repeal the Glass-Steagall Act, which had separated investment from domestic banking. The combination of these two different banking institutions produced the banking behemoths who bundled worthless mortgages into bigger and bigger securities, selling them again and again, thus leveraging the country into the worst financial crisis since the Great Depression. Glass-Steagall was repealed by the Gramm-Leach-Bliley Act (1999) by bipartisan votes in the Senate 90 to 8, and the House 362-57. (Wiki) The story that the deregulation of the banking industry was a Republican affair motivated by the donations of lobbyists is just not true. It was a bipartisan affair motivated by the donations of lobbyists, but it seems Phil Gramm led the way on behalf of Sandy Weill of Traveler's Insurance and John Reed of Citicorp, who needed Glass-Steagall out of the way to bring about the merger of their two companies to create Citigroup. Citigroup was the biggest banker in the world in 2008 and was bailed out because it was too big to fail: it received an astonishing $476.2 billion in cash and guarantees. See Citigroup Tops List of Banks Who Received Federal Aid

Under Clinton’s watch, both sides of the mortgage business were encouraged to be irresponsible, lenders and borrowers. With regard to borrowers, Clinton further liberalized Jimmy Carter’s Community Reinvestment Act (1977) forcing banks to give more sub-prime mortgages. Thus, not just more deregulated bankers were put into contact with more sub-prime customers, but thanks to regulatory architects of the Clinton period, bankers were required to grant more sub-prime mortgages. 

For a good article about how all of this worked, and some others who have responsibility, see The Atlantic: Hey, Barney Frank, the Government Did Cause the Housing Crisis

You could spread the blame even farther, to people without money who took mortgages they couldn't afford. But if banks will lend money to people, they will borrow it, and in the 2000s, I had three calls a day or more, sometimes, from banks wanting me to take out a second mortgage. "Pre-approved" credit cards arrived in the mail in a constant stream. When I bought my house in 2003, the sub-division builder asked me if I wanted to buy two or three! It was insane. If you throw temptation enough times in the way of enough people, a lot of them will give in. I blame the tempters more than the tempted.

III. Did the Obama Stimulus and His Other Policies Work?

In late 2008 and early 2009, it might have satisfied both Tea Partiers and Occupiers to march some of the people named above, as well as the heads of the big financial behemoths and auto companies, over a cliff. I have complete sympathy with Tea Party anger over bailouts of banks and auto companies. Unfortunately, the bailouts seem to have been necessary to prevent financial panic, destruction of credit, and permanent economic damage. A lot of odious people got away with gross financial malfeasance and probably made money.

One of the first programs put into effect was the Troubled Asset Relief Program (TARP), enacted while President Bush was in office (October, 2008) and continued into the Obama Administration. TARP allowed the U.S. Treasury to purchase or insure up to $700 billion of bad mortgages or instruments based on bad mortgages, such as the notorious collateral debt obligations. In other words, the government was frantically trying to correct the mistake of repealing Glass-Steagall and liberalizing the Community Reinvestment Act. Much of the TARP money has been paid back. It's purpose was to prevent the failure of the banking / credit system, which it seems to have accomplished.

I think that TARP had to be enacted. Paul Ryan has gotten some flak from the Tea Party for supporting it, but he helped to make TARP a better piece of legislation, and I believe, acted intelligently and responsibly. Here is his argument in the House, miss-labelled "pathetic" by detractors:

(Paul Ryan argues for the passage of TARP)

      The policy decisions which the Obama Administration has to own include:
1. The $825 billion stimulus
2. The bailouts of GM and Chrysler
3. The Public-Private Investment Partnership to buy toxic assets from banks.
4. Cash for Clunkers
5. The Home Buyers Credit
6. Deficits which increased, in four years, the federal debt another $5 trillion
7. Five versions of foreclosure relief
8. Energy subsidies

I think that Republicans can accurately point to a general expansion of government under Obama, the creation of an uncertain business climate, the failure of a green energy policy, and a distribution of stimulus money aimed at Democratic Congressional districts.

But despite the above criticisms, economists disagree widely on whether the recession was alleviated by the stimulus spending or whether the United States threw money down the drain and only put itself deeper in debt. Here, as a voter with little technical expertise in economics, I am at the mercy of expert opinion, which goes in all different directions. An article which shows the almost impossible complexities of the issue appeared in the Washington Post and reviewed several studies; six said the stimulus helped, three said it mainly did not:

Did the Stimulus Work? A Review of 9 studies

Many commentators, even on the left, believe the stimulus was poorly designed. Stimulus packages stimulate when people spend the money they are given, but in-debt and worried Americans saved about 30% of it, or paid off debt. The trouble with social engineering is that people often don't act the way that policy-makers and bureaucrats expect them to. (Policy makers should all have to read Notes from Underground a couple of times a year.) The solution of people like Joseph Stiglitz, Paul Krugman, and Bill Bradley (see his book, We Can All Do Better) is to pump another stimulus into the economy, about as big as the last one, which they feel was inadequate. Maybe people would spend the money this time--or maybe they wouldn't. The problem of individuals who have suddenly become financially responsible extends to corporations as well, who trust the business climate so little they are sitting on about $1.5 trillion rather than investing it and hiring people. So go the best laid plans of Keynsians and the Federal Reserve . . .

What about Cash for Clunkers and the rest? Some analysts say Clunkers generated car sales, and others that it just moved them ahead a couple of months. There is disagreement among economists on most of what Obama did.

With brilliant economists in disagreement, but divided along clear party lines, the responsible voter doesn't get much help, despite hours of reading. All the claims, by both parties, to know what they are doing are cast into deep suspicion as one gets into the basic data and what various professors make out of it--Chicago and Harvard liberals taking one stance, Stanford Hooverians another. The claims and the charges at the national conventions become absurdly over-confident when seen against the pattern of complexity and uncertainty that really exists.

Bill Bradley, in We Can All Do Better, gives a summation of the Obama stimulus which I think is half right:

First, the right part: “In 2008-2009, in response to the worst financial collapse since the 1930s, the federal government used its economic tools to keep the nation out of a depression. The Federal Reserve injected a massive amount of liquidity into the economy so that banks could resume lending and businesses could resume hiring, creating three times as much money in one year as it had since it came into existence. In addition, Congress passed a $700 billion bailout of banks and a $787 billion dollar spending [stimulus] bill, most of which stretched over 2009 and 2010. Still, unemployment remained above 9 percent. Might it have gone to 11% without the stimulus? No one really knows. [my italics]”

Now, just when Bradley is doing well, he takes a leap off planet earth into the economic twilight zone: “President Obama chose to go with what he could get. In retrospect, it appears that the stimulus should have been bigger. If we had done as much as China did with its 2009 stimulus as a percent of GDP, ours would have been $1.9 trillion [a truly Krugman sized stimulus] The lesson is clear. China has bounced back from the downturn. We’re still stuck in it.”

Well, no Mr. Bradley. The lesson is not clear. Your assumption is all that matters is the amount of the stimulus as a percent of GDP, but why wouldn’t the structure of the stimulus matter, and how can you predict what people would have done with that stimulus? They sure didn’t perform as expected the first time. We are not China, and China may still be heading into a recession. We are a different people in a different context. Even if it turns out that China’s stimulus was more than a short term fix, there’s no guarantee that a whopper stimulus would have worked for us. Location, location, location: it's not just for real estate.

The lack of certainty among economists about economic engineering ought to make them as well as us uncertain about what to do, yet Krugman and Siglitz on the left or supply-siders on the right speak with a certainty that is almost absolute, and all out of keeping with the disagreement in their profession. That we should engage in wild policy bets on the basis of their predictions of what will happen if their policies are adopted or what would have happened if they had been is reckless. Engaging in government expansion and more stimulus spending seems a wild bet. Likewise, keeping taxes low with the supply-siders seems a wild bet. 

This is the fact that makes me a conservative to begin with--the doubt that schemes for mass social engineering can really work, especially when they are counter-intuitive. It is why I'd like government to have a smaller role in my life than a larger one.

Close the loopholes in the 72,000 page tax code, consider slightly raising marginal rates, and reduce government spending. This is the commonsense answer that with steady application would bring the country back as an economic dynamo, but it would require us to disciple ourselves.

Lets say that on this one Obama gets a pass, barely. His programs may have alleviated some unemployment, but whether they were worth the money that eventually will have to be paid is hard to say.

The following interview of Joseph Stiglitz is interesting as an appendix to the above. He identifies the weaknesses in the Obama stimulus, and forges into the unknown with great confidence:

(Stiglitz on Fora TV)

IV. Has anything effective been done to solve the problems that led to the Great Recession?

The answer to this question is “no.”

Again, I’ll go to Bradley, who gives a succinct one-paragraph analysis of how little we’ve done to prevent 2008 from reoccurring:

“The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 was supposed to prevent another financial meltdown. Instead it risked turning the financial sector into a government monolith. The bill punted on breaking up the too-big-to-fail banks. Far from it, Dodd-Frank bolstered them against failure and encased the whole thing in a four-hundred-thousand word web of complexity that will serve as a full employment act for many members of the Washington club. The act provided for an orderly dissolution when a too-big-to-fail institution got into trouble. But no one knows how orderly dissolution will work. As Henry Kaufman pointed out in a speech to the Foreign Policy Association on December 6, 2011, ‘Untangling these credit relationships will affect prices and other market relationships. Who will take the losses? Who will take over the assets and liabilities as the dissolution proceeds? . . . [A] good portion of the assets and liabilities will be acquired by other institutions that are too big to fail. . . . Either way, the entire process will increase financial concentration.’ There is only one answer to this dilemma: Shrink the big financial institutions. You could spin off the credit-card and consumer-loan divisions into a new company. You could do the same with the mortgage division or the insurance division. You could even put the investment banking and trading operation in a new company. After these behemoths have been downsized, they will no longer be a systemic risk. Small businesses will find easier financing. Conflicts of interest will end. Large corporations will no longer receive a privileged flow of funds. The economy will be more resilient and stable." from We Can All Do Better, pp. 59--60.  

I don't notice either Obama or Romney talking about this.


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