Obama and the Recovery

Between now and November we are going to hear a lot about the economy. President Obama's supporters will say that he prevented the recession from deepening into a depression. This is nonsense. The real crisis came in the Fall of 2008 when several large banks threatened to go bankrupt, taking the world economy with them. The Bush administration dealt with this and kept GM and Chrysler afloat until they could go through bankruptcy (which the Obama administration handled).

When it was making its case for the stimulus, the White House projected that the recession would end during the Summer of 2009. The purpose of the stimulus was to help with the recovery, especially since unemployment always trails recovery. Sure enough, the recession officially ended June, 2009 but the recovery since then has been so weak that many people feel that we are still in recession.

So the big question is Did Obama botch the recovery?

The first round of fact-checkers points to the stimulus and the jobs that it created/saved as calculated through Keynesian economics. But there is a lot more to managing a recovery than throwing money at it.

Recent White House memos indicate that the $800 billion figure was the biggest amount that the White House figured it could get through Congress. A big chunk of that was meant to implement the President's agenda. Another third provided a two-year bail-out for the states. The administration couldn't think of anything else to spend money on so the final third of the stimulus was in the form of tax cuts.

Less noticed is the Obama administration's handling of banks and monetary policy. According to the book Confidence Men, Obama had two choices for his economic team. Team A was led by Paul Volcker. They believed that we needed to purge the system of toxic mortgages and get the banks out of the business of selling debt. This would cause short-term pain would allow finances to bottom out and begin growing again.

Instead, Obama went with Team B led by Larry Summers. They believed that the system was too delicate for big changes. Instead the government needed to prop up the existing systems until they regained confidence. This had the political advantage of being less disruptive.

The result of Obama's various policies are still being felt. The stimulus may have saved jobs but only for two years. States that were bailed out in 2009 and 2010 finally had to make cuts in 2011 which resulted in a drag on the recovery.

Another significant drag is house prices. They are continuing to drop for the 4th year. New housing accounts for a large portion of the economy but people are reluctant to build houses when they might lose value before they are completed.

Obama has hurt other sectors of the economy, also. He has discouraged domestic oil production (yes, it is up but only because increases on private land were bigger than reductions on federally owned land). New EPA regulations are raising the cost of electricity. The Affordable Care Act (health care reform) will make it more expensive for small businesses to hire people.

Currently the unemployment rate is the dropping but this is misleading because it only counts people actively looking for work. Today's workforce is 5 million smaller than at its peak. If these people decide to start looking for work then the unemployment rate will jump.

While the official inflation rate is still low, prices are rising and consumers know it. This is especially true in food and energy prices. Wages are not rising so this slows the recovery even more.

Obama has a strong ideology and, when forced to choose between ideology and the common good, always goes for ideology. Accordingly, in numerous small ways he has hurt the recovery.