Who wouldn’t? The turnaround since Obama took office in 2009 has been stunning.
But the president’s rosy tale of triumph has always posed a problem for economic progressives concerned about the slow, weak and narrow nature of the recovery from the Great Recession.
How can one acknowledge that the seven-year recovery has been inadequate without giving aid and comfort to conservative partisans hell-bent on denying Obama and his stimulus policies credit for very real progress?
A new study by the Economic Policy Institute, a progressive think tank, tries to thread this needle with an analysis that argues Republican-driven austerity, rather than any Obama administration policy, is to blame for the incomplete economic turnaround.
The bursting of the housing bubble, the financial crisis of 2008 and the ensuing recession destroyed trillions of dollars in wealth, decimating demand for goods and services. The damage was not entirely without precedent, however. The deep recession in the early 1980s had, by some measures, a similar impact, according to EPI.
In the final quarter of 1982, the low point of that recession, the economy was operating at 7.6 percent below its potential capacity. In the second quarter of 2009, the trough of the most recent recession, the economy was running at 7.1 percent below its potential capacity.
Yet the economy recovered much more rapidly and completely in the early 1980s than in the Great Recession of 2007 to 2009, EPI notes. Measured in terms of payroll growth, it took 51 months for the economy to reach its pre-recession employment peak after the Great Recession, compared with 11 months in the early 1980s.
Other figures, not cited in the paper, also point to a disappointing economic recovery. The unemployment rate is close to 10 percent if you count people working part time who want to be working full time, people who have stopped looking for a job, and otherwise discouraged workers.
Meanwhile, the typical American household has not seen its income rise since the beginning of the Great Recession.
The key difference is in how the government responded to the Great Recession, compared with previous busts, EPI argues.
When the federal government wants to counteract a sharp pullback in consumer demand, it uses either monetary policy or fiscal policy.
To enact monetary stimulus, the Federal Reserve lowers the target federal funds rate ― the interest rate at which banks lend to one another overnight ― reducing borrowing costs throughout the economy.
Boosting economic growth through fiscal policy entails either cutting taxes or increasing public spending.
In the early 1980s, the economic circumstances allowed monetary policy to play a bigger role than it could in recent years, EPI argues.
Since interest rates were already low in the wake of the Great Recession and inflation was nonexistent, the government needed to rely much more heavily on fiscal stimulus to fill the gap in demand, according to EPI.
Obama, understanding this, advocated for the massive stimulus package, some two-thirds of which was on public spending for items like rebuilding train and road infrastructure.
But state and local lawmakers ― mostly Republicans ― cut back on spending so severely that total government spending per person ― at the federal, state and local levels ― is lower now than it was at the worst point of the Great Recession, according to EPI.
Some of the fiscal austerity at the state and local levels during and after the Great Recession was the result of conservative ideology run amok, such as 19 states refusing federal aid to expand Medicaid as part of the Affordable Care Act.
Much of it, though, was due to the financial realities of those lower levels of government. Unlike the federal government, state and local governments must balance their budgets and cannot borrow at low interest rates with the same ease.
The federal government, which continues to enjoy rock-bottom interest rates on its debt, could have more than offset that, however.
It chose not to do so after Republicans won control of the House of Representatives in 2010. From 2011 onward, congressional Republicans leveraged key deadlines ― from the expiration of the debt ceiling to the funding of the government ― to extract greater and greater spending cuts from the Obama administration, including the automatic, across-the-board cuts of sequestration.
EPI concludes it is almost entirely congressional Republicans, not Obama, who should be faulted for the weak economic recovery.
“Both in word and deed, Republican lawmakers have embraced and enforced fiscal austerity, and the result has been the most discouraging recovery on record,” writes Josh Bivens, EPI’s research director.
I know the president can’t wave his wand and make Congress follow, but someone could have explained why we needed to spend more to boost the economy. Dean Baker, Center for Economic and Policy Research
Former Federal Reserve Chair Ben Bernanke, a Republican appointee, in April accused congressional Republicans of stalling economic growth through their insistence on drastic spending cuts.
Dean Baker, co-director of the Center for Economic and Policy Research, a progressive think tank with close ties to EPI, agreed with the thrust of EPI’s analysis.
But Baker said the paper somewhat understates the degree of the economic havoc wrought by the Great Recession. It would have benefitted, he suggested, from noting Obama’s middle-class tax cuts as well, including a payroll tax cut extended in 2011 after Republicans retook the House. Doing that would highlight that even with the additional stimulus, the economy has not recovered as heartily as in past cycles.
Baker also noted that while Obama may not be responsible for enacting fiscal austerity once Republicans took control of the House, he is to blame for pivoting to deficit reduction in 2010, while he still controlled Congress.
Obama convened the Bowles-Simpson fiscal commission in 2010 to recommend major deficit-reduction measures. Had key Republicans like then-House Budget Chair Paul Ryan (R-Wis.) not withheld their support for the commission’s proposals, Baker maintained, Congress might have adopted the commission’s report and enacted deeper austerity earlier.
And regardless of the president’s actions, Baker said he wishes Obama had at least used his bully pulpit to push back against the conventional wisdom that budget deficits are always bad.
“I know the president can’t wave his wand and make Congress follow, but someone could have explained why we needed to spend more to boost the economy,” Baker said. “You have to explain this again and again and again.”
EPI’s Bivens makes a similar point.
“Had the Obama administration made such a powerful case for why austerity was hampering growth, it could have educated the public and potentially helped build support for more sensible policy the next time the United States faces a recession,” he writes.