You mention the policy mistakes by Obama as 'failure to address labour market directly' and 'the mild effort to reduce the overhang of household debt'
But what you don't mention is the lack of action by Obama on the housing market reforms (read Fannie & Freddie). This was the opportunity to use the sledge-hammer reforms on the same.
Ditto for the mild action on Banking reforms.
The real government debt chart exposes both these short-falls.
a) It shows US real govt. debt rise as about 44% but it doesn't includes the actual loss on Fannie & Freddie (appx. $300 bn) and the leverage of about $1.5 trillion which is about 15% of GDP. Isn't that off-government balance-sheet?
b) It shows the huge rise in US (and UK) govt. debt is the result of subsidizing and saving the banking sector.
Regards,
Pradeep
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Obama did many things. That is already impressive.
I agree that there is much to do on housing. But there is no gigantic urgency. There won't be another housing bubble for a long time. Let the Republicans do that!
Martin Wolf
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Why US voters are suing Dr Obama
By Martin Wolf
Published: October 26 2010 22:28 | Last updated: October 26 2010 22:28
An ambulance stops by the roadside to help a man suffering from a heart attack. After desperate measures, the patient survives. Brought into hospital, he then makes a protracted and partial recovery. Then, two years later, far from feeling grateful, he sues the paramedics and doctors. If it were not for their interference, he insists, he would be as good as new. As for the heart attack, it was a minor event. He would have been far better off if he had been left alone.
That is the situation in which Dr Barack Obama finds himself. A large part of the American public has long since forgotten the gravity of the financial heart attack that hit the US in the autumn of 2008. The Republicans have convinced many voters that the intervention by the Democrats, not the catastrophe George W.Bush bequeathed, explains the malaise. It is a propaganda coup.
Does President Obama deserve blame for this outcome? No and yes. No, because his treatment was right, in principle; yes, because it was too cautious, in practice.
It is essential to remember the context. Large financial crises do long-lasting damage. As the University of Maryland’s Carmen Reinhart and Harvard University’s Kenneth Rogoff note in an update of previous work: “More often than not, the aftermath of severe financial crises shares three characteristics. First, asset market collapses are deep and prolonged ... Second, [it] is associated with profound declines in output and employment ... Third, the real value of government debt tends to explode.” As ever, the risks built up, disregarded, in the boom and materialised in the bust.
As Prof Reinhart and Vincent Reinhart of the American Enterprise Institute note in a paper presented at this year’s economic policy symposium at Jackson Hole, the US shared with several other high-income countries (notably, Spain, the UK and Ireland) a massive rise in house prices, credit and the financial sector’s balance sheet: between 1997 and 2007, real US house prices rose by 87 per cent, the ratio of US financial sector debt to gross domestic product rose by 52 per cent and the ratio of total private debt to GDP rose by 101 per cent. This was a disaster waiting to happen. What has made managing the bust far more difficult is the fact, demonstrated in the Reinhart and Reinhart paper, that this has been by far the biggest global financial crisis since the second world war (see chart).
So how well has the US economy done in this crisis? Quite well, in some respects, above all on overall economic output; less well, in others, notably unemployment. On average, real GDP per head (at purchasing power parity) fell by 9.3 per cent in the previous crises studied by Profs Reinhart and Rogoff. This time it fell by 5.4 per cent in the US. The unemployment rate rose by 7 percentage points in previous crises, on average. This time, US unemployment rose by 5.7 percentage points. (See charts.)
This contrast between poor US performance on unemployment and better performance on output, by historical standards, carries over to comparisons between the US and other large high-income countries. Despite being at the epicentre of the crisis, the US experienced a smaller proportional decline in output per head than other large high-income countries, except France. But unemployment rose far faster in the US than elsewhere. The explanation is that US productivity growth was exceptionally fast, above all in 2009.
What, then, does this performance tell us about US policy? The answer is that it did well in terms of what it did address, but far less so in terms of what it did not address.
As Lawrence Summers, the president’s chief economic adviser, noted at the FT’s “View from the Top” conference in New York on October 7, the administration’s focus was on “the return of stability, confidence and the flow of credit to support strong recovery”. The elements were: support for the financial system – through the troubled asset relief programme, inherited from the previous administration, financial guarantees and “stress tests” on banking institutions; the fiscal stimulus; and the actions of the Federal Reserve to sustain the flow of credit.
By their nature, such policies work by sustaining demand and so output. Their impact on employment (and unemployment) is indirect. As it turned out, productivity growth was so strong that not too bad a performance, in terms of output, failed to prevent the surge in unemployment. One would have expected supporters of the free market to conclude that the US economy and, particularly, its labour market, remains flexible, under this “socialist” president. One would have expected them to conclude, too, that more stimulus was needed. After all, it was quite modest: fiscal stimulus was less than 6 per cent of GDP and so accounts for less than a fifth of the cumulative deficits of 2009, 2010 and 2011, while monetary policy is caught in a liquidity trap.
The truth is not that policy was foolhardy and failed, but that it was too timid and so could not succeed. A big mistake was the failure to address the labour market directly, perhaps by temporarily slashing payroll taxation. There were other mistakes, too: the effort to reduce the overhang of household debt should have been stronger.
Yet even the hated Tarp looks remarkably effective in hindsight. As Mr Summers noted, its cost to the taxpayer looks likely to be ⅓ per cent of GDP. This is far less than the cost of the bail-out of the savings and loans institutions in the 1980s. It is also far less than the direct fiscal cost of comparable crises elsewhere.
Unfortunately, the Republicans have succeeded in persuading a large enough portion of the American public that if the patient had been left entirely alone, he would be in perfect health today. This is surely a fairy story. But voters naturally pay little attention to calamities averted. They focus only on how far experience falls short of what they desire. Mr Obama gains no credit for the former and much blame for the latter. His aspirational rhetoric no doubt worsened the disappointment.
The president’s willingness to ask for too little was, it turns out, a huge strategic error. It allows his opponents to argue that the Democrats had what they wanted, which then failed. If the president had failed to get what he demanded, he could argue that the outcome was not his fault. With a political stalemate expected, further action will now be blocked. A lost decade seems quite likely. That would be a calamity for the US – and the world.
martin.wolf@ft.com
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