I would like to respond to the President’s Washington Post op-ed, “Rebuilding Something Better.” All quotes in this post are from the President.

Nearly six months ago, my administration took office amid the most severe economic downturn since the Great Depression.

The President and his team use this language to lower the bar against which they are measured. The U.S. economy was quite unhealthy on January 20th, and it still is. Still, Donald Marron shows that, while the President’s statement is almost technically true, there is a big difference between “most severe … since the Great Depression” and “comparable to the Great Depression.” Here is Donald’s graph:


You can see that the recession of the past 19 months is not comparable to the Great Depression.

Nearly six months ago, my administration took office … and many feared that our financial system was on the verge of collapse.

Incorrect. In September-December of 2008, many feared that our financial system was on the verge of collapse. Large financial institutions were failing roughly every other week. By January 20th, we were pretty much out of the woods in avoiding a financial crash. Things were still bad and needed serious long-term repair, but that’s not the same as on the verge of collapse. Had our financial system been on the verge of collapse in January, we (the Bush team) would not have waited to draw down the last $350 B of TARP funding.

The swift and aggressive action we took in those first few months has helped pull our financial system and our economy back from the brink.

The President uses the past tense: “has helped.” Which actions, exactly, have had positive effects so far?

The Administration and the Fed deserve credit for the stress tests, which have encouraged banks to raise private capital. And they have continued the Bush Administration’s efforts to prevent particular too-big-to-fail financial institutions (AIG, Citi, Fannie & Freddie) from imploding.

They successfully followed the path (which President Bush laid in late December) to allow GM and Chrysler to enter and exit bankruptcy, although they did it in a much more heavy-handed way than we had hoped. President Bush’s and President Obama’s actions allowed these firms to avoid immediate liquidation, but it is too soon to call this effort a success.

That’s pretty much it so far:

  • The stimulus has not yet had any measurable macroeconomic benefit, although it will, starting a few months from now.
  • The much-hyped TARP “Financial Stability” program to buy risky assets (aka “the Public-Private Investment Partnership,” or PPIP) has been dialed back to a fraction of its originally proposed extent. The specifics were announced only last week.
  • As of June 17th, CBO could find no evidence that any of the $50 billion allocated for foreclosure mitigation had been spent. (See footnote (d) on page 2.)
  • The President’s announced small business loan program does not yet exist.
  • The President’s budget would make our fiscal position much worse than current law, necessitating both higher taxes and more debt over the next decade. And, other than the stimulus and a huge appropriations bill, none of it has yet been enacted into law.
  • Creeping Congressional and Administration protectionist actions are filling the gap left by Presidential inaction on the free trade agreements with Colombia, South Korea, and Panama.

Aside from the important and apparently successful stress tests for which the Administration and the Fed rightly deserve credit, the most successful and effective actions taken by the Obama Administration in its first six months were the continuation of the TARP capital purchase program and the extension of the auto loans. Both were initiated by President Bush.

I cannot see what else counts as as “swift and aggressive action” that “we [the Obama Administration] took in those first few months” that “has helped pull our financial system and our economy back from the brink.”

The American Recovery and Reinvestment Act was not expected to restore the economy to full health on its own but to provide the boost necessary to stop the free fall. So far, it has done that.

2.6 million fewer Americans are employed now than when the President took office, and the unemployment rate is 9.5% and climbing. Job loss in June was greater than in May. The good scenario is one in which we continue to lose jobs for “only” another six months. Please prove that the stimulus is working. To use the Administration’s misleading metric, how many jobs have been “saved or created” so far?

It was, from the start, a two-year program, and it will steadily save and create jobs as it ramps up over this summer and fall.

Uh-oh. Why are the verbs now in the future tense? And what happened to the specific and oft-repeated prediction of 3.5 million jobs by the end of next year? Those are important language changes, along with the implicit admission that the stimulus has not yet “ramped up.”

This did not have to be a two-year program. Congress could have front-loaded the stimulus had they instead given the cash directly to the American people, as they did on a bipartisan basis in early 2008. We would have saved much of it, paying off our mortgages, student loans, and credit cards (which would not be a bad thing). We would have spent the rest much more quickly than the federal and state government bureaucracies now stumbling through their usual corrupt, slow and inefficient processes. Instead the President handed the money and program design over to a Congress of his own party, who saw it as a big honey pot rather than as an exercise in macroeconomic fiscal policy. The President’s primary macroeconomic policy mistake was allowing Congress to pervert a rapid Keynesian stimulus into a slow-spending interest-based binge.

The President is correct that the stimulus will increase economic growth, mostly next year. That is too late, and later than it could have been had they done it right.

We must let [the stimulus] work the way it’s supposed to, with the understanding that in any recession, unemployment tends to recover more slowly than other measures of economic activity. … There are some who say we must wait to meet our greatest challenges. They favor an incremental approach or believe that doing nothing is somehow an answer.

So the President says we must wait for the stimulus to work, then attacks others who say we must wait “to meet our greatest challenges.”

Who says we must wait? Who favors an incremental approach to our greatest challenges, or believes that doing nothing is somehow an answer? These are straw men. I, for one, want to address these problems, but in a different way. In some cases the solutions being developed by Congress would do more harm than good. This does not need to be a choice between doing something and doing nothing, or between action and inaction. If the majority party would allow the minority to have votes on their policy proposals, this would instead be a debate among different models for reform.

Speaker Pelosi told the President’s team privately that we must not address Social Security reform. Our greatest immediate fiscal challenge is actually the rapid aging of the population, not health costs. This is notably absent from the President’s problem definition. We need to bend the health cost curve down and we need to address more immediate demographic pressures in Social Security, Medicare, and Medicaid. The Speaker says we must wait to address the Social Security challenge. She favors inaction.

To build that [stronger] foundation, we must lower the health-care costs that are driving us into debt, create the jobs of the future within our borders, give our workers the skills and training they need to compete for those jobs, and make the tough choices necessary to bring down our deficit in the long run.

Amen. But:

  • The health reform bills being developed by a Democratic Congress would raise private and public health care costs and drive us even deeper into debt.
  • Raising energy prices will hurt the economy, not help it. One could argue that the environmental benefit from reducing U.S. carbon emissions is worth it (I would not), but it is invalid to claim that higher energy prices will help our economy.
  • CBO says the President’s budget would result in deficits averaging 5.2% over the next decade, and would increase debt held by the public from 52% of GDP this year to 80% by 2019. In the long run, we need to address immediate demographic pressures (which the Administration ignores) and change incentives to bend the long-term health cost curve down (which neither the President nor his Congressional allies have proposed).
  • If we do not, then “make the tough choices necessary to bring down our deficit in the long run” just means “raise taxes.”

Already we’re making progress on health-care reform that controls costs while ensuring choice and quality, …

Maybe the President knows about a bill that has not yet been released. Every bill that is public so far would reduce incentives for individuals to consider the costs of the insurance they buy and the medical care they use, and would therefore increase health care costs. These bills bend the private and public sector health cost curves up, not down.

On “ensuring choice,” CBO estimates about 10 million people who under current law would be covered through an employer’s plan would under the Kennedy-Dodd bill not have access to that coverage because some employers would choose not to offer it. This breaks the President’s promise that “If you like your health plan, you will be able to keep your health care plan, period. No one will take it away, no matter what.”

Already we’re making progress on … energy legislation that will make clean energy the profitable kind of energy, leading to whole new industries and jobs that cannot be outsourced.

Yes, but at a cost to the economy as a whole. The House-passed bill would make clean energy profitable by raising the cost of carbon-based energy sources, which hurts economic growth. In addition, American manufacturers will have to pay higher energy prices that it appears their Chinese and Indian competitors will not. This hurts American firms and American workers.

I remain confused as to why the President believes he can claim that jobs in low-carbon energy technologies “cannot be outsourced.” Of course they can. The maintenance jobs cannot be outsourced, but design and manufacturing of clean energy technologies can be done anywhere in the world.

We must continue to clean up the wreckage of this recession, …

Lucky for us we have an economy that self-repairs over time. Economic growth will at some point return, with or without good policy. In the case of the financial sector, the capital purchase program and stress tests are accelerating the pace of recovery. In most all other cases, the President’s policies cannot be demonstrated to be helping. GDP continues to decline, and the anticipated good scenario is one in which job growth does not return until early next year. When you combine these uncomfortable facts with statements like “we misread the economy” and “we had incomplete information,” it is hard to see how the clean-up claim is justified.

After a rough ten days economically and politically, the President is trying to regain his footing and frame the week ahead.

The new jobs data has caused him to back off his specific commitment — there is no longer any mention of 3.5 million jobs by the end of next year. But the primary point of this op-ed is to signal a new message, captured most succinctly here:

[The stimulus] was expected to provide the boost necessary to stop the free fall. So far, it has done that. It was, from the start, a two-year program, and it will steadily save and create jobs as it ramps up over the summer and fall. We must let it work the way it’s supposed to, with the understanding that in any recession, unemployment tends to recover more slowly than other measures of economic activity.

The President’s new message is: No second stimulus. This one will work. Ride it out and be patient.

He’s right that it will help, eventually. If the July employment report due on August 7th returns us to the prior slow but steady recovery path, the President might only have to worry about 6-9 months of economic and political pain. But if the July report shows that the June report is a new downward trend, then policymakers will have a more serious problem to address.

The President’s op-ed is titled “Rebuilding Something Better.” Unfortunately I think there is a roadside construction sign reading “Expect lengthy delays.” Let us hope it doesn’t take too long for the rebuilding to work.

(photo credit: Sewer Construction at Commercial and Broadway I by roland)