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ENDING THE GREAT RECESSION
It Was the Economy, Stupid
On the day before he became president of the United States, Barack Obama put on faded jeans and went to the Sasha Bruce House, a shelter for runaway youth on Capitol Hill, where he used a roller to apply blue paint to a bedroom wall. Obama also visited with hundreds of volunteers who had gathered at a Washington-area high school to write letters to American military personnel stationed abroad. And he made an impromptu stop at Walter Reed Medical Center to meet more than a dozen wounded veterans of the wars in Iraq and Afghanistan. The day before the forty-fourth president’s inauguration was the national Martin Luther King Jr. holiday, and Obama quoted the great civil rights leader as reporters listened: “Everybody can be great,” said the president-elect, “because everybody can serve.”
In the evening, Barack and Michelle Obama participated in a Washington custom, attending bipartisan events to honor, among others, his campaign opponent Senator John McCain. The senator may be best known for surviving as a prisoner of war in Vietnam, and Obama referred to him as an “American hero.” Obama also praised him for understanding the need for “common purpose and common effort” in an age of intense partisanship.
The next day, Obama took the oath of office before a crowd of more than 1.8 million people, which was, by some estimates, the largest ever gathered in Washington. According to a Gallup poll, the number of Americans who felt more hopeful about the future outnumbered those who did not by six to one.
Parts of Obama’s inaugural address, including a firm commitment to security, won vigorous applause even from the Republicans seated on the platform that had been built beside the US Capitol. Other items in his speech appealed mainly to the 53 percent of voters who had cast ballots for him. He repeated many of his campaign promises, including health care reforms, an increase in clean energy production, and closing the controversial Guantánamo Bay prison camp. But clearly this president knew he was taking office at a moment of crisis, and he dwelled at length on the three big challenges facing the country: the most severe economic recession since 1929, the terrorism of Islamic extremists, and climate change. He said:
That we are in the midst of crisis is now well understood. Our nation is at war against a far-reaching network of violence and hatred.
Our economy is badly weakened, a consequence of greed and irresponsibility on the part of some, but also our collective failure to make hard choices and prepare the nation for a new age. Homes have been lost; jobs shed; businesses shuttered. Our health care is too costly; our schools fail too many; and each day brings further evidence that the ways we use energy strengthen our adversaries and threaten our planet.
These are the indicators of crisis, subject to data and statistics. Less measurable but no less profound is a sapping of confidence across our land—a nagging fear that America’s decline is inevitable, and that the next generation must lower its sights.
Today I say to you that the challenges we face are real. They are serious and they are many. They will not be met easily or in a short span of time. But know this, America—they will be met.
Of the three big challenges, resolving the economic mess was the most acute. The pain of the recession was not theoretical, not a matter of numbers in ledgers. Layoffs, foreclosures, ruined retirement accounts, and shuttered businesses were making it more difficult for millions of people to provide themselves with food and shelter. (Two signs of economic pain could be seen in the rising use of antidepressants and declining rates of pregnancy.) The Great Recession was draining the resources available for business to grow and for the government to perform its basic functions, including antiterrorism efforts and environmental protection. Worst of all, some economists had begun to warn that the recession might become something worse. Some, such as Nobel Prize winner Paul Krugman, feared the arrival of the first depression—a double-digit decline in gross national product and high unemployment—since the 1930s. Others worried of a “lost decade” of the sort endured by Japan in the 1990s. The Japanese had experienced a bubble in asset prices and subsequent burst in the same way that America’s real-estate and financial-asset bubbles popped in 2007–8. Although commonly called the lost decade, the decline in Japan had actually continued for almost twenty years.
The specter of Japan’s extended crisis and the suffering of individuals and families who’d lost jobs and homes and were losing hope made the Great Recession the most important problem the president faced. To borrow a phrase made famous during the 1992 presidential election, the first concern was “the economy, stupid.” Everything else, including national security, the environment, and even the nation’s ability to provide basics such as education and health care, depended on the vigor of the economy. It would be the highest priority for Obama throughout his presidency.
As he considered the challenge, Obama prayed for a change in Washington’s ways, quoting Scripture—“the time has come to set aside childish things”—and calling for an end to “the petty grievances and false promises, the recriminations and worn-out dogmas, that for far too long have strangled our politics.” The new president did not have to mention the attempt to remove Bill Clinton from the White House after a sex scandal or the election of 2000, which was decided in Republican George Bush’s favor in a party-line vote of the Supreme Court. Every informed American understood that political division had grown in recent decades, and the rift was pronounced in Congress. In 1982, two-thirds in Congress held centrist views as defined by the National Review. By the time of Obama’s presidency, the centrists would comprise just 4 percent.
Political scientists Thomas E. Mann and Norman J. Ornstein would place the responsibility for the polarization in Congress mainly on Republicans. Neither Ornstein nor Mann were known to indulge in partisan rhetoric. Mann leaned a little Left, Ornstein a little Right. Together they were among the most moderate and widely respected political experts in the country. In their much-praised book It’s Even Worse Than It Looks, they concluded, “The Republican party has become an insurgent outlier—ideologically extreme; contemptuous of the inherited social and economic policy regime; scornful of compromise; not persuaded by conventional facts, evidence, and science; and dismissive of the legitimacy of its political opposition.”
The drift toward the extreme politics noted by Ornstein and Mann had been a factor in Obama’s choice of a running mate. The new vice president, Joseph Biden, had served thirty-six years in the US Senate, where he was perhaps the most well-liked person in Washington of any political stripe. Affable and gregarious, Biden had learned to be a senator in the time when centrists from both parties ran the place. He counted many congressional Republicans as friends, and it was hoped, by some Democrats, that he could help move the new administration’s agenda forward on Capitol Hill. Biden was an old-school sort who thought the Senate was a truly deliberative body and that compromise was one of the political arts.
This is not to say that Joe Biden was a political Pollyanna. He had experienced the hyperpartisanship of House Speaker Newt Gingrich, who infamously orchestrated a government shutdown and was also the first House Speaker ever disciplined for an ethics violation. The vice president had weathered the Clinton impeachment trial and acquittal, which had been achieved thanks to the votes of the few GOP moderates remaining in the Senate. A decade later, many of the cooler heads who had saved the country from a constitutional crisis, by refusing to support one or both of the articles of impeachment, were gone from the Senate. One who remained, Arlen Specter of Pennsylvania, told Biden to expect trouble from the GOP. Biden surely understood Specter’s warning, but he couldn’t know the extent of the opposition the new administration faced.
Voters had given Obama a mandate and repudiated congressional Republicans by adding twenty seats to the Democrats’ majority in the House and seven to their majority in the Senate. However, Republican leaders in both houses of Congress were already pushing for a united front of opposition to everything Obama might propose. Although the strategy would become obvious as Congress voted on the president’s initiatives, its political purpose would be revealed more gradually. In time Obama would learn that the less than loyal opposition united against him so that its leaders could point to his failure when it came to winning bipartisan support. According to their logic, that the president couldn’t win Republican support was proof, not of their intransigence, but of his. Obama’s embrace of many ideas, especially in health care, that originated with Republicans wouldn’t matter. What mattered was that GOP leaders could claim that Obama, who had been elected with enormous support, was out of touch with the country he was chosen to lead.
Hostile Republicans could enforce their blockade with a parliamentary procedure called the filibuster. Historically this technique required that senators speak for hours on end, until exhausted colleagues capitulated or a supermajority of sixty voted to break the logjam. In modern times the threat of a filibuster was often enough to force the Senate to assemble a supermajority or move on to other business. Though rarely invoked in prior generations, the rate of filibusters had risen sharply beginning in the 1990s. Both sides used them, although Republicans practiced this form of obstruction more often.
Rules in the House do not permit filibusters and thus do not require a supermajority to end parliamentary delays. There, the GOP minority would have to content itself with symbolic opposition if the Democrats got in line behind the new president. Toward this end Eric Cantor, the vote-counting House Republican whip, told aides that he would organize the minority party to fight Obama in an extremely disciplined way. Obama had won more than 9 million votes than John McCain, but Cantor didn’t feel any obligation to honor the mandate. He put it bluntly: “We’re going to fight these guys.” The top Republican in the Senate also rallied his colleagues to the cause of blocking the new president. Ohio senator George Voinovich would reveal that Minority Leader Mitch McConnell of Kentucky had declared in private, “If he [Obama] was for it, we had to be against it.”
The motivation behind this strategy was power. Having analyzed the election results, GOP strategists determined that the other party’s control of the House and Senate was not as strong as it may have seemed. Many of the seats recently won by Democrats were in districts with lots of conservative-leaning voters who voted against Obama. These representatives could be vulnerable to challenges in the next elections if they were painted as too loyal to the president. This was explained by Representative Pete Sessions of Texas, who made a presentation at a meeting of his fellow House Republicans where he offered a PowerPoint slide that said, “The Purpose of the Minority Is to Become the Majority.”
As Washington writer Robert Draper would recount in his book Do Not Ask What Good We Do, a dozen or so congressional Republicans and strategists spent much of inauguration night devising a plan to block the new president’s efforts to lead the country. While the Obamas and Bidens danced at various balls celebrating their election, Eric Cantor, Pete Sessions, Newt Gingrich, and others explored ways to deprive Obama of legislative victories, which would position the GOP to prevail in future elections. Draper reported that when the evening ended, Gingrich told the other men, “You’ll remember this as the day the seeds of 2012 were sown.”
* * *
More concerned with 2009 than 2012, the new president could not wait to extinguish the Great Recession, which had begun burning across the American economy in 2007 and had consumed millions of jobs. (Eventually the toll would reach more than 7.4 million.) The value of real estate, including the homes that sheltered the wealth of most American families, was in the middle of a $10 trillion decline. Stocks traded on various exchanges, which underpinned retirement accounts, were headed toward a loss of $7.4 trillion. In 2008, more than 860,000 homeowners received foreclosure notices. In the coming year the number would reach a record of nearly 3 million. The numbers represented men, women, and children forced to abandon their homes, and entire communities where unoccupied houses, with their windows boarded and their landscapes growing wild, outnumbered those where signs of life could still be seen. Tumbleweeds skittered into culs-de-sac. Coyotes loped through backyards.
The financial disaster that loomed over Obama’s presidency was so powerful that it seemed like a purpose-built monster. In a way, it was. Beginning in the early 1980s, Democrats and Republicans in Washington had created the conditions for crisis by dismantling the regulatory system that would have prevented it. Conceived after the Great Depression, these rules were imposed by leaders who believed that finance was so essential to the well-being of the nation, and so rife with potential for abuse, that it required special oversight. But as politicians born well after the Crash of 1929 came to power, and the experience of the Great Depression faded into history, many found fault with the laws that constrained banks and brokerages and insurers. Unshackled, the argument went, financiers would produce new ways to lend money where it was needed. Since these men and women were obligated to keep their firms strong and thriving, they had more than enough incentive to act with prudence and responsibility.
The key moment in deregulation came in 1999, after an election that saw political candidates and parties rake in $58 million in campaign donations from groups and individuals associated with financial institutions. Urged on by these donors, Congress essentially gutted the Glass-Steagall Act of 1933, which had kept banks, insurers, and stock brokerages separate for almost seventy years. In that time, the United States had not seen a return of the type of crisis that started in 1929. The repeal effort was led in the Senate by Republican Philip Gramm of Texas, who saw nothing but upside in a bill that would, he said, make banking easier and cheaper. Among the handful of senators who opposed him, Democrat Paul Wellstone of Minnesota predicted that banks would merge and create much larger entities that could place great burdens on the taxpayers, who, ultimately, insure bank deposits. “Why on earth are we doing this?” he asked.
President Clinton did not share Wellstone’s worries. During his presidency, declining unemployment, generally lower inflation, and the longest period of sustained economic growth in US history had led to the first federal budget surplus since 1970 and promised a rapid pay-down of federal debt. The Clinton years would pass without one recession and be recalled as the Roaring Nineties by the Nobel Prize–winning economist Joseph E. Stiglitz. In this decade the stock market surged almost 150 percent and the value of Americans’ homes increased every year, in every region of the country.
A close look would have turned up signs of trouble. In Reagan’s time a New Gilded Age began as those at the highest income levels reaped a disproportionate share of the economy’s growth. Well-paid jobs in manufacturing were continuing a long decline. Contrary to the complaints of the deregulators, the financial sector captured a greater share of the total economy—increasing from about 6 to 8 percent—which made its risk-taking even more dangerous to bystanders.
No caution appeared in the statement President Clinton made as he signed the Glass-Steagall repeal. Instead he invoked the holy trinity of American politics—businesses, consumers, and freedom—as he announced that the bill changes would spur innovation, heighten competition, and “alleviate burdens” on financiers. “Removal of barriers to competition,” said Clinton, “will enhance the stability of our financial services system.”
Unburdened, the financial industry continued a spree of mergers and concentration that had begun during the Reagan administration. Many smaller banks disappeared, and the business was soon dominated by a few dozen institutions with regional, national, and global reach. Investors, including many from abroad, flooded lenders with cash, with which they funded mortgages for “subprime” borrowers, including many not worthy of the credit they received. Although a few words of warning came from the likes of Federal Reserve governor Susan Bies, who worried about risky real estate loans, her minority perspective was countered by the famous Federal Reserve chairman Alan Greenspan, who spoke repeatedly of the ways deregulation had made finance safer. In his cryptic speaking style he credited new financial instruments, including the sales of bundled mortgages to investors, with “the dispersion of risk.” This dispersion of risk—to insurance companies, hedge funds, and others—supposedly helped protect everyone.
As a young man, Greenspan had been an acolyte of self-taught philosopher Ayn Rand, who exalted “the virtue of selfishness.” Throughout his career he had helped lead a retreat from the theories of John Maynard Keynes, who had reserved a role for government as both a careful business regulator and consumer of last resort. Keynes urged special attention to banking and finance, where mischief-making could have tidal-wave effects on communities and countries. The government could respond to a collapse in confidence that made people pull back from the marketplace by spending money to “prime the pump.” Greenspan favored government inaction and faith in private enterprise. He expressed this faith with the kind of certainty and devotion to unfettered markets that his mentor would have admired.
When he addressed the National Italian American Foundation in 2005, Greenspan said new, risky forms of debt were stabilizing influences, and he announced that America was “rediscovering the benefits of competition and the resilience to economic shocks that it fosters.” All this Greenspan hailed even as benefits had concentrated even more at the highest levels. According to the Congressional Budget Office, incomes for the top 1 percent of earners rose 250 percent between 1979 and 2005. In the same period more than two-thirds of Americans had seen their incomes stagnate.
Greenspan had heard warnings about looming dangers in the economy. Weeks before the Fed chairman spoke to the Italian Americans, economist Raghuram Rajan had bravely sounded an alarm at a conference at Jackson Hole, Wyoming, which had been organized to celebrate Greenspan’s career. The warning came in a paper—“Has Financial Development Made the World Riskier?”—that Rajan had begun researching with the assumption that Greenspan had been right about deregulation. Rajan concluded that under Greenspan lightly policed financiers had actually taken huge risks that could upend the economy. This had happened because the key players on Wall Street were motivated by short-term gains, which they could make with risky decisions, and their tendency to move together, like a herd, to avoid getting out of step with their peers. Rajan described this as unexpected “perverse behavior” that defied what Greenspan and his allies assumed about a world full of rational people making coolheaded choices.
Dismissed at Jackson Hole, Rajan nevertheless turned out to be right. Deregulation had permitted the rapid growth of unconventional financial institutions such as hedge funds, which operated without the kind of federal deposit insurance that made regular banks secure places for investors. Deregulation also allowed the expansion of risk-taking by banks and of exotic financial instruments such as collateralized debt obligations. Banks could undertake riskier lending without setting aside money or other assets that could be used in the event of big failures. This is how leverage works. The greater the leverage, as allowed under law, the greater the risk, the greater the gamble, for banks, and ultimately for taxpayers, who stood behind the insurance system that guaranteed the banks’ solvency.
Many of the riskiest new forms of debt were based on mortgage payments made by American homeowners. These payments were, in essence, assets, and in theory they were reliable streams of income because lenders make careful evaluations of applicants, and borrowers will do almost anything to stay current on their mortgages and stay in their homes. However, with real median household income falling from its 1999 peak, lenders had loosened their standards to continue lending to applicants and continually increase the flow of monthly payments. This “subprime” mortgage market helped create artificially high rates of homeownership and a false run-up in home values, which in turn made people feel rich. At the height of the frenzy, lenders allowed people to borrow without proving their income or putting any money down on the property they were buying. In some cases the mortgages exceeded the price of the real estate. As one real estate agent would tell CBS News reporter Steve Kroft, borrowers were “getting paid to buy a house.”
Although some insiders were worried about the risk created by excessive leverage, for a time Greenspan’s confidence steadied markets. However, by early 2007 Treasury Department officials were quietly developing a plan to rebuild the financial system in the event of its collapse. The need for this plan became obvious in late summer of 2008 with a steep plunge in the stock market and the demise of the investment banks Bear Stearns and Lehman Brothers. As lenders stopped giving new loans and businesses began to suffer the consequences, President Bush and Congress committed $700 billion to bail out bankers. Writing in the Guardian, economist Nouriel Roubini, who was among the few who predicted the real estate bust, declared the plan a “rip-off” that shifted risk to taxpayers and profited financiers. It was enacted as the Troubled Asset Relief Program (TARP). Soon federal money would pour into financial institutions to bail out executives and shareholders, and to limit the chaos in the economy.
President Bush got his TARP only with the help of congressional Democrats, who gave him the votes he needed to overcome the opposition of his own party. However, TARP did not stop the decline in the securities markets. After a brief pause the Dow Jones Industrial Average continued to plummet from its height of about 14,000 toward a low, to be reached in the coming April, of just above 7,000. Unemployment continued to rise about half a percent per month. Worst of all, the US economy was actually getting smaller and at an accelerating rate. The huge auto industry had been staggered when consumer credit evaporated. With a severe drop in sales, automakers lost so much revenue that even four hundred thousand layoffs couldn’t fix their finances. The chief executive officers of Chrysler, Ford, and General Motors went to Washington seeking help from the TARP fund. Both Chrysler and General Motors were headed for bankruptcy.
Rising unemployment. Markets in free fall. Credit frozen. The economy shrinking. It was too easy to imagine that the recession could become a depression with the kind of suffering not seen since the 1930s.
With the post-TARP economy getting worse, Obama’s solution—the American Recovery and Reinvestment Act of 2009—would call for hundreds of billions of dollars in deficit spending, which previous presidents had used to deal with recessions. Direct government spending could create demand for goods and services, and jobs, but in many cases this activity built slowly. Even road projects deemed ready to start required months of contract preparations. Other actions, such as tax cuts, unemployment benefits, food stamps, and financing for private initiatives, could work more quickly by putting money in the hands of people who would spend it. This jolt of spending was called a stimulus because it was intended to cause ripples of buying and selling that would radiate across the economy. Thus stimulated, the economic activity would begin to flow on its own.
Missing from the package, which took shape prior to the inauguration, were impressive projects that would change the landscape and win history’s acknowledgment. There would be no Hoover Dam (Franklin Roosevelt), no federal highway system (Eisenhower), and no moon shot (Kennedy). Obama had once pressed his aides to come up with impressive projects that would match the legacies left by his predecessors and satisfy those of his fellow Democrats who dreamed of something comparable to the New Deal programs that provided direct employment to millions of people. However, the Great Recession was not yet a depression, which meant that Obama would meet skepticism over projects that would take years to gear up and complete. For this reason the president set aside anything so big it could be seen from space and stuck with a varied mix of proposals to get money into the economy.
To sell his plan to lawmakers and citizens, Obama would declare his plan “timely, targeted, and temporary,” which framed it as a response to a crisis. It was. But federal spending is always an expression of policy—hawks feed the Pentagon, doves do not—so the American Recovery and Reinvestment Act was also an opportunity for the president to move quickly on his agenda. His chief of staff, Rahm Emanuel, announced the president’s intentions quite explicitly, and unapologetically, when he appeared at a Wall Street Journal forum held days after the election. His eyes shadowed with postcampaign exhaustion, Emanuel sat in a swiveling chair and answered a moderator’s questions for an audience of leading corporate executives. In time his remarks would be edited by critics to suggest he was an opportunist. In full his statement was more like a call for calm but also decisive action:
You never want a serious crisis to go to waste. And what I mean by that is an opportunity to do things that you think you could not do before.
I think America as a whole in 1973 and 1974, and not just my view but obviously the administration’s, missed the opportunity to deal with the energy crisis that was before us. For a long time our entire energy policy came down to cheap oil.
This is an opportunity, what used to be long-term problems, be they in the health care area, energy area, education area, fiscal area, tax area, regulatory reform area, things that we have postponed for too long, that were long-term, are now immediate and must be dealt with. This crisis provides the opportunity, for us, as I would say, the opportunity to do things that you could not do before.
The good news, I suppose, if you want to see a silver lining, is the problems are big enough that they lend themselves to ideas from both parties for the solution.
Emanuel said a recent meeting Obama had with Republican senators McCain and Lindsey Graham of South Carolina was not window dressing but a genuine consultation. The need for action grew more urgent with every report on the condition of the economy. Job losses, which caused obvious pain for individuals and families but also rippled through the economy, were especially alarming. The president-elect’s top economic advisers, Jared Bernstein and Christina Romer, issued an estimate of the effects the stimulus bill might have on employment. After noting that “all of the estimates presented in this memo are subject to significant margins of error,” the economists estimated that as many as 3.6 million jobs could be saved or created and that the rising unemployment rate could be halted before it reached 8 percent.
After Obama’s inauguration, the new president’s first trip to the Capitol was to meet with House Republicans, and not Democrats, with the Recovery Act the only agenda item. House Democrats had formally proposed the program, which was priced at about $800 billion, which was far bigger even than President Roosevelt’s Depression-era New Deal. A Wall Street Journal poll found a great majority of Americans, including 68 percent of people in their own party, thought Republicans in Congress should support it.
In choosing to trek up to Capitol Hill the president broke with tradition—usually members of Congress visit the White House for such sessions—and he demonstrated his sincere desire for joint action. Obama would need the support of just two GOP senators to break a possible filibuster; However, he was hoping for the political cover that would come from more substantial bipartisan support on both sides of the Capitol. Without it, the recession-fighting project would belong to the Democrats alone, and given the challenge of turning around the economy, they would take all the blame if it didn’t work as well, or as fast, as Americans hoped.
Considering the defeats suffered by Republicans in 2006, when they lost the House, and 2008, when they lost the White House, one might have expected them to offer a measure of conciliation. However, GOP members of Congress were not looking back at the voters’ rebukes but forward to coming elections—in 2010 and 2012—and calculating that they would fare better if they could stand united against the president. They would distinguish themselves as staunchly opposed, even in a losing cause, rather than dignify the president’s ideas with even the slightest support.
Publicly the leaders of the House and Senate Republicans pledged to have open ears. After his visit with the Republicans in the House, the president stopped to speak with the press in the Ohio Clock Corridor, where senators often answer reporters’ questions, and said the meeting had been “very constructive.” However privately, in the hours before Obama’s arrival, House minority leader John Boehner had told his GOP colleagues, “I hope everyone here will join me in voting no.” A day earlier, five corporations had announced that another thirty thousand workers would be fired from their jobs, becoming casualties of the crisis. Soon the president would warn that America could suffer a Japan-style “lost decade” of economic suffering if his plan was not approved.
Although Republican representative Paul Ryan of Wisconsin would praise Obama for “starting us off, at least, beginning to talk to one another,” the discussion did not continue. Ryan’s House colleagues resisted dialogue, and when the president’s plan was approved, not one House Republican would support it. In the Senate, Minority Leader McConnell would rally Republican members against every Obama initiative, beginning with the recovery plan. McConnell wanted voters to consider Obama’s plans, and indeed, his entire presidency, to be divisive and controversial. He also wanted to resume the age-old claim that his party was better at managing the economy, overall, and employment and budget deficits in particular.
McConnell believed that American voters associated the GOP with stronger economic leadership. If the Recovery Act failed, a GOP united against it might claim their confidence. In the short term, however, Americans blamed the Great Recession on Obama’s predecessor, Republican George W. Bush, and they wanted to give the new president’s policies a try. The Gallup poll gave Obama a 78 percent favorable rating, which was substantially higher than the margins enjoyed by Bill Clinton and George Bush when they began their presidencies. This trend was matched by an astounding spike in public concern about the economy. Eighteen months before, just 16 percent of respondents said the economy was America’s most serious problem. From there it shot almost straight up, to 80 percent. McConnell also had a problem when it came to the GOP’s overall reputation. Since the 1950s Gallup had asked the public to rate the parties on the economy forty-two times. The Democrats beat or tied the GOP in twenty-seven of these surveys. Also, during the Bush presidency, when Republicans held the White House for eight years, the House for six years, and the Senate for four, the trend toward deficit reduction begun by Bill Clinton had been reversed. Both deficit spending and the national debt, which were supposedly anathema to GOP economics, had increased during the Bush years.
In January 2009 the tough times that began under Bush got worse. The unemployment rate, swollen by six hundred thousand January job cuts, rose to 7.4 percent. For the individuals who’d lost jobs and homes these facts were devastating. For others, the news provoked a Grapes of Wrath kind of anxiety. Republican senators from the more moderate Northeast states began to express concern about the need for substantive action.
Try as they might, partisan critics could point to no actual boondoggles in the Recovery Act proposal. This defied what many people assume about the way Washington works. Prevailing wisdom held that any piece of legislation written in more than a thousand pages of text must contain outrageous elements. Conservative media bristled with the false claim that $30 million would be spent to protect a threatened species of mouse. The planned construction of a Homeland Security facility was criticized as a $248 million furniture-buying program. Requests for projects that the administration had rejected were nevertheless trumpeted by critics as included in the plan, which allowed for press releases about frivolities such as Frisbee parks.
Despite complaints about his heavy-handedness, Obama persisted in his pursuit of bipartisan action. He responded to GOP priorities by not including items they thought frivolous, and by adding the party’s favorite type of action: tax cuts. He appointed Republicans to his cabinet and won endorsements for his Recovery Act from a handful of GOP governors. The administration even courted and obtained support from both the national Chamber of Commerce and the National Association of Manufacturers, two groups that were normally opposed to government intervention in the economy. Officials at these organizations understood the danger facing the economy. Commerce and manufacturing were slowing at such a rate that the business interests these groups represented were imperiled. These endorsements would provide cover for any Republicans who might support the president: they could tell their constituents they had done what the sober leaders of American business had recommended.
When the big program was finally put to a vote in the House, on January 29, not one Republican supported it. However, the Democrats enjoyed such a large majority in Congress that Obama prevailed even with eleven members of his own party, each of whom represented a conservative district, joining the opposition. The victory, coming so soon after Obama’s inauguration, was enabled by the widespread anxiety created by the economic crisis. In the days after the House vote the press reported layoffs at schools in Missouri, the retailer Target headquarters in Minnesota, radio stations in Ohio, and many other places. Each lost job represented not just a crisis for the individual worker, but uncertainty for dependents and the withdrawal of the worker’s income from the local economy.
Before the Senate recorded ayes and nays, the new president used the power and emblems of his office to command attention for his plan. He flew in the presidential plane, Air Force One, with the White House press corps in tow, to visit the economically devastated city of Elkhart, Indiana, where he visited a manufacturing plant and addressed a “town hall” gathering of local residents.
No place in America had suffered more in the Great Recession than Elkhart. The region’s major employers make products such as musical instruments and recreational vehicles that are never in demand during hard times. As these industries saw a steep decline, unemployment rose from 4.7 percent to 15.3 percent in a single year. “The situation we face could not be more serious,” said Obama in a speech in the small city. “We can’t afford to wait. We can’t wait to hope for the best. We can’t posture and bicker and resort to the same failed ideas that got us here in the first place.”
The line about posturing and bickering provoked cheers and applause, and Obama seized the energy offered by the crowd to remind those who listened, “That was what the election was all about. The American people rejected those ideas because they hadn’t worked. You didn’t send us to Washington because you were hoping for more of the same. You sent us there to change things. The expectation was that we’d act quickly and boldly to carry out change, and that’s exactly what I intend to do as president of the United States of America.”
Upon his return to Washington, the president reiterated the themes he’d sounded in Elkhart at his first-ever prime-time White House press conference. Obama had been alarmed by the depth of the crisis, which, he discovered after winning the election, was worse than he knew. “We can differ on some of the particulars, but again, the question I think that the American people are asking is, ‘Do you just want government to do nothing, or do you want it to do something?’ If you want it to do something, then we can have a conversation,” he said. “But doing nothing—that’s not an option, from my perspective.” Obama defended the role of government in the recovery, saying, “With the private sector so weakened by this recession, the federal government is the only entity left with the resources to jolt our economy back to life.”
Although House Republicans had established and held their united front against him, Obama didn’t need any of them to move his program forward. The Senate, which was the target he intended to reach with his Elkhart visit and his televised press conference, was a different matter. He needed not a simple majority, but sixty out of a hundred votes to prove that he could block a filibuster, which would have been fatal to his plan. With the Massachusetts Democrat Edward Kennedy too ill to vote and independent Joe Lieberman of Connecticut wavering, the president needed GOP help. He got what he needed from Arlen Specter of Pennsylvania and Susan Collins and Olympia Snowe of Maine. Specter would soon jump to the Democratic Party and thus escape repercussions. The move by the senators from Maine, who were well supported back home, signaled that their small state might wield outsize power in the Obama presidency.
President Obama wore a Republican-red tie at the White House ceremony where he signed the Recovery Act. He dubbed the moment “the beginning of the end” of the Great Recession. It wasn’t the most radical economic policy ever undertaken. This distinction may actually belong to the policies of Republican president Richard Nixon, who unilaterally dropped the gold standard for the dollar, froze private wages and prices, and imposed a 10 percent duty on imports. The Obama bill was, however, the most expensive and most sweeping economic program ever produced by Washington. More than a third of the effort would be measured in tax breaks for businesses and individuals, which conformed with GOP priorities but also figured to get cash circulating quickly. But the rest, about $500 billion, would be spent to shore up social programs—food stamps, unemployment benefits, lunches for poor schoolchildren—and fund a long list of projects that would pump money into the economy, invest in lasting public works, and fulfill a great many of Obama’s campaign promises. Among these projects were:
• About $100 billion to repair or upgrade highways, bridges, airports.
• More than $150 billion for health care, including modernization of medical record-keeping.
• Roughly $18 billion for water and sewerage projects and other environmental protection efforts.
• $27 billion for energy conservation and research and to finance renewable-energy efforts.
• $7.6 billion for basic scientific research.
• Almost $15 billion for housing.
• $21.5 billion to improve electric transmission and grids and disposal of nuclear wastes.
• $100 billion for schools, more than half of which would go to prevent teacher layoffs.
• $10 billion in government technology upgrades.
In addition to the large categories of spending, the bill was loaded, critics would say larded, with hundreds of millions of dollars for items that were, in light of the overall program, small. Police departments ($4 billion), farmers ($749 million), and small-scale business operators seeking loans ($730 million) all got a boost from the Recovery Act. Relative crumbs of equal size—$50 million—went to the National Cemetery Administration and the National Endowment for the Arts. The cemetery administration oversees military burial grounds. The NEA offers support to artists, including some who court controversy, which has led to occasional calls for its abolition.
The funding for the NEA was, of course, among the sins highlighted by critics of the Obama program. Writing in The Atlanta Journal-Constitution, former GOP congressman Bob Barr singled out this spending as an example of “the true evil of this spending boondoggle.” Other examples included $2 billion for child-care subsidies, $2.1 billion to advocate solutions to global warming, and $400 million for antismoking and safe-sex programs. Barr was also outraged by the $20 billion supplement to the “bloated” food program for the poor.
In fact, after settling at a twenty-year low in the Clinton years, the federal food stamp program had begun to grow during the George W. Bush presidency. This was due not to a sudden outbreak of indolence, but to the most anemic job growth since the Great Depression, which made more people eligible for aid. The program was hardly an encouragement for people to go on the dole. It paid a little more than $1 per person per meal. Roughly half of recipients were children, and another 25 percent were the disabled and the elderly. No able-bodied person without children could receive the help for more than ninety days. Adding to the program was also one way of putting money into the economy quickly. Tax breaks for upper- and middle-class people could be diverted to savings. Spending devoted to bridges and highways would take months if not years to accomplish. But poor people in need of food would use food stamps promptly.
With congressional approval for his economic plan in hand, Obama had not just the stimulus he felt the nation required, but also funding for his policy priorities, and he emphasized this second part of his victory by traveling to Colorado to put his signature on the bill in a public setting. A bit of stagecraft favored by President Reagan, out-of-Washington bill-signing ceremonies had been rare since the Gipper left office. Obama’s chosen site was a science museum in Denver, where the president was given a tour of an exhibit of solar energy panels. The Recovery Act would make the largest-ever federal investment in alternative-energy science and provide loan support for companies that would make solar panels, as well as other alternative-energy equipment. These forward-looking investments reflected the president’s personal interest. Having won election in part thanks to Internet-based activism, he was a president of his time who understood and appreciated science and technology.
Careful to avoid raising expectations, the president told the crowd at the museum, “I don’t want to pretend that today marks the end of our economic problems. Nor does it constitute all of what we’re going to have to do to turn our economy around. But today does mark the beginning of the end, the beginning of what we need to do to create jobs for Americans scrambling in the wake of layoffs.”
On Wall Street, unimpressed traders expressed their opinions about the stimulus plan by pushing stock prices down. By day’s end the main index of the US stock market would plunge three hundred points. Before Obama returned to Washington, the House Republican leader John Boehner would declare, “The flawed bill the president will sign today is a missed opportunity, one for which our children and grandchildren will pay a hefty price.” Republican governors, who were meeting in Washington, also expressed great pessimism. Some, including Mark Sanford of South Carolina and Bobby Jindal of Louisiana, rejected parts or all of the spending marked for their states. In Sanford’s case this would be roughly $700 million, which he would decline for the sake of making a partisan point. While laid-off workers in other states would receive additional unemployment benefits, Sanford’s constituents would not. Neither would they receive help holding on to their health insurance, which the stimulus bill provided.
In The Wall Street Journal, editorialist Daniel Henninger would compare the program to “a recreational drug” and prescribe, instead, penny-pinching of the sort that would dominate economic policy in Great Britain and the eurozone countries, where the Great Recession had also struck. Thanks to diverging economic and political points of view, Obama and his critics would see a real-world macro-experiment unfold as the United States and Western Europe adopted different responses to the crisis. American officials considered the stunningly low cost of borrowing (Treasury-bill interest rates were approaching zero) a historic opportunity to fund public investments and push government money into the economy with deficit spending. Their counterparts in Europe viewed the crisis as a chance to cut spending and therefore government activity, on the theory that the real problem was national debt and, from their ideological perspective, social programs. The Great Recession also provided the conditions for an experiment within the United States as governors in some states also adopted austerity on an ideological basis. Officials in Kansas and Wisconsin would pursue cuts in government spending with particular zeal, especially after each state elected austerity-minded governors in 2010.
Although Republican governors could adopt their own economic policies, the party’s leaders in Washington had been swamped by Obama’s fast drive to get his program approved and lacked the power to act on their own. They could, however, seek to undermine him on the basis of an idle, destructive rumor, and this they proceeded to do. A few days after the ceremony in Denver, Republican senator Richard Shelby of Alabama met with residents in the small city of Cullman, north of Birmingham, Alabama, where he was asked about Internet-fed suspicions that the president was not a US citizen. For forty years, while conservative critics had gone to great lengths to cast the press as biased in favor of liberals, public confidence in the traditional news media had declined, especially among Republicans. This loss of confidence, combined with the power of the Internet to spread and sustain partisan-flavored rumors, created the context in which someone in Alabama might imagine that Obama could sneak into office as a foreigner. Senator Shelby did nothing to correct this perception, saying, “Well, his father was Kenyan and they said he was born in Hawaii, but I haven’t seen any birth certificate. You have to be born in America to be president.”
Shelby’s statement depended on an unnamed “they” to create doubt and amplify suspicion. The idea that someone who was barred by the Constitution could somehow become president, without any officials noticing, was incredible. Besides, no one in politics could have missed that the question had been raised in the 2008 campaign and resolved with release of Obama’s official short-form birth certificate. But even if Shelby was ignorant of this, could he know, for certain, that previous presidents had been born on US soil? Had he seen their birth certificates?
Reports on Shelby’s comments did not include any suggestion that these deficiencies in his reply to the question were noted at the time. Instead, readers were left with the image of a Southern senator encouraging doubt that the first black president was, in fact, eligible for the office. Shelby would correct himself in July, but the canard would be advanced by another Republican, Congressman Roy Blunt of Missouri. Blunt would say, “What I don’t know is why the president can’t produce a birth certificate. I don’t know anybody else that can’t produce one. And I think that’s a legitimate question. No health records, no birth certificate.”
When Blunt spoke, hoaxers were circulating a fake document they presented as the president’s Kenyan birth certificate, which they said proved he wasn’t actually an American. State officials in Hawaii repeatedly affirmed the validity of the short-form certificate made public during the 2008 campaign. These statements did not quell speculation, but they were deemed sufficient by the president, who didn’t consider the rumors worthy of his attention. Besides, the administration had far bigger worries. Billions of dollars were being funneled into the economy via tax breaks, increased social-program benefits, and new initiatives, but the data measuring the condition of the economy wasn’t improving. In May, frozen credit markets began to thaw as banks lowered the rates they charged each other for borrowing funds. In the next month, foreclosures would decline by 6 percent. However, these glimmers of improvement were not meaningful to Americans, who feared the future. Unemployment remained stubbornly high and even crept upward. In October 2009 it passed 10 percent, which some economists considered an especially discouraging milestone.
A double-digit jobless rate gave critics grounds for attack, and several quickly insisted that the president had promised that his stimulus program would keep unemployment below 8 percent. Although the number had been in Christina Romer’s pre-inauguration report, where it was subject to numerous caveats, President Obama had never promised such a result. Nevertheless, he faced an extremely difficult challenge in that economic activity depends, at least a bit, on public confidence, which influences people’s decisions on purchases and investments. For the good of the country he needed to both encourage optimism and cultivate patience.
As he sought to rally public support, Obama conducted periodic “town hall meetings,” where he answered questions and sought to reassure citizens. Extremely relaxed by nature, he performed exceedingly well in these settings. Occasionally the people he called upon offered him encouragement. In New Orleans a ten-year-old named Terrence Scott asked, “Why do people hate you? They’re supposed to love you.” Obama gave him a hug and with a chuckle in his voice said, “I did get elected president, so not everybody hates me.… But it’s true that if you’re watching TV, it looks like everybody’s getting mad all the time.”
Obama told Terrence he thought that his critics were just trying to keep him on his toes and urged Terrence to not “take it too seriously.”
Although he sought to reassure Terrence Scott, Obama understood that people who had lost their jobs or their homes were at risk of losing hope, too. The American public was probably not much interested in the factors that made the current recession more intractable than others, even though they were well established. Earlier in the year the International Monetary Fund had issued a report predicting the crisis would be “long, deep with slow recovery.” In the IMF’s view, recessions that began with catastrophe in the financial system and spread around the world, such as the Great Recession, were especially difficult to resolve. These facts were cited in October 2009 by Nobel Prize–winning economist Paul Krugman as he urged the administration to stay the course.
Krugman had been worried that the United States faced an actual depression, and while he believed that it had been averted, he feared any recovery that might be under way could be undermined. This was a human concern for Krugman, who worried about the “blighted lives” caused by child poverty, which would increase if things didn’t get better fast. He was dismissed by economists such as Allan Meltzer of Carnegie Mellon University, who noted some hopeful signs in the economy and counseled simply scrapping the stimulus program, which would halt both the spending and policy initiatives it contained. There would be no energy research and investment, no speeded repairs of bridges and roads, no added support for the poor and unemployed.
* * *
As politicians and economists squabbled, the Obama administration pressed ahead with its agenda by advancing its plan to overhaul health care, which the president saw as essential to righting the economy for the long term. Opinion polls indicated that the public was losing confidence in him. Then something good happened. In November 2009 the unemployment rate dipped back below 10 percent. For the next five months it would hover between 9.9 and 9.8 percent, then it dropped to 9.4 percent and commenced a bumpy but nevertheless definite decline.
Month after month, as the stimulus took hold, the number of jobs being lost receded, until, at last, by November 2009, more had been created than lost. The trend took a pause in December and resumed for the next five months. Then another retrenchment in the summer of 2010 spread worry among Americans who had endured years of difficulty. For Republicans running in the congressional elections, the bad news was evidence that Obama was failing. In September the president tried to answer that assessment as he faced a group of citizens at a televised event sponsored by the CNBC television network. Although he got a rock star’s welcome from the crowd, he acknowledged that many must have deep concerns about the country’s condition. Economists believed the recession had ended, he said, but “obviously for the millions of people who are still out of work, people who have seen their home values decline, people who are struggling to pay the bills day to day, it’s still very real for them.” He also reminded the audience that “the month I was sworn in we lost 750,000 jobs; the month after that 600,000; the month after that 600,000. This is before any of our plans had a chance to take effect. The financial markets were on the verge of meltdown, and the economy was contracting about six percent—by far, the largest contraction we’ve seen since the thirties.”
One of the toughest questions Obama heard during the session came from a woman who had voted for him and was impatient with the slow pace of the economic recovery. “And quite frankly, I’m exhausted,” said the woman. “I’m exhausted of defending you, defending your administration, defending the mantle of change that I voted for.”
With poll numbers telling him voters were genuinely worried, Obama didn’t sugarcoat his reply: “My goal here is not to try to convince you that everything is where it needs to be. It’s not.… But what I am saying is, is that we’re moving in the right direction. And if we are able to keep our eye on our long-term goal—which is making sure that every family out there, if they’re middle-class, that they can pay their bills, have the security of health insurance, retire with dignity and respect, send their kids to college; if they’re not yet in the middle class, that there are ladders there to get into the middle class, if people work hard and get an education to apply themselves—that’s our goal. That’s the America we believe in. And I think that we are on track to be able to do that.”
The employment turnaround that Obama expected came in October 2010, but would not appear in economic reports until after the election. The GOP won control of the House and cut the Democratic Party’s advantage in the Senate to 51–49. On the day after the election the president told reporters at the White House, “Some election nights are more fun than others,” and that his party had suffered a “shellacking.” But when a reporter asked if he would concede that the election was a “fundamental rejection of your agenda,” he wouldn’t go that far. He accepted his share of responsibility, saying, “I’ve got to do a better job,” but he added, “just like everybody else in Washington does.”
With reporters pressing him on the meaning of the election result, Obama said he was willing to consider ideas offered by Republicans in Congress and that he imagined he would find some he was willing to adopt. Asked if he would be “willing to negotiate,” Obama replied, “Absolutely.”
Although the midterm election brought a difficult outcome for the president, the country would soon recognize the beginning of a long period of positive job growth in the private sector, the longest since the data collection began in 1939.
Jobs represented just one of several positive trends that began after the stimulus program was begun and continued throughout the Obama presidency. Housing starts, which reflect economic attitudes and depend on both growth and job creation, also rose. Contrary to political orthodoxy, which held that liberal-leaning policies are bad for business, the stock market, which had reached a nadir thanks to the financial collapse and the Great Recession, recovered briskly. So, too, did corporate profits.
Even deficit hawks, who were alarmed by the borrowing done to fund stimulus spending, had to be heartened by Obama’s performance.
The deficit picture improved in part because revenues increased in a healing economy. At the same time, federal spending as a share of the overall economy spiked briefly but then declined.
Critics complained about the slow pace of recovery under the Obama stimulus approach, but the American experience was much better than what was seen in the United Kingdom and eurozone countries where the austerity approach—cutting spending to reduce deficits—was tried. Austerity brought rises in unemployment at a time when the jobs picture was improving in the United States and tamped down growth compared with the United States.
Although the country-to-country comparisons demonstrate Obama’s success, proof is also available closer to home. In Wisconsin, Governor Scott Walker’s use of steep tax cuts, which were intended to spur recovery, actually coincided with worsening unemployment, compared with the rest of the country. And in Kansas, where spending was slashed and taxes on the wealthy were reduced, austerity had a similar effect. It also prompted some strange budgeting gymnastics. Hundreds of millions of dollars were diverted from the Kansas Department of Transportation, which maintains the fourth largest network of state highways in the nation, to pay for other government functions. Some of this money was obtained, not via taxes but by issuing long term bonds, which are more typically applied to capital expenditures. One GOP state representative compared this practice to using a credit card to pay a credit card bill. The net effect of this policy has been the postponement of infrastructure maintence that, over the long run, could lead to higher spending as roads and bridges require more costly repairs.
On the other side of the economic spectrum, the two states that fared best in the five years after Obama’s policy was enacted were two most associated with the crisis in American industry—Michigan and Ohio. When the recession began, Michigan was in the worst shape of all the states, with the highest unemployment and an economy shrinking at an alarming 9 percent annual rate. Ohio was in similarly difficult straits. Both wound up at the top of the recovery in part because of the stimulus and in part because of Obama’s remarkably successful initiatives that rescued the American auto industry.
Nationally, the challenge of creating jobs, and in particular jobs that paid well, was the most difficult for the country to overcome. In September 2016 the census Bureau reported that median household income grew by more than 5 percent between 2014 and 2015. This was the first time the bureau reported an increase since before the Great Recession. At the same time, the official poverty rate declined by 1.2 percent. This mean that 3.5 million people left the ranks of the poor in 2015. Good as this news was, the data did not reflect the value of social-service benefits for lower income Americans or the fact households are smaller than they once were. If these and other factors had been included, the picture would have been even brighter.
Copyright © 2016 by Michael D’Antonio