How Barack Obama rescued the US economy

Given the starting point, and congressional opposition, recovery has been remarkable

By Martin Wolf


     

How should we assess the economic success or failure of Barack Obama’s presidency?

This is a difficult question to answer. After all, the incumbent of the White House cannot determine the performance of the huge and complex US economy. Indeed, policy initiatives usually have a modest impact. But the story of Mr Obama’s presidency is a little different from the usual, since it began amid the worst financial crisis since the 1930s. If we consider the disaster he inherited and the determination of the Republicans in Congress to ensure he would fail, his record is clearly successful.

This does not mean it is perfect. Nor does it mean the US confronts few economic challenges. Neither statement would be close to correct. Yet it does mean he has laid a strong foundation.

The latest Economic Report of the President analyses the Obama record. It is also the brief for the defence. But Mr Obama’s Council of Economic Advisers does first-rate analysis. This report is no exception to that rule.

The starting point must be with Mr Obama’s inheritance: the economy was in free fall in early 2009.

As the report notes, perfectly correctly: “It is easy to forget how close the US economy came to an outright depression during the crisis. Indeed, by a number of macroeconomic measures . . . the first year of the Great Recession . . . saw larger declines than at the outset of the Great Depression in 1929-30.”

Responsibility for the successful recovery does not rest with this administration alone: the administration of George W Bush was responsible for the immediate response (though bearing some responsibility for the severity of the crisis); the US Federal Reserve acted effectively; and Congress passed important legislation. Yet, shockingly, most congressional Republicans opposed all significant monetary, financial and fiscal actions taken to deal with the crisis.

The Obama administration implemented a number of important fiscal measures, notably the American Recovery and Reinvestment Act of 2009. It also provided strong moral support for the Fed (including the reappointment of Ben Bernanke, who had been President Bush’s nominee). The administration also restored the financial sector faster than expected and carried out a highly successful rescue of the car industry.

Meanwhile, Republicans decried the fiscal stimulus, complaining about the huge fiscal deficits caused by the crisis. Yet it was as absurd to complain about deficits then as it is to slash taxes now, when the economy seems close to full employment.

Some Republicans claimed Fed policies risked hyperinflation. Most opposed the re-regulation of the financial sector and savaged the bailout of the car industry. Yet President-elect Donald Trump might not be in a position to bully automakers today if they had not been rescued back then.

In all, given the starting point, the performance of the economy has been remarkable. The unemployment rate has consistently fallen faster than expected. US business has also added 15.6m jobs since private-sector job growth turned positive in 2010. Real wage growth has been faster in the present cycle than in any since the early 1970s. In the third quarter of 2016, the economy was 11.5 per cent bigger than at its pre-crisis peak and real gross domestic product per head was 4 per cent above the pre-crisis peak, while that of the eurozone was still below it. Household net worth has also reached 50 per cent above its 2008 level.




Yet Mr Obama was interested in more than economic recovery. He tried to move the US closer to the universal health insurance taken for granted in other high-income countries. The Affordable Care Act (“Obamacare”) has added an estimated 20m adults and 3m children to the insurance rolls. Healthcare costs have also grown exceptionally slowly since the law was enacted, relative to past US performance.

These are all genuine achievements. Yet some problems could not be cured.




First, US economic outcomes have become exceptionally unequal, despite a modestly progressive shift in the impact of fiscal policy under Mr Obama. Doing something effective about this was beyond his powers, both because it is difficult and because his opponents had no interest in helping.

Second, the participation in the labour force of prime-aged males (25 to 54) has been on a 70-year downward trend, while that of prime-aged females has flatlined for three decades. This is a poor performance by the standards of most high-income economies. It is impossible to argue credibly that this is the result of particularly generous US welfare benefits or particularly high minimum wages.
The failure is deeper.




Third, growth of labour productivity has slowed sharply, though it was still higher than in other members of the Group of Seven leading high-income countries between 2005 and 2015.

The reasons for this slowdown are a puzzle. Possibilities include the post-crisis weakening of business investment and a broader post-crisis loss of animal spirits. It is also likely that the underlying rate of innovation is slowing. Some argue that this is the result of excessive regulation.

The next administration is set to test that hypothesis to destruction.

Finally, the US has a key role to play in tackling the threat of unmitigated climate change. In the absence of any consensus on this question in the US, Mr Obama relied on executive actions, which will now presumably be reversed.

In all, the administration rescued the US economy and bequeathed a sound foundation for its successor to build on. But it made a big mistake: it did not go all out to punish those whose malfeasance and irresponsibility blew up the financial system and economy. This sense of injustice is one reason why the US has elected the wrecking crew that is about to take office. Mr Obama could not channel rage.

Mr Trump, alas, can.


Trump, the Presidency and Policymaking

What makes a president great isn’t what you think.

By George Friedman


There are four classes of people in Washington. There are those who research policy papers.

There are those who write policy papers. There are those who present policy papers. There are those who throw away policy papers. Political power is in the hands of the latter. For those climbing the hierarchy of the policy-production industry – the think tanks, universities and government departments – writing policy papers is a serious attempt to create deep and comprehensive guidance for leaders. The issue is the relationship between policymaking and the presidency. On the surface, they are the same. In my view, they are at most indirectly connected.

One of the accusations against President-elect Donald Trump is that he is inconsistent or disengaged from the complexities of policymaking. That is probably true. However, it gives me an opportunity to consider the relationship between policymaking and the American presidency and, by extension, other political systems. I would argue that the idea that policy optimization is at the core of the presidency is incorrect. The president is not the U.S.’ chief administrative officer. He is a leader and manager of the political process. His job is to be a symbol around which a democratic society draws the battle lines of who we are. He must express his vision as something aesthetic, not prosaic. The president cannot spare time from his real job to craft policies. Successful presidents know that and hide it. Trump doesn’t try to hide it.
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A man walks along Pennsylvania Avenue past the White House and Secret Service officers in Washington, D.C. BRENDAN SMIALOWSKI/AFP/Getty Images


Leaders experience government as chaos. The process of becoming president is the experience of random and shifting pressures from an almost infinite number of directions. Leaders, to be effective, cannot have fixed and comprehensive positions on the endless issues with which they must cope. No U.S. president has the ability to comprehend the vast array of policy issues that face him, nor can he grasp the depths of any single issue. Some presidents have tried. They generally did not do well.

Presidents who succeed have certain characteristics. They can lead. They provide the public with a sense that they understand what is needed and how to get it done, and that they care deeply about those who are hoping problems will be solved. They rarely take office with that ability, but rather gain it in the course of balancing things that cannot be balanced. In many cases, their ability to lead is best seen after they leave office.

Franklin D. Roosevelt was ridiculed before he took office as an intellectual lightweight whose only reason for wanting to be president was to be president. It would appear that few of the initiatives for which he is lauded were things he thought of before taking office. Roosevelt understood that policies may or may not work, but he gave the public a sense that someone decent was in charge. For most of his first two terms, Roosevelt came under vicious attack by his enemies, who were legion. He developed policies from two sources. The first was from the reality he faced, a desire to be re-elected and tactical moves to build his popularity. The second was from a group of advisers who cobbled together fairly hit-or-miss ideas on what might work, and which frequently didn’t work. The same could be said of Harry S. Truman, Dwight D. Eisenhower and Ronald Reagan, among others. They were not universally admired when elected, they lived in a chaotic fun house, and their goal was to survive. All of them made policy, but not as the policy industry would have liked.

All of them had in mind a general idea of the direction they wanted to go. Truman wanted to continue the New Deal. Eisenhower wanted to stabilize U.S. foreign policy and avoid nuclear war. Reagan wanted to end stagflation and re-establish American power after Vietnam. These were intentions.

Policymaking, the complex weaving of a plan, could not survive the realities of political life. First, policies focused on one subject as if the presidency consisted of neat pigeonholes. Second, the policy writer might have a good idea, but not grasp or care that there were powerful forces outside the president’s realm that would rip at the policy’s fabric if the idea succeeded.

Washington’s primary industry is the production of policy papers. It is the center of a democratic republic, and its decision makers must be far more concerned with the voters who elect the president than the bright meritocracy who wants to advise him. The ideas might be technically good, but whether they will survive the chaos of democracy is the issue. Whether a president who focuses on policy will flourish is another issue. The best policy from a technocratic point of view may have no connection to political realities that bind American society together. Policies are crafted on the fly, in the midst of the push and pull of special interests, since all Americans pursue special interests, namely their own.

Trump has chosen not to posture. He is taking office with a higher degree of loathing than Roosevelt or Reagan, but that does not mean he will not wind up revered – or reviled, for that matter. He has clearly positioned himself as a political leader and succeeded extremely well with half of the population. He has also defined himself clearly. His intention is to reshape foreign policy to make it more beneficial to the U.S.

What Trump has not done is immerse himself in the details of policy, for which he is condemned. But he is actually publicly saying what all presidents know. The foundation of the job is to lead and enunciate broad policy outlines. He then must select people he trusts and who know better than he does how to execute this broad intent without tearing the presidency apart.

Reagan was charged with being detached. Jimmy Carter was praised for his deep involvement in the details of governing. Carter was defeated after his first term. Reagan won two terms and has become an iconic figure. Some defend Reagan by claiming that he was far more involved in policymaking than it appeared. That may be true, but Reagan knew something Carter didn’t. Making policy is not a president’s central task, except in crisis. Presidents should be leaders who create a seductive image of what the country should be like and allow the love and hate of a country to focus on them – by allowing themselves to become a battleground that drives the country forward. Carter created an energy policy. He could not lead, seduce or accept his role as an icon. He missed the point of the presidency.

When John F. Kennedy said that we would “oppose any foe to assure the survival and the success of liberty,” he did not provide any sense of what he was talking about, which was good since his vision of this was terrifying. What he meant to do was to not declare a policy, but rather present the public with a vision of American strength and moral courage. Kennedy knew both had limits, and he saw this was the key to America’s future. He was not making policy. That would come later, and the process would be as ugly as making sausages is said to be. This was intended to be a work of art.

Trump’s slogan, “Make America Great Again,” is not intended to be policy. It can’t be, because as with Kennedy’s promise, it makes no sense as policy. It is intended to inspire, to resurrect hope and portray Trump as a powerful leader. It is also an invitation to his enemies to dismiss him as being engaged in empty posturing. Trump has focused the country’s admiration and hate on himself. That clarifies and personalizes. It is all about Trump, as it was all about past presidents. It focuses and defines the divisions in the country that already were there.

Trump’s general outline on foreign policy is simple. He argues that the international structures and ideologies that have been in place since World War II no longer serve the national interest. Free trade is not an absolute good and its benefits depend on the circumstances. The U.S. commitment to allies must be examined based both on U.S. interests and whether or not allies have acted like allies. All of this must be measured against U.S. strategic and economic interests.

This is the broad vision that comes from “Making America Great Again.” What follows is not a set of clear policy initiatives to implement this, but rather political chaos. Trump has posed a sea change to American foreign policy, and he will need to build coalitions in Congress, corporations, labor and so on. He will need to deal with foreign powers and encounter the reality that we need some of them more than they need us. Trump will have to deal with a country that feels he has failed on his promises, as no president can fulfill promises this vast.

The policies that eventually emerge will not be the product of presidential engineering, but rather what is left after factions in the U.S. and foreign powers have ripped it apart and rebuilt it. Visions come from presidents. Papers come from think tanks. Reality emerges from the political process. The U.S. founders did not envision a technocracy.

Just as Kennedy could not fulfill the promise to protect liberty everywhere, nor could he avoid problems he wanted to avoid, Trump will have to face not only the limits of his own power as president, but also that which must happen and that which must not happen, despite what he wants.

Trump’s supporters expect him to be extraordinary. His opponents believe he will be a disaster. From my point of view, he will be the 45th president of the United States, the 45th man whom some imbued with the powers of the messiah and others saw as the devil incarnate. I doubt he will be either. He will not spend his time making policies. He will be too busy doing what other presidents do: making calls pleading with obscure congressmen to let his bill out of committee, with very little to offer or threaten. He will bargain away many things to get a little of what he wants.


Trump’s Defective Industrial Policy

Dani Rodrik
. Newsart for Trump’s Defective Industrial Policy


CAMBRIDGE – US President-elect Donald Trump has yet to take office, but his brand of flawed industrial policy has been on full display since his surprise win in November.
 
Within weeks of the election, Trump had already claimed a victory. Through a mix of inducements and intimidation, he prevailed on the heating and cooling firm Carrier to keep some of its operations in Indiana, “saving” around 1,000 American jobs. Touring the Carrier plant subsequently, he warned other US firms that he would impose stiff tariffs on them if they moved plants overseas and shipped products back home.
 
His Twitter account has produced a stream of commentary in the same vein. He has taken credit for Ford’s decision keep a Lincoln plant in Kentucky, rather than move it to Mexico. He has threatened General Motors with import tariffs if it continues to import Chevrolet Cruzes from Mexico instead of making them in the United States.
 
Trump has also hounded defense contractors for cost overruns, berating the aerospace giants Boeing and Lockheed Martin on separate occasions for producing planes that are too expensive.
 
Trump’s policy style represents a sharp break from that of his predecessors. It is highly personalized and temperamental. It relies on threats and bullying. It is prone to boasting, exaggeration, and lies about actual successes. It is a type of public spectacle, staged on Twitter.
 
And it is deeply corrosive of democratic norms.
 
Economists tend to advocate an arm’s-length relationship between government and business.

Public officials are supposed to insulate themselves from private firms, lest they be corrupted and engage in favoritism. This is a prized principle in the US – but one that is more often breached than observed. An obvious example is the undeniable influence over US government policy exercised by finance moguls during the last three decades.
 
Yet close business-government interactions also lie behind many of America’s successes. The history of US economic development is one of pragmatic partnerships and collaboration between the public and private sector, rather than arm’s-length relationships and rigid rules.
 
As historically minded economists and policy analysts such as Michael Lind, Stephen Cohen, and Brad DeLong have reminded us, the US is heir to a Hamiltonian tradition in which the federal government provides the investment, infrastructure, finance, and other support that private enterprise needs.
 
US technological innovation owes as much to specific government programs, such as loan assistance or government purchases as it does to American entrepreneurs’ and inventors’ ingenuity. As Harvard Business School professor Josh Lerner notes, some of the most dynamic technology companies in the US, including Apple and Intel, received financial support from the government before going public. The electric carmaker Tesla was a beneficiary of the same public loan guarantee program as Solyndra, the solar cell company that went bust in 2011 in a spectacular public collapse.
 
As the Solyndra example illustrates, many public initiatives fail. But the ultimate test is whether the social return on the portfolio as a whole is positive, taking successes together with the flops. Such broad evaluations tend to be rare. But one analysis found that US programs to boost energy efficiency had produced positive net benefits. Interestingly, the bulk of the benefits were attributable to three relatively modest projects.
 
Sociologists Fred Block and Matthew Keller have provided perhaps the best analysis of the US “developmental state” – a reality that they say the reigning market-fundamentalist ideology has obscured. Block and Keller describe how a “decentralized network of publicly funded laboratories” and an “alphabet soup” of financing initiatives, such as the Small Business Innovation Research (SBIR) program, work with private firms and help them commercialize their products. They and their colleagues have documented the extensive role of both federal and state governments in supporting the collaborative networks on which innovation rests – whether in biotech, green technologies, or nanotech.
 
Such industrial policies, based on close collaboration and coordination between the public and private sectors, have of course been the hallmark of East Asian economic policymaking. It is difficult to imagine China’s transformation into a manufacturing powerhouse – and the attendant success of its export-oriented model – without the Chinese government’s helping and guiding hand. It is ironic that the same people who extol Chinese gains from globalization are often alarmed that a US administration may copy the Chinese approach and explicitly endorse industrial policies.
 
Unlike China, of course, the US purports to be a democracy. And industrial policy in a democracy requires transparency, accountability, and institutionalization. The relationship between the government and private firms has to be calibrated carefully. Government agencies need to be close enough to private enterprises to elicit the requisite information about the technological and market realities on the ground. For example, what are the fundamental reasons for the loss of manufacturing jobs in, say, automobile production, and how can the government help, if at all? But they cannot get so close to private firms that they end up in companies’ pocket, or, at the other extreme, simply order them around.
 
And that is where industrial policy à la Trump fails to pass the test. On one hand, his appointments to key economic positions indicate he has little intention of severing government ties to Wall Street and big finance. On the other hand, his policymaking-by-tweet suggests he doesn’t have much interest in building the institutionalized dialogue, with all the required safeguards, that sound industrial policy requires.
 
This means that we can expect the Trump administration’s industrial policy to vacillate between cronyism and bullying. That may benefit some; but it will do little good for the overwhelming majority of American workers or the economy as a whole.
 
 


2017: Year of Extremes

By: Clif Droke


Now that another New Year is upon us, it's time to reflect on what the coming months might unfold.

Normally when market analysts try their hand at predicting the year ahead it involves either wild guessing or linear extrapolation based on prevailing trends. I tend to eschew both methods and instead focus on comparing past events in comparable time frames. This method is based on something known as Kress cycle "echo" analysis and was pioneered by my late mentor, Samuel J. Kress.

The year 2016 was filled with ups and downs, but was mainly a torpid year with stock prices stuck in a dull trading range for much of the spring and summer. It continued a theme of directionless and no progress from the prior year, which, combined with the after-effects of the preceding slow-growth years, culminated in a disaffected mindset on the part of the masses.

The result was clearly seen in the outcome of the 2016 U.S. presidential election.

One of the most reliable of the long-term market rhythms (or "echoes") is the 10-year (decennial) pattern. This is often erroneously referred to as a "cycle" despite not fitting the technical definition of one. The 10-year rhythm was famously expounded by the late market analyst Edson Gould and by Edgar Lawrence Smith in his book, Tides in the Affairs of Men.

The seventh year of the decade tends to be tempestuous and often sees extraordinary volatility.

It's a year filled with extreme ups and downs and not uncommonly witnesses both a major high and a major low within the year. In recent decades, the seventh year has witnessed the market making impressive strides, yet not without its share of turmoil. Crashes, mini-crashes and panics are quite common in the seventh year (e.g. September 1987, October 1997, February/August 2007). It will do us well to keep this in remembrance as we enter what promises to be a year filled with tremendous opportunity for making money in the stock market - in both directions.

For 2017, the 10-year rhythm equates to 2007. As you recall, 2007 was a momentous year characterized at once by great volatility alternating between great fear and euphoria. It was the year that saw the last major stock market top and also the onset of the credit tsunami which overwhelmed the market the following year. If the decennial pattern holds true, 2017 should witness both a meaningful rally to new all-time highs as well as a decline of potentially major proportions later in the year. In short, it could turn out to be a big year for the bulls as well as the bears.

Now what about the economy in the coming year? Year 2016 ended on a positive note, with the last meaningful economic news in late December being the revelation that U.S. consumer confidence had hit a 15-year high. The Consumer Confidence Index hit 113.7 in December, exceeding economists' expectations of a 109 Reading. The reading was the highest since August 2001. Rising sentiment among consumers implies an optimistic economic outlook in the wake of Donald Trump's election win. The following graph is courtesy of the Trading Economics website

(www.tradingeconomics.com).
Consumer Sentiment

For many in the middle class, Trump's win has provided a reason for genuine hope for the first time in years. Whether this hope will ever be fulfilled is a matter for conjecture. What's important from a market perspective is how consumers and investors respond to that hope. To that end the appropriate question to ask is, "Will 2017 be the year that retail investors finally return from the sidelines?"

For the year-seven decennial pattern to repeat, as it has in the three prior decades there must be not only a continuation of rising consumer confidence, but an acceleration in investor optimism as well. To this end, it would seem necessary that small investors return from the sidelines and put their money back into the stock market. After years of being stuck in the bomb shelter of low-yielding bonds, this important group of participants is no doubt feeling the urge to grow their money.

To that end, the stock market is beckoning to them - especially with so many major indices at or near all-time highs. The fact that the man who they believe represents their interests as an economic class will be in the White House will serve to stimulate their confidence in the economic outlook. History shows that when consumers feel good about their intermediate-term economic prospects they are more likely to invest in stocks.

Here is what investor sentiment currently looks like according to the Rydex Ratio of investor sentiment. We should ideally see a major spike higher in this ratio sometime this year, ideally by late summer, to let us know that the historical pattern for Year Seven is on track for being repeated.

Ryydex Funds Nova/Ursa Ratio Sentiment Indicator


Whether or not 2017 will prove to be the exception to the "rules" of the decennial "echo" established in the prior decades remains to be seen. We are certainly living in exceptional times, so it's possible that 2017 will in effect throw the historical playbook out the window. But as the last several years have resonated to the tune of the Kress cycle echoes to some degree or other, I have to assume that there will be at least some validity to the decennial rhythm for 2017.

Remember, while history doesn't always repeat it does usually rhyme.