Still Waiting for the Obama Recovery
The most important statement of the Washington week was not actually President Obama's State of the Union address. That address will bump the polls a little bit, but it will not alter any deep political realities.
The most important statement was delivered on Tuesday by Doug Elmendorf, the director of the Congressional Budget Office (CBO).
Elmendorf warned the country: Brace yourselves. Despite the positive (if preliminary) fourth-quarter GDP numbers released this week, the recovery will be slow and it will be weak. Unemployment will hover around 10% through 2010, and will only slowly decline thereafter. Not until 2014 should anyone expect to see the number decline to the 5% level of 2007.
To appreciate how horrifying this news is, look back in time. The last severe U.S. recession was that of 1981-82. Unemployment peaked at 10.8% in November and December 1982. Then things got better fast.
The U.S. growth rate exploded: 4.5% growth in 1983, 7% growth in 1984, 4% in 1985.
Unemployment tumbled: The rate dropped two points during 1983, another 1½ points in 1984, another half point in 1985.
Within three years of the recession bottom, the ugly experience had faded into history. The Reagan recovery would prove amazingly enduring.
Between Election Day 1984 and Election Day 2008, almost a quarter of a century, there would be only five months in which the unemployment rate would exceed the 7.5% level Ronald Reagan inherited in November 1980.
That's why they called it "morning in America."
Compare that record to today's projections. U.S. economic output has been rising since the summer of 2009, but mostly because of government spending and inventory restocking. Debt-hammered consumers continue to keep their money in their pockets. The CBO predicts two years of weak growth and agonizingly slow progress against unemployment: maybe half a point in 2010, maybe another half point in 2011.
If those predictions prove correct, the Obama recovery will be the most protracted and unsatisfying since the 1930s.
It's not entirely Obama's fault. As Carmen Reinhart and Kenneth Rogoff show in their important new book, This Time It's Different: Eight Centuries of Financial Folly, recessions after banking crises are much nastier and longer than recoveries from other kinds of recessions.
On the other hand, Obama's policies are not exactly helping. The President is pushing spending onto a permanently higher new plateau. (The "freeze" touted in the State of the Union address is a gimmick, not a policy -- a slushie, not a freeze.) The emergency spending in the so-called stimulus was too big, too slow and too hard to reverse when the emergency ends.
To finance the new spending, taxes will rise -- with many of the rises being imposed for arbitrary and punitive reasons, like the President's proposed tax on lending by big banks. The economy is being re-regulated, while protectionism accumulates. The free trade agreement with Colombia mentioned by the President on Wednesday night was signed all the way back in 2006. Ratification has been stalled by Democrats in Congress for almost four years. It's good that Obama has finally sorta kinda endorsed it -- but where has he been? Oh yes: imposing trade sanctions on Chinese tires.
Obama's version of the bank bailout, or TARP, has seriously miscarried. The toxic assets remain on the books of the banks, inhibiting new lending. Banks are paying TARP back rapidly, not because they have recovered their health, but in order to free themselves from their federal senior partner. Now Obama is proposing to use some of the repaid TARP money as a federal lending fund for smaller banks: an ongoing federal intrusion into commercial credit allocation.
Under a law professor President, the security of rights under law has abruptly become less certain. In the AIG, General Motors and Chrysler bankruptcies and near-bankruptcies, the President used his political power to intimidate executives and creditors into surrendering contractual rights. In the State of the Union, Obama did something no president has ever before done: criticize a specific Supreme Court decision before a national audience to the very justices who wrote it.
At a crucial juncture in his presidency, Bill Clinton famously declared that the age of big government was over. Clinton signed NAFTA, accepted welfare reform and a big cut in the capital gains tax, declined to regulate the Internet, balanced the federal budget -- and presided over sustained economic expansion.
Thus far, however, Obama has declined to rethink or reverse. He is not a market Democrat in the Clinton style: In 2008, he campaigned almost as fiercely against Clinton's record as against George W. Bush's. From the point of view of America's unemployed, however, the Bush and Clinton records are beginning to look far more appealing than the Obama future.
Originally published in the National Post.