There is little doubt Obama inherited the recent economic crisis from his predecessors. George W. Bush left a toxic economic legacy unequaled since the days of Herbert Hoover in 1932: a $27 trillion rise in total US debt; a doubling of the federal debt from $5 to more than $9 trillion; a depression in housing and construction; a collapse of the banking system in September 2008; more than $4 trillion in tax cuts favoring investors, speculators and corporations; a breakdown in health care and retirement systems financing; an accelerating unequal distribution of incomes benefiting the wealthiest 1% households at the expense of the bottom 80%; wars costing more than $3 trillion on his watch; trade deficits approaching $1 trillion annually; and, as he left office, a veritable collapse of business investment and consumer spending which quickly resulted in job losses of roughly a million a month for six months between October 2008 and March 2009—i.e. a job loss rate faster than that which occurred in 1929-30.
But Bush was just the concluding act of a tragic play that began well back into the early 1980s and before. Reagan, Bush senior, and Clinton all pushed the same policies that contributed to the near collapse of the US and global economies beginning in 2007. Their differences were of emphasis and degree. Bush merely accelerated the processes and policies to the breaking point that were already underway and gaining momentum since the 1980s.
While it is true that Obama cannot be blamed for causing the current economic crisis, the same cannot be said for the failure of the Obama administration to generate a sustained recovery from the crisis. That failure of recovery to date is clearly Obama’s and is the economic hallmark of his first two years in office.
Obama and his advisors proclaim their policies prevented an even greater collapse of the system, that there almost certainly would have been another great depression on the scale of the 1930s if they hadn’t bailed out the banks, rescued auto companies and other industries at taxpayer expense, spent $812 billion on a stimulus program, passed a financial regulation bill, and so forth. Maybe…or maybe not. It is not possible to prove (or disprove) something that has not occurred.
What is possible, however, is to look at the economic events and conditions of the past two years on Obama’s watch, to measure that against the policies and programs he did introduce, and to then ask: what did we get for $2.3 trillion in free, no interest, Federal Reserve money given to the banks, insurance companies, hedge funds, and their financial friends? What was the benefit received in exchange for the additional $1.7 trillion cost of the Fed’s purchasing bad bonds from banks and mortgage lenders at above market prices? What did the further $1 trillion given by Congress and the Treasury to corporations and GSEs (government sponsored enterprises—i.e. Fannie Mae, Freddie Mac) actually produce for mainstreet America? How did workers, homeowners, and consumers in general benefit from the $812 billion 2009 fiscal stimulus legislation? And what about seldom mentioned, and still untallied, hundreds of billions of dollars in tax cuts and direct subsidies given to businesses and investors since February 2009 in addition to all the above? Who benefited?
In short, what has the preceding total of more than $6 trillion in various forms of financial assistance disbursed by the Obama administration over the past two years to banks, businesses and investors actually produced in terms of economic recovery for all?
What’s a ‘Recovery’?
It is important to be clear what ‘recovery’ means. It does not mean ‘having prevented a depression’. It does not mean having stopped the banks from further collapse. And it certainly does not mean a return of pre-crisis levels of bank and corporate profits. All that of course has indeed occurred: The ‘big 19’ financial institutions that control two-thirds of all the assets in the US financial system have been stabilized—even though some like Citigroup and AIG are still technically insolvent. They have been rescued—as have GM and Chrysler, their financial arms, finance companies, mutual funds, countless mortgage lenders, and other institutional investors. Meanwhile, more than 200 of smaller, regional US banks have been closed by the FDIC, with another 829 on the FDIC’s potential failure list—a number doubling over last year and growing each month. At the same time, the big 19 banks over the past year have accumulated and are sitting on more than $1 trillion in cash and liquid assets—which they refuse to loan to small and medium businesses to prevent further layoffs—but eagerly loan to ‘traders’ (read: professional speculators) globally to finance quick capital gains in Chinese properties, Brazilian currency, short selling of Greek bonds, gold futures, emerging market funds, and so on. Similarly, the non-financial S&P 500 corporations and other big, multinational corporations over the past year have accumulated an even larger cash hoard of $1.84 trillion, according to the Financial Times business daily—which they refuse to invest in the US to create jobs.
No matter the public relations spin, none of the $1 trillion bank cash hoard or the $1.84 trillion cash on hand by non-banks represent economic recovery. At minimum, recovery can only mean a return to the levels of economic activity that existed immediately prior to the onset of the crisis in mid-2007. That is, a return to levels of employment, residential and commercial construction, industrial production, retail sales, business and consumer spending, credit availability and lending, and other key economic indicators that predated the beginning of the economic descent that began in the second half of 2007. To say, to the contrary (as the Obama administration has) that recovery means conditions are not getting worse is to redefine recovery to mean ‘continuing stagnation’.
From the beginning, in February 2009, the administration impaled itself on the horns of an economic dilemma. One horn has been the failure to recover jobs. The other has been failure to staunch the depression-level economic bloodletting in residential housing and commercial property. Here ‘recovery’ is, in fact, continuing decline. In all other cases of economic indicators over the past 18 months, ‘recovery’ has meant a recouping of less than half of what was lost, followed by stagnation or, even worse, a return to decline.
What then has been the Obama record to date on jobs—which have not only failed to recover by any measure but in fact have continued to deteriorate.
Dimensions of the Jobs Crisis
Most accounts of the jobs situation focus on what is the called the U.S. Labor Department’s ‘U-3’ unemployment indicator. This is a very limited, conservative assessment of job loss, however. More accurate is the broader ‘U-6’ measure. Both measures have risen significantly since Obama came into office in January 2009: the U-3 from 7.2% to 9.6% and the U-6 from 12.6% to 17.1%. Most of that rise in unemployment did occur in the first seven months. Unemployment levels then stagnated and remained at those low levels of 9.6% and 17.1% over the year July 2009 to July 2010.
It is worth noting that the stagnating unemployment roughly coincides with the Obama $812 billion stimulus’s taking effect. That is, the stimulus appears to have virtually no effect on reducing the unemployment rate from mid-2009 to late summer 2010. It therefore did not benefit the unemployed. That is why the administration has fallen back to the position that the stimulus ‘at least prevented unemployment from getting worse’.
But the stimulus was sold on the promise it would generate recovery, and in terms of unemployment measures over the past year there has clearly been no ‘recovery’—only continued stagnation at best. The stimulus has not created any jobs, although it certainly helped the 25 million still unemployed today (per the U-6 measure) from starving and not paying the rent for which it should be commended. But that’s still not job creation.
A better indicator of the job situation is to look at what’s happened to employment levels, not the unemployment rates. Here the picture is even worse.
In the first seven months in office (January 09 to July 09) the economy continued to lose jobs by the millions. A total of 5.2 million jobs were lost. One could reasonably argue that this job loss was the fallout from the Bush period and the massive collapse of jobs that began, at a rate of nearly 1 million a month, from November 2008 through March 2009. OK. We can’t blame Obama for all of that. After all, the $812 billion stimulus didn’t get passed until February. But what about the additional 2.0 million jobs that were lost from July 2009 to September 2010, after the stimulus? Nonfarm jobs continued to fall and 2.65 million more workers left the labor force, at least half of whom were previously employed and just gave up on finding work. And a million more workers were converted from full time to part time, or hired as part time, in just the last two months from July 2010 to September 2010. That’s a total of at least 2 million more without work during the period in which the stimulus bill was supposed to be having it spositive effecg on employment.
Yet another perspective on the jobs situation is to consider severity of unemployment. Has it gotten worse in terms of duration of long term unemployed? Looking at those suffering from 27 weeks or more unemployed—i.e. the ‘long term unemployed’—the picture has been getting worse as well over the past year. In January 2009 there were 2.6 million (23% of the unemployed) who were jobless more than 27 weeks. By July 2009 this had risen to 4.9 million or 34%. By July 2010 the numbers rose to 6.5 million and 45%. Nevertheless, Congress kindly cut off insurance benefits for these long term unemployed despite their rising numbers. Not surprisingly, most gave up and left the labor force, thereby providing a false impression of unemployment rates stabilizing.
Still another way to look at the growing seriousness of the jobless situation is to consider what is called the ‘JOLT’ indicator. This measures how many jobless there are for each available job opening. When Obama came into office it was 3 unemployed workers for every available job opening. Today that number is approximately 5 to one.
An indicator that estimates the future direction of jobs is the weekly ‘jobless claims’ estimate. Workers who apply for new jobless benefits are a partial indicator of future unemployment. Weekly jobless claims less than 400,000 is correlated with positive jobs growth. Claims above 400,000 means jobs are continuing on net to be lost. When Obama entered office the jobless claims were averaging 600,000 a week. This slowed to around 500,000 a week by the fall of 2009. But a year later, by September 2010 new jobless claims were still averaging 465,000 a week.
A look at what has happened on the jobs front from January of this year through July is also revealing. The administration has trumpeted the fact that the private sector has created 593,000 jobs since January. But less often mentioned is the fact that at least 300,000 of these are temporary hires. The Federal government had hired 575,000 jobs by April. But 574,000 of these were temporary census workers, the majority of whom have since been laid off. So far as State and Local government is concerned, there has been a net loss of more than 150,000.
The question must be raised ‘has the $812 billion stimulus benefited jobs’? A simple calculation shows that the 593,000 private sector jobs, plus the administration’s claim of 600,000 jobs ‘saved’, means a total of 1.2 million jobs since the stimulus was passed. 1.2 million divided into $812 billion yields a cost per job of more than $600,000 each. Which, of course, is ridiculous and which means that the stimulus went somewhere—but not to new job creation.
As of late September 2010 there are approximately 27 million jobless in the U.S., when defined by the U-6 rate and adjusting for those groups chronically underestimated by the labor department’s survey approach to estimating the unemployed among inner city youth, itinerant workers, and the 11 million undocumented in the labor force. That’s a true unemployment rate between 17.5% and 18%. More than one out of every three workers in the labor force experienced some period of unemployment during this recession. None of the current, or recent, unemployed are likely to forget that come November elections.
Table 1 below summarizes this dismal performance on the jobs front since Obama came into office, showing the first period from January to July 2009 and a second from July 2009 to July 2010 in which the stimulus was supposed to have taken effect. All that can be said positively about it is that the massive job loss that occurred in late 2008, and during the first six months of Obama’s first term, has slowed over the subsequent year from July 2009-July 2010. However, jobs have continued to disappear. This is not recovery by any definition or stretch of the imagination. More importantly, it represents a massive drag on the recovery of the general economy. It is simply not possible to generate a sustained economic recovery with more than 25 million effectively unemployed.
Dimensions of the Jobs Crisis
December 31, 2008 to July 31, 2009 August 1, 2009 to July 31, 2010
U-3 Unemployment Rate: 7.2% to 9.4% 9.4% to 9.5%
U-6 Unemployment Rate: 12.6% to 16.5% 16.5% to 16.4%
Number Jobs Lost -7.9 million - 3.5 million
Long Term Unemployed 2.6 to 4.9 million 4.9 to 6.5 million
JOLT 3:1 to 6:1 6:1 to 4.8:1
(# unemployed per job opening)
New Jobless Claims Filed 600,000 to 500,000/week 500,000 to 465,000/week
Do Tax Cuts Really Create Jobs?
As the November elections campaign season intensified, the battle over extending the Bush tax cuts grew as well. Led by business interests and their friends in Congress, this took the initial form of calls to cut the federal deficit, that had risen to more than $11 trillion as a result of the collapsed tax collection due to the deep recession, the bailouts of banks and businesses, the $812 stimulus package, and other measures. Total government debt as a percent of GDP had risen to 90%. But behind the deficit hawks’ calls for spending cuts lies the real objective: take the heat off of ending the Bush tax cuts passed in 2001-04—that is continue the tax cuts for corporations and the wealthiest households—by cutting spending instead of allowing their tax cuts to expire and their taxes therefore to rise.
Beginning with Reagan, tax cuts for corporations and wealthy investors has been the economic mantra of Republicans and conservatives and most Democrats as well. The idea that tax cuts create jobs has permeated the press and even public consciousness. What they mean more precisely, however, is that tax cuts for corporations and wealthy will create jobs. But what, in fact, is the record of this myth?
First, Bush pushed through a series of tax cuts between 2001-04 that amounted to a total of $3.4 trillion over the decade. Every tax cut bill for the rich was called a ‘jobs creation’ bill. More than 80% of the $3.4 accrued to the top 20% households and corporations, and most of that to the top 5% and 1%. What did it produce in terms of jobs?
Between 2001 and 2004 the US economy witnessed the weakest jobs creation on record. It took a full 48 months just to recover to the level of jobs in the economy that existed in January 2001 when the recession of that time began. It was a moderate recession, not like the present. Yet it took four full years to get back to a previous jobs level. Most of those jobs created, moreover, were likely due to the boom in the construction industry that had little to do with the tax cuts and more to the record low 1% interest rates of the time.
Another ‘test’ of the (business) tax cuts create jobs thesis is what happened in the spring of 2008. The current recession began in December 2007 and by spring 2008 it was in full bloom. Bush and the Congress passed a $168 billion stimulus bill. $90 billion of that was tax cuts and much of that business tax cuts. What jobs did it create? Job losses and unemployment continued into the fall of 2008 when the bottom fell out of the jobs market and jobs began disappearing at a rate of nearly one million a month. So much for the second ‘proof’ that tax cuts create jobs.
The Obama stimulus bill is yet another example of the failure of this idea. Of the original $787 billion stimulus passed in February 2009, about half was tax cuts. Approximately $225 billion was business and investors’ tax cuts. For that $225 billion we have eighteen months later a total of 593,000 jobs, half of which are temps.
What those who advocate tax cuts for jobs refuse to acknowledge is that no business is going to invest and expand after given a tax cut, and hire more employees, if there is no demand for the increased products produced by those added employees? If there is no additional consumption forthcoming, business will just pocket the tax cut savings. Or invest it offshore where there is demand, as in China or Brazil. Or use it to speculate in foreign exchange or other such markets to turn a nice short term capital gain. But a consumption increase is not possible with 25 million unemployed. Or with 10 million homes in foreclosure. Or another 10 million ‘under water’ in terms of net equity. Or with households’ savings having been depleted, retirement funds having fallen by $trillions, and so on. Tax cuts simply won’t create jobs in that environment. Nevertheless, the same tired song is being sung yet again.
Sadly, the Obama administration has begun to sing it as well. In the past few months, for example, it has accelerated equipment depreciation write-offs (a form of business tax cut). It has indicated its interest in considering a business ‘payroll tax holiday’. It has abandoned its promise to close loopholes and tax corporate foreign profits. Gave up its proposal to make banks pay a tax to cover future bail outs. Signaled it is willing to negotiate a reduction in the corporate tax rate for corporations sheltering profits in offshore subsidiaries. And, this writer predicts, will eventually significantly soften—if not drop—its proposal to return the wealthiest 2% return to pre-Bush level taxes (i.e. discontinue their Bush era tax cuts).
Dimensions of the Housing Crisis
The second ‘horn’ upon which the Obama administration has impaled itself is housing—or more specifically both residential housing and commercial construction as well.
When the crisis in subprime housing loads imploded in August 2007, driving the rest of the financial system down, the Bush administration did nothing. It stalled by encouraging banks and mortgage lenders to introduce voluntary mortgage modifications. Nothing happened. When Obama entered office, as part of his overall banking rescue plan a mere $75 billion was committed to the housing crisis. This, moreover, targeted the bailout of lenders, by providing them subsidies if they lowered their mortgage rates to new buyers. This was called the HAMP, or ‘Housing Affordability Modification Program’. HAMP did virtually nothing for those in foreclosure or delinquent on payments. In fact, its target was not those in trouble, but to help ‘new buyers’ get into the foreclosed homes. Or, to subsidize home builders to help them sell their unsold inventory to new buyers.
Delinquencies and foreclosures rose throughout 2009. The foreclosure rate grew from 2% of mortgages when the recession began in late December 20007 to 4.6% by December 2009.
In July 2009 there were 8 million (out of the 54 million total mortgages in the US) who were behind in payments or in foreclosure, for a 13.5% rate. By July 2010 this has risen to 14.4% The foreclosure rate has risen throughout 2010. It nearly doubled in 19 states, according to the ondustry source, Realty Trac. It tripled in 7 more states. In July 2010 alone there were 325,000 defaults, a 4% increase in a month. Lenders seized 92,858 homes in July, the highest on record. This acceleration of foreclosure activity by banks and lenders was too much to tolerate in an election year. The administration and courts responded by late summer 2010, identifying bank practices involving foreclosure processing that were highly questionable. Some banks and lenders in response consequently suspended some foreclosure activity. It remains to be seen if this is temporary, and designed not to create too embarrassing a situation in an election period in the runup to November 2010.
The only bright spot in the housing front over the past year was the introduction, after the 2009 stimulus bill and HAMP, of the ‘First Time Homebuyers Program’. This briefly increased housing demand—but again did nothing for those losing their homes or facing more delinquence in their payments. The Obama plan for housing has always been to get new buyers to absorb the foreclosures—not to help those in foreclosure. That, of course, has been the bank-lenders strategy as well.
But the ‘First Time Homebuyers’ program did slow the fall in home prices. After falling more than 305, home prices stabilized in December 2009. They then remained flat throughout 2010 to September. The program was discontinued in the late spring of 2010. The consequence was a renewed collapse of home sales, a rise in the supply of unsold homes, and a likely near future resumed fall in home prices once again.
July 2010 recorded the biggest drop in home sales son record. Sales were down 32% over the year earlier, already a weak amount. August 2010 recorded the lowest home sales since 1997. The supply of homes on the market has doubled from a 6.5 month supply in December 2009 to 12 months in August 2010. It is therefore clear that nothing has really been done concerning residential housing. The First Time Buyers program merely pulled in future sales temporarily. Its discontinuation resulted in the renewed collapse of residential housing. Home prices cannot be begin to fall once again in the near future.
In terms of the Commercial Property markets (office buildings, hotels, resorts, industrial building, etc), there never was even a temporary halt to the decline. Commercial property prices have continued to fall over the past year by 7.3%, with July 2010 suffering a biggest one month fall of 10.9%.
To sum up, the administration’s strategy and policies to address the construction sector, residential and commercial, has been abysmal. Like jobs, it has been ‘too little too late’. The picture is one of continued decline, and a decline that shows signs of accelerating. Like the 25 million unemployed, there are tens of millions being impacted by the still on-going housing crisis. Not just the 7 to 10 million having foreclosed or about to, but the millions more suffering negative net equity in their homes, and the millions more associated directly and indirectly with the commercial property sector as well.
If it is true, as previously argued, that there can be no sustained economic recovery with 25 million unemployed, then it is even more true there can be only continued stagnation of the general economy longer term so long as the housing sector is in a state of de facto depression, let alone recession.
The Rest of the Economy
Jobs and housing are, of course, not the entire picture of the economy. But their failure to recover is sufficient to prevent the rest of the economy from recovering, and thus ensure continued general stagnation long term. That term may last for 5 to 10 years, until sufficient fiscal stimulus is forthcoming. That was evident in previous Epic Recessions, such as 1907-14 in the US or in Japan from 1992-2002.
Other elements of the economy include what’s happening, for example, with manufacturing, the service sector, retail sales, business spending, consumption and household spending, and that aggregate indicator of all the above: gross domestic product or GDP. A look at these show a similar pattern in the first two years of the Obama administration. That pattern is an initial stemming of the rapid collapse of the economy, followed by a partial recovery of less than half of the initial decline, in turn followed by an extended stagnation period in which some sectors of the economy weaken and relapse once again. In other words, the pattern typical of a Type I Epic Recession, in which a deep financial and economic collapse is stabilized, followed by a weak and short recovery period that in turn softens and declines moderately once again. This weak up-down pattern can continue for years.
Services constitute 78% of the economy. Manufacturing another 10%. The above pattern is evident in both cases. The index representing the Services sector of the economy collapsed after August 2008 with the banking panic of Sept-October 2008. It fell from a level of 50 which represented no growth, to a low of 38 representing a deep contraction. It recovered slowly in 2009 back to 50 and a high of 55 in May 2010. Since then it has fallen again, however, indicating a relapse underway. The same trajectory is evident for manufacturing, falling from 50 to a low of 32, back to a high in April 2010 and since then a decline once more.
Business spending is another major part of the economy. Normally business spending varies annually from an increase of 6% to 9% annually, and never fell below 3% even in recessions. In 2008 it grew by only 1.5%, then fell to an unprecedented, negative –18% in 2009, the first such negative drop since 1945. Since then it has recovered only 3% of that decline. The current 3% ‘recovery’ further compares to business spending increases of 9%-10% 30 months after the start of the recessions in the 1970s and early 1980s.
The pattern is repeated with retail sales. After dropping 10%, it grew back 3.6% between August 2009 and August 2010. After rising the early months of 2010, it has leveled off and remained stagnant. In comparison to previous recessions, it has only recovered half of its decline, or 5%, whereas in recessions in the 1970s and 1980s, retails sales had recovered by 20%-22% after 30 months from the start of the recession.
The same story for consumer or households’ spending, which fell to -1.2% in 2009, the worse drop since 1942. It recovered in 2009 due in part to the stimulus, and the supplemental programs of ‘cash for clunkers’ auto sales subsidization and ‘First Time Homebuyers’ home sales subsidization by the federal government. Consumer price cutting and states’ introduction of ‘sales tax free’ holidays, have kept household spending from falling further once again. But full recovery has not occurred with consumer spending essentially flat for the last several months.
The picture is similar throughout the economy. What we see is a prevention of further collapse, a recovery of part of the deep losses, and a leveling out of the economy on virtually all fronts—except for jobs and housing which continue to decline. This is essentially a picture of an economy that was given fiscal stimulus in a composition and magnitude only sufficient to prevent further collapse—and that for a temporary period. It is not a picture of a program to create jobs, stop the collapse of housing, and generate a sustained recovery in general.
Obama’s Strategic Error
The Obama economic plan from its inception in February 2009 was never to create jobs directly or to rescue the increasingly imperiled home owner. That strategy was, first, to bail out the banks and financial system. That would ‘get credit flowing again’, as Obama and other members of his administration repeatedly declared. Getting credit flowing was the key to a market-driven economic recovery. The Obama strategy was designed only to temporarily put a floor under the collapse of consumption, in its worse forms caused by record jobless and housing collapse. Bail out the banks, get credit (loans) going again, and put a floor under the collapse of consumption for a year. That was the original stimulus program. The market would take over after the year. Banks would lend. Businesses would invest and expand. Jobs would return. Consumption would again rise. And recovery would be underway.
But it didn’t work that way. The banks were indeed bailed out, but they didn’t lend—at least not to small-medium businesses in the US that depend on bank loans to keep their businesses going let alone expand. Big corporations don’t borrow from banks. They raise funds via issuing corporate bonds and commercial paper. And they’ve raised bond funding in record amounts not seen in decades. They are fat with cash, from bond financing and from cutting labor and other costs to the bone. They have, as noted previously, $1.84 trillion on hand. But they aren’t creating jobs, at least not in the U.S. Similarly banks are not lending despite their $1 trillion in additional reserves accumulated over the last year—reserves due to borrowing at 0.21% interest rates from the Federal Reserve, from money injections from the Fed of more than $4 trillion (which was the real bail-out, not the paltry TARP spending by Congress of less than $500 billion), and from ‘trading’ (read: speculating) in offshore currencies, real estate, commodities, derivatives, etc. once again.
The refusal of banks to lend and businesses to invest in job creation are together the rocks upon which the Obama strategy has crashed. The assumption was the ‘free’ market would take over and continue the expansion of the economy. Government driven job creation and government driven homeowner rescue was never on the program table in the original Obama plan in the first half of 2009.
It soon became reasonably clear by mid-2009 this plan and strategy was not working. Congress therefore added further direct programs benefiting consumers: the auto ‘cash for clunkers’ program and the housing ‘First Time Homebuyers’ program. Both gave a modest boost to the economy in 2009, and then were discontinued. The mild recovery that began in late 2009 in terms of Gross Domestic Product, GDP, growth is attributable to those programs, a very mild contribution from the $787 billion stimulus, business rebuilding its inventories after the historic collapse of 2008, and a modest expansion of manufacturing activity driven by export sales, mostly to China.
But all those factors are now weakening by late summer 2010. Inventories have been restored as much as they will be. The Obama stimulus, as weak as it was, is dissipating, having run its course. Exports and manufacturing are weakening, as China purposely slows its economy and European countries gain the U.S.’s share of exports due to the falling Euro. Consumer spending in the US is going nowhere. State and Local government spending is falling. And housing is relapsing. Longer term, the prospect of cutting federal spending to address deficits, instead of raising wealthy taxes, looms large as a further problem for recovery in 2011.
Cognizant of this, some of the more prescient Democratic members of Congress have lately been rushing to shore up the cracks in the economic edifice. To try to get desperately needed loans to small business, Obama has recently proposed a $30 billion small business lending bill. But the bill is designed primarily to subsidize smaller, regional banks to entice them to loan to small business since the larger banks refuse to do so. Nothing near the (insufficient) $30 billion will get to the businesses that need it. Obama has also announced further a $50 billion infrastructure spending bill. Congress also passed an additional $26 billion funding for states, local governments and schools. All well and good. But one wonders if this is just pre-election posturing. Proposals to be used as campaign material, knowing full well they won’t pass Congress. Whether all that Machiavellian or not, the proposals, magnitudes and composition of spending in these latest proposals are once again ‘too little too late’. The mobilizing the Democratic party base with real programs for jobs, housing, and other reforms should have come in early 2010, with Obama’s first annual address to the nation. Now the trust and the fire is all but gone from that base, and it won’t be resumed with mere words.
There are several interesting historical parallels to the situation today. The situation is not primarily similar to 1937, as Paul Krugman and other liberal economists like to argue. They point out that we are about to repeat the error of 1937, when fiscal spending was cut as a consequence of conservatives in the Senate and among business interests focusingon the need to reduce the deficit. And it certainly is not 1993-94, as conservatives and Republicans like to remind, hoping to repeat the ‘Contract for America’ conservative takeover from a Democratic president (Clinton) forcing him to govern from a moderate Republican policy perspective thereafter. It is more similar to 1933-1934.
In 1933 Roosevelt bailed out the banks. The financial system was stabilized. Jobs were not the primary focus, except for getting a couple hundred thousand young men off the streets and into the forests as a result of the Civilian Conservation Corps. As a result of bailing out the banks the economy temporarily surged for the next 6-9 months. Industrial production nearly doubled. Prices rose. Businesses expanded inventories sharply in anticipation of higher prices and sales. Some jobs came back. After falling 89% the stock market boomed back 60% of that loss. But it was temporary. By year end 1933 it all flattened out. The economy moved sideways in 1934. Facing midterm elections in 1934, Roosevelt and his advisors planned and announced a more aggressive program of vast fiscal spending and job creation, including the Works Progress Administration. That’s when the New Deal was born. That fiscal stimulus resulted in a significant recovery of the economy in 1935-37. But that stimulus was stopped in its tracks in 1937-38 by conservatives, led by the Senate. The New Deal was reduced. The economy immediately fell back into depression in 1938. It never got out of depression, with unemployment remaining at 15% levels well into 1941. It wasn’t until 1942, with massive government fiscal stimulus that increased government spending to 40% of the economy, from the New Deal period of 17%, that a sustained recovery of the economy began.
This is the fall of 1934 once again. Not 1937 and certainly not 1993. Obama had the choice of a strategy similar to FDR. He hasn’t taken it. FDR excited the electorate in the 1934 Congressional elections with the promise of real recovery programs benefiting real people—not just the banks and wealthy. It paid off. But it is almost certainly too late for Obama and Democrats of today to repeat that event. Obama’s historical legacy will not be FDR. It will more likely be a repeat of Carter in 1978, another President who inherited a mess made by Republicans in the 1970s—but who for whatever reasons couldn’t or wouldn’t take advantage of the historic opportunity. The eventual result we all know: Ronald Reagan and three subsequent decades of declining living standards for 80% of households, consumers and workers in America—and the implementation of policies eventually leading to the current crisis.
Jack is the author of EPIC RECESSION: PRELUDE TO GLOBAL DEPRESSION, May 2010, Palgrave-Macmillan and Pluto Press, available on Amazon and in local bookstores.