RSS Feed MenuThe 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.
teabag // Jan 30, 2010 at 9:01 pm
I didn’t say tax rebates are successful. I don’t believe that they are. They are however a tax cut given in a lump rather than spread out.
Personally I would rather had that money spent on our crumbling infrastructure for all the good it did as a tax cut. It was only introduced as a third of the stimulus in order to try and get some bi-partisan support. That worked out well.
LauraNo // Jan 30, 2010 at 9:06 pm
I’m already tired of the canard that Bush ’spent like a drunken liberal’. Look at history, you ‘conservatives’ who live on that lie. You supposedly revere history even in the face of actual ‘facts on the ground’. If that were true, you would understand as well as the rest of us that that is a fallacy. They all spend, because the people WANT it. Move on and figure out how to talk honestly about the problems we are facing. Or forget your idea of a conservative come back.
teabag // Jan 30, 2010 at 10:10 pm
SdSpringy said.
“One of the great myths of people like you Teabag is that Clinton reduce spending, thus balancing the budget. Clinton did absolutely nothing of the kind. ”
You seem ill informed about the budget process.
The President presents a budget. The congress looks at the budget then amends as they see fit.
Then the President can either sign of veto that budget. Grinrich did bring the government to a halt in the most irresponsible manner together with the criminal Delay. Not a high point in GOP history.
Jim_M // Jan 30, 2010 at 10:31 pm
M A S S A C H U S E T T S. N E W J E R S E Y. V I R G I N I A.
Bad Moon Rising….
kevin47 // Jan 30, 2010 at 11:53 pm
“I’m already tired of the canard that Bush ’spent like a drunken liberal’. Look at history, you ‘conservatives’ who live on that lie.”
It’s not quite a lie, but I agree with you, by and large. Bush’s fiscal policies were relatively right leaning.
Sinz makes a fair point about the unemployment rate, though it’s worth noting that this generation is not accustomed to LBJ-Nixon-Carter level unemployment. How they will respond, and whether they (we) will tolerate 8.5% unemployment over the long haul remains to be seen.
My goodness, this Teabag guy is but prolific.
pieteronvashon // Jan 30, 2010 at 11:53 pm
David, where is the olive branch from the “new GOP” to Obama? Where’s the loyal opposition? Be the change you want to see!
BoolaBoola // Jan 31, 2010 at 12:34 am
Now! Now! NOW! David wants his economic recovery NOW! If it doesn’t start in three months, David will hold his breath until he turns blue!
balconesfault // Jan 31, 2010 at 2:08 am
The tax cuts of 2003, or the Bush tax cuts resulted in an increase of tax revenue.
Actually, better to say “coincided with an increase of tax revenue”.
Since the economy was pumped up also by extremely low interest rates spurring a construction boom, as well as the government ramping up spending on military procurements. These both produce an increase in tax revenues.
In fact, what is most telling about the years following the Bush tax cuts is that between 2000 and 2003, the US economy actually shed 2.5 million jobs … and almost 3 million jobs in the goods producing sector.
In fact, manufacturing jobs in America experienced almost a straight line decline throughout the Bush Presidency, from 17.3 million in 2000, to 13.4 million in 2008.
Construction jobs offset that for awhile, growing from 6.8 million in 2000 to 7.7 million at its peak in 2006 (slumping to 7.2 million in 2008).
What other sectors grew coincident with the Bush tax cuts?
Financial services: 7.7 million (2000) to a peak of 8.3 million (2006).
Professional and business services: 16.7 million (2000) to a peak of 17.9 million (2007)
Education and health services: 15.1 million (2000) to a peak of 18.9 million (2008)
Leisure and hospitality services: 11.9 million (2000) to a peak of 13.5 million (2008)
Oh – and government: 20.8 million (2000) to a peak of 22.5 million (2008)
That’s the real economic growth following Bush’s tax cuts. Increases in construction, financial services, hospitality services, professional and business services, education and health services …
And government.
The tax cuts kicked off a decade of buying things from abroad, building ourselves more McMansions and pretty office buildings, lots of creative investing schemes, more money on healthcare and education and recreation. Kind of like a multi-year process of Americans spending on making ourselves feel good, until the bubble burst.
But again, our manufacturing employment steadily declined. If the tax cuts were intended to stimulate renewed investiment into our industrial sectors, it failed very, very badly.
teabag // Jan 31, 2010 at 9:15 am
Kevin47I know that Rightys just don’t do facts.
Like every Democrat President had reduced the deficit and almost every modern Con President has increased it.
Facts that prove the Fiscal Conservative lie. But hey live in your Rushworld.
sinz54 // Jan 31, 2010 at 9:23 am
LauraNo: Move on and figure out how to talk honestly about the problems we are facing.
balconesfault: The tax cuts kicked off a decade of buying things from abroad, building ourselves more McMansions and pretty office buildings
You couldn’t buy an office building or a McMansion with a 10% tax cut.
What kicked off the spree of real estate buying was Greenspan’s lowering of interest rates to what was a historic low at the time. (Money market funds were yielding only 0.5% annually!!!) The Fed did this in the wake of 9-11, to head off what appeared to be a major recession, as airlines and auto rental agencies went bankrupt as Americans feared to travel by air.
Every time the U.S. has had a recession in the last 20 years, the Fed has responded with dramatically low interest rates. That worked–temporarily. But you can’t live large indefinitely on a credit card. And the willingness of the U.S. to live indefinitely on loose cheap money is going to threaten the dollar as the world’s reserve currency.
The real problem the U.S. is facing is that the manufacturing and industrial base of the U.S. has slipped away to nations whose labor forces are cheaper. College-educated workers in high-tech businesses will survive. But it leaves the non-educated part of the U.S. work force–the blue collar guys who aren’t college material–out in the cold, literally. With the bankruptcy of General Motors and Chrysler, this problem can’t be ignored anymore. With the debt bubble exploded, the standard of living in the U.S. is likely to stagnate or even decline, unless we can reindustrialize America somehow.
teabag // Jan 31, 2010 at 10:27 am
With the bankruptcy of General Motors and Chrysler, this problem can’t be ignored anymore.”
You mean the Communist socialist fascist takeover of Government Motors surely. Most on the right would have wished the motor companies to close down and the big banks to fail. They live in Rushworld.
balconesfault // Jan 31, 2010 at 8:35 pm
Sinz: You couldn’t buy an office building or a McMansion with a 10% tax cut.
What kicked off the spree of real estate buying was Greenspan’s lowering of interest rates to what was a historic low at the time.
Did you not read my whole post?
“Since the economy was pumped up also by extremely low interest rates spurring a construction boom”
The tax cuts kicked off the decade. It set a tone that the budgetary discipline that we saw during the 90’s was out the window. The public followed the lead.
JonF // Feb 1, 2010 at 6:49 am
In regards to TARP (a program passed at the insistence of the Bush administration) it has done exactly what we wanted it to do: prevent a massive meltdown of the financial system. What’s more it has come in under budget. While it may not have been perfect, it has been a success. And yes, the Bush administration also deserves some credit there.
sinz54 // Feb 1, 2010 at 9:19 am
JonF: In regards to TARP (a program passed at the insistence of the Bush administration) it has done exactly what we wanted it to do: prevent a massive meltdown of the financial system.
I agree.
Even National Review had to grit its teeth and accept TARP as a necessary evil.
Note who was against it: The loons on BOTH the left and the right. In Congress, the opposition came from the semi-socialists of the Congressional Progressive Caucus and the rightists like Jim DeMint and the other free-market purists.
sinz54 // Feb 1, 2010 at 9:30 am
kevin47: Sinz makes a fair point about the unemployment rate, though …. whether they (we) will tolerate 8.5% unemployment over the long haul remains to be seen.
That’s been made more difficult by the lack of proper leadership from the Obama Administration.
Obama raised expectations by his strong hint that the stimulus package, once passed, would start reducing unemployment almost immediately. (And of course it didn’t.) He let his VP, Biden, release this totally false prediction that unemployment would hit 9% without the stimulus package, only 8% with the stimulus package, and decline almost immediately thereafter:
http://tinypic.com/r/14tniao/6
Now the CBO estimates that the unemployment rate in 2011 will be about 3 percentage points higher than Biden had “forecast.” That’s a blunder comparable to the Bush Administration’s “prediction” that our troops would be welcomed in Iraq as liberators.
I remember how Reagan handled the economic crisis he walked into in 1981. He repeatedly pleaded with the American people for patience, suggesting that an economic malady that took years to develop can’t be solved in a single year. By lowering expectations that way, it was possible for the economic recovery to stretch through the first 3 years of his first term without losing the support of the American people. (Though they did vote in more Dems in Congress to keep an eye on him.)
Good leaders never raise expectations past probable scenarios, as Obama-Biden did.
“I have nothing to offer but blood, toil, tears, and sweat”
— Winston Churchill
balconesfault // Feb 1, 2010 at 11:30 am
Even National Review had to grit its teeth and accept TARP as a necessary evil.
Note who was against it: The loons on BOTH the left and the right. In Congress, the opposition came from the semi-socialists of the Congressional Progressive Caucus and the rightists like Jim DeMint and the other free-market purists.
Sinz, here are the Democrats in the Senate who voted last January for stopping the release of TARP funds:
Bayh (IN), Cantwell (WA), Dorgan (ND), Feingold (WI), Lincoln (AR), Ben Nelson (NE), Shaheen (NH), Sanders (VT), Wyden (OR)
Are you calling Bayh, Dorgan, Lincoln, and Nelson semi-socialist loons, or free-market purist loons?
FWIW, 33 Republicans voted to block the release of TARP funds. I’m going to assume that they’re not semi-socialist … so does that mean that 33 of the 41 Republican Senators at the time were free-market purist loons?
balconesfault // Feb 1, 2010 at 11:35 am
I remember how Reagan handled the economic crisis he walked into in 1981. He repeatedly pleaded with the American people for patience, suggesting that an economic malady that took years to develop can’t be solved in a single year.
From Barack Obama’s Inaugural Address:
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.
It constantly seems to me that people would think much higher of what Obama has been trying to do if they listened to what he has been saying, rather than simply to the Fox News excerpts.
WillyP // Feb 2, 2010 at 11:00 am
What got us here? Loose money (from the Fed) and government induced lax-lending standards.
What have the effects been? Widespread bankruptcy, and an insolvent banking/financial system.
What have we done since the crisis? Prop up illiquid banks and homeowners.
What have the results been? Continued stagnation, mounting unemployment, tight lending, more debt, and higher gold prices.
What is the proposed course of action in the future? More of the same.
What have the RINOs said through all this? Give Obama another chance. He’s really not a radical. It’s those tea partiers who are out of hand! Not the post-racial president!
Now that we’re all on the same page….