This morning, I came across a letter (opens .pdf-like document) written by Larry Summers, President Obama's chief economic advisor, to Congress on Tuesday. In the letter, Summers essentially gives the Obama administration the credit for the improvement in the economy and explains what actions are needed to keep the economy strong. I'd like to tackle Summers' explanation of why the Obama administration deserves the credit for the economy's improvement.
Let's look at the each of the administration's actions Summers claims resulted in the economy improving:
The stimulus definitely helped, no question. When you throw money at people, they feel better. That's probably the most obvious economic conclusion imaginable. The tax cuts probably did the most good, as many of Congress' spending measures have been struggling to get off the ground. I find this statement amusing:
Importantly, the Recovery Act will gain momentum over time, peaking during 2010 with about 70 percent of the total stimulus provided in the first 18 months.
Importantly? I would have used the word "unfortunately." Maybe I'm crazy, but spending that peaks a year after the bill is passed and is still one-third unspent 18 months later doesn't sound like particularly effective stimulus to me. Although the stimulus has helped, its design was certainly poor, as the statement above shows. After all, virtually every government economist predicted that we would be out of the recession by 2010, and well into recovery 18 months later.
Financial Stability Plan
Maybe this made the markets feel better, but the Obama administration did not really do anything to stabilize the financial system. They did stress tests, which might have had the effect in leading investors to believe that the government would step in after asserting that an institution was sound but still ended up having trouble. I'm not sure that's a particularly impressive outcome, as they might as well just formally guarantee all the big banks if that's their game.
Then there's the toxic asset purchase plan, the "Public-Private Investment Partnership," that also has yet to get off the ground. The reality is that the Bush administration was far more responsible for stabilizing the financial system after former Treasury Secretary Paulson stepped in and bailed out the banks. After that, it just took investors some time to realize that the storm had passed.
Another quote from Summers:
. . . approximately 200,000 trial modifications have begun so far.
According to the government's financial stability website, the plan hoped to help between 7 and 9 million struggling homeowners. Using the middle of that range (8 million) as their goal, that means they're 2.5% of the way there. That's after five months. At this rate, it will take nearly 17 years to reach their goal. I'd hardly call that a slam dunk.
Financial Regulatory Reform
Sure, if they pass some then they can start bragging about it. They haven't. The credit card regulatory reform is all that has really passed, but that was set into motion in the fall of 2008 by Rep. Carolyn Maloney (D-NY). It just took her until this spring to have the votes to get it passed. That credit card regulation was also vastly redundant to measures the Federal Reserve had already set into motion at the end of 2008. I would also note that credit card company practices had virtually nothing to do with the financial crisis or broader recession.
So should the Obama administration get credit for saving the economy? Not based on these assertions by Summers. The stimulus probably helped, but I'd argue that the U.S. would still be headed in the right direction without it. Maybe unemployment would be a little higher and GDP a little lower, but there would still be a vast improvement over the trends we saw in the first quarter of 2009. If they deserve any credit, it would be for keeping the economy on a steady course. They renewed Bush's pledge not to allow any big banks to fail (for better or for worse) and didn't do anything crazy like raise taxes. But to cite these actions as the basis for our economic improvement seems more politics than substance.