How Much Credit Does Obama Deserve for the Stock Market Recovery?

The president set the floor under the Great Recession. Multinational corporations used it as a trampoline.

615 obama banard college.jpg

For a president who is supposedly bad for business, Barack Obama has been surprisingly good for business.

In his term, the S&P 500 is up 80%. The Dow has gained nearly 70% -- "the fifth best for an equivalent period among all American presidents since 1900," according to the New York Times.

How much credit does the president deserve for the stock market?

Screen Shot 2012-10-22 at 11.52.47 AM.png
Obama's inauguration interrupted a financial meltdown that had already destroyed a third of the Dow's value in 2008. There was catch-up growth to be had, but only after the president attended to the crisis. Some Obama critics claim the president talks too much about his first few months on the job. This is a little like telling a hero-firefighter to shut up, please, about the father, mother, baby daughter and seven kittens he rescued from that burning house, once. The president parachuted into the worst financial conflagration in 80 years, saw a million jobs disappear in his first two months, passed a stimulus, expanded TARP, instituted stress tests, and got the economy back to growing after only months.

That is something to talk about and take credit for.

The stimulus probably pulled growth forward a few months. But it's the stress tests -- and their implicit promise that government capital stood ready to rescue banks that couldn't find money in the private market -- that put a hard floor under the financial crisis. Years from now, when a fuller history of the government's response to the recession is written, the coordination between the Federal Reserve and the Bush/Obama administrations will likely go down as a hallmark of fast and effective crisis relief. The Obama administration clearly deserves credit as a part of that team.

But what about the next three years? Some conservative critics have said Obama played a good firefighter but a bad executive. It is the economic version of the "good war-time president/bad peace-time president" argument.

There is scarce evidence that the president's most important pieces of legislation -- financial reform and health care reform -- are having much of an impact on growth or employment. In fact, the most important drivers of growth or uncertainty are utterly out of the president's hands. Recently, China and Europe have scared multinational companies and hurt global trade. But there's not much a U.S. president can do to clear China's housing stock or badger the Germans into accepting higher inflation. Here at home, the president hasn't made much more luck in the persuasion department. Since the Recovery Act, the president has come up empty with pleas for more stimulus, settling instead for extending and expanding tax cuts passed under Bush.

Most of the stock market growth in the last three years has occurred neither because of, nor in spite of, the president's policies. This shouldn't come as a huge surprise. The president controls one branch of government, the federal government accounts for merely one-fourth of GDP, and today the U.S. economy is merely a slice (albeit a big slice) of multinational companies' revenue pie.

Most of the stock market recovery has reflected natural (if unsatisfying) growth both here in the U.S. and abroad, where U.S. multinationals are expanding and economies are growing sometimes twice or three times faster than the U.S. Weak job growth has helped to keep labor costs down and improved profits. Finally, in the last six months, the news from Europe and China has mellowed from quasi-apocalyptic to merely-extremely-concerning, and some of that relief has probably buoyed stocks.

In the last two or three years, the market has been driven by catch-up growth, fairly strong global trade, a dash of medicine from Ben Bernanke and Co., and now (we hope) a real-honest-to-God housing recovery. The administration deserves tremendous credit for being part of the team that oversaw the stabilization of the U.S. economy -- but it's not fully responsible for the jittery ascent (or, occasionally, jittery descent) of the stock market. Basically, Obama set the floor and some stocks used it as a trampoline.

Update: Commenter FranklinDMadoff points out that German and UK stocks have tracked the U.S. fairly closely over the last five years. Here's that picture: [UK index in BLUE; German in GREEN; S&P in RED; Dow in PURPLE]

Screen Shot 2012-10-22 at 2.14.05 PM.png

I'd also point out that the European recession has created quite a bit of distance (up to 20%) between EU and US stock indices in the last two years.

Screen Shot 2012-10-22 at 2.15.33 PM.png

What do the synchronicity in the first graph and the gap in the second graph suggest? That nation-by-nation policies matter -- which means presidents matter and party control matters -- but there are also huge international trends and figures (Chinese exports, commodity prices, European GDP figures) that move the whole world, and no U.S. president can plausibly claim to control them.