Obama and Unemployment, Research Paper Example

In 2008, Barack Obama was elected president after running a campaign that inspired people in a way few American politicians have ever managed. Perhaps the only thing that matched the passion his supporters showed for him was the passion his detractors felt against him. Almost three and a half years later, his first term is coming to an end, and the American populace has shown some dissatisfaction with him evidenced by the losses suffered by his party during the 2010 midterm national elections. Yet, Obama not only still has a good chance of a second term, but is likely the favorite in the upcoming election.

Obama, as his campaign is willing to remind anyone, became president during a particularly tumultuous time for the country. The country was embroiled in two separate wars, each month brought a new record national debt, millions were without health insurance despite skyrocketing amounts being spent on it, several nations were perceived as growing threats to America, and to top it all off, years of falling asset prices culminated in a financial meltdown that launched America into the largest recession since the Great Depression just before he took office. His presidency has been about responding to these problems, and while the efficacy of his actions is contended by both major parties, it is on these issues he will mostly be judged.

“It’s the economy, stupid.” This famous slogan from the 1992 presidential election used by the Clinton campaign explains a general nature of elections that feature incumbents matched up with challengers. When the economy is good, the incumbent can be expected to win and the challenger is more likely to take it when the economy is sagging. Despite the parties being reversed, the 1992 election shows some superficial similarities to the upcoming one. George H.W. Bush received high approval rates for his handling of Iraqi invasion of Kuwait, similar to how Obama was able to order significant withdrawals of troops from Iraq and Afghanistan while still eliminating high profile Al Qaeda members, such as Osama Bin Laden. Yet, both incumbents faced reelection during economies judged to be below par. Bush was unable to overcome this situation; the question is whether or not Obama can succeed where Bush failed.

Of course, there can be disagreement about what constitutes a bad economy and therefore disagreement about what kind America is currently facing. The national unemployment rate is currently 8.3%[i], well above the historical average of about five percent, but down from the ten percent peak it hit during October of 2009. The economy has grown every quarter since then as measured by GDP after that, which was in the midst of the fifth consecutive quarter of a shrinking economy[ii]. Unemployment might be falling more slowly that preferable, but there is undeniable progress.

Yet, clearly this is not the image the Republican candidates are trying to portray of the economy. If they can convince people that the economy is growing slowly due to Obama’s mishandling of it that will significantly damage his hopes in the general election. The constant drumming on this issue by the other party is likely an attempt to convince the American populace that their narrative of the economy is the correct one, since there is little doubt that the election will hinge on the economy. Obama’s approval rate has moved in opposition to the unemployment rate, going up when unemployment falls and vice versa.[iii]

The facts about the economy are quite limited. It was terrible in 2009 and is better now, but still sub optimal. Something has happened to help it improve while something else is holding back recovery. What those things are is up mostly to interpretation. The Obama campaign would likely say that their efforts have been driving the economic recovery and only a reluctant Congress has slowed down their efforts. Yet, the Republican story seems to be that an economic recovery is natural and it is the high tax and regulation proposed by Obama holding back a private sector driven recovery.

The first way to figure out what has happened is to look to standard economic theory about the business cycle. The classic account was that when an economy was struggling, gluts of goods and labor developed, sinking the prices for these items. These lower prices made investment more lucrative, causing companies to put money into the economy and causing it to grow. Essentially market forces served to self correct any economic issues. However, this theory changed during the Great Depression largely due to writings by John Maynard Keynes. Keynes said that prices did not automatically drop to their market clearing levels. They were in fact sticky due to costs associated with changing prices and the difficulty in removing trained labor and replacing it with lower paid workers. To Keynes, while an economy could self correct, it was not wise to wait around for it do so. He said that stimulus should be undertaken by fiscal and monetary authorities until the economy reached full employment and growth again.

Obama’s campaign promises largely fit into a Keynesian account of the business cycle. He promised to extend unemployment benefits and cut regressive taxes such as the payroll tax and unemployment insurance to help those at the lowest end of the economic spectrum.[iv] This fits in with the idea of fiscal stimulus, where the objective is to quickly get money to the citizens so they can spend it and provide money to businesses which can begin investing it. This is the multiplier effect, where putting some little amount of money into an economy causes it to increase more than just the amount you put in.

However, the biggest part of Obama’s fiscal stimulus strategy is probably the second most controversial legislative achievement of his presidency, behind only the healthcare reform undertaken. The American Investment and Recovery Act was the main attempt at revitalizing an ailing economy. Its cost was almost eight hundred billion dollars, aimed at increasing the amount of spending power Americans had, with secondary objectives such as repairing infrastructure and also making a more green economy. Many liberal economists saw this as the main thing that prevented the recession from turning into a full blown depression. However, they would have liked to see either a bigger stimulus or a second stimulus, something the minority of Republicans in Congress managed to prevent.

“Romer argues that a $1.8 trillion stimulus would be needed to fill in the anticipated output gap …But Larry Summers considered that figure unrealistically high — they would be laughed at by the political team — so the memo that reached Obama’s desk described an $850 billion stimulus as the largest possible option.”[v]

Romer refers to Christia Romer, the head of Obama’s Council of Economic advisers, while Larry Summers was another economic advisor to the campaign. The point is that the stimulus was not even half as big as the one desired by the economists. To someone supporting stimulus, this would mean that the stimulus is driving the recovery, but reluctance to pass a larger one is the issue still plaguing the economy.

Obviously, the Republican account of things is much different. To them, most of the issue with the economy is caused by the deficit. This is because their interpretation generally sees the strength of an economy as residing in the private sector. Businesses drive the economy, but they are rational actors who expect the United States to begin paying down its debt someday in the future. Therefore they expect either higher taxes, cut downs in government contracts going either to them or interlinked businesses, or both. The result is that they are sitting on any profits they manage to make in anticipation of needing it to weather the economic storm that will come through austerity.

Therefore, the theory is that the stimulus, which significantly increased the deficit, just made people more reluctant to spend, making it a self defeating policy. Not only is the deficit in play, but Obama has a reputation for being more skeptical of markets than Republican presidents would be. Whether or not this reputation is deserved is not essential, if the market actors believe he is not a believer in markets, they will act as such. Perception will become reality. So, if they believe this about him and expect more regulations to come, it will depress investment just as the increased deficit spending does. This theory of regulatory uncertainty appears directly on potential Republican candidate Mitt Romney’s website. “A new regulation can suddenly transform a profitable investment into an unprofitable one or render employees unproductive. This produces uncertainty with all its attendant economic ills.”[vi] So the narrative being pushed by Obama detractors is that the private sector is pushing the recovery and it is Obama’s attempts to stimulate the economy holding it back.

One area with significant influence not being talked about much is monetary policy. The Federal Reserve, which sets the nation’s monetary policy, has a dual mandate to promote both full employment and low inflation rates. Yet during this recession they have seemingly been more interested in the idea of price stability than they have been with any attempts to increase employment levels. The Federal Reserve position under Ben Bernanke seems to be that price stability is that leads to full employment. “Stable prices in the long run are a precondition for maximum sustainable output growth and employment as well as moderate long-term interest rates.”[vii] The theory here being that low inflation will necessarily lead to full employment eventually, yet clearly this is not happening.

The main reason that this area is not getting a lot of attention is probably the politically impartial nature of the Federal Reserve. Barack Obama cannot tell them what to do and positions on the board for the Federal Reserve are so long term that is members are largely insulated from any political pressures. However, this does not necessarily mean that there is nothing Obama can do to influence their policy. The Federal Reserve Board of Governors currently has three vacancies and just four members. By nominating three members who will push for more employment related goals, he could potentially change the Federal Reserve’s goals. This could be a large boon to his campaign as in the past monetary policy has been considered more effective than fiscal policy for stimulus purposes.

So, while it is clear that something has happened to improve the economy and that something else is stopping it from growing even more, it is unclear what those two things are. Obama supporters would say that he has been a large part of the solution, with the stimulus, and that the problem rests in his opposition, who will not allow him to pursue more stimuli. However, there could be two potential ways around this problem. For one, he could offer substantial budget cuts in the future for temporary stimulus which could alleviate Republican concerns. He could also try and change the makeup of the Federal Reserve until it strives to fix the employment issue in this country. Both of these due require Republican support and since they see him as a large part of the problem it is not clear it that will be there for him.

So, heading into his reelection, Obama is dependent largely on an economy he is unable to fix through his preferred policies. Luckily for him, the outlook is improving and he may be able to win even without stamping his authority on the recovery. Republican opponents will surely try to point out that the economy is still not in an ideal position, but Obama could correctly point out that it was a whole lot worse when he got in, and it really could still be. Oddly, after running such an idealistic campaign with lofty ambitions, his best bet this time could be to tell Americans their bleak situation is better than the counterfactual.

[i] Bureau Labor Statistics

[ii] Trading Economics

[iii] Brian Smailowski

[iv] Obama Watch

[v] John Chait

[vi] Mitt Romney Campaign

[vii] Daniel Indiviglio

References

Chait, John. “The Secret Romer Stimulus Memo — Daily Intel.” New York Magazine. http://nymag.com/daily/intel/2012/02/secret-christie-romer-stimulus-memo.html(accessed March 23, 2012).

Indiviglio, Daniel. “Is The Fed Doing Enough To Curb Unemployment? – Daniel Indiviglio – Business – The Atlantic.” The Atlantic. http://www.theatlantic.com/business/archive/2009/12/is-the-fed-doing-enough-to-curb unemployment/31236/ (accessed March 23, 2012).

“Bureau of Labor Statistics Data.” Databases, Tables & Calculators by Subject. http://data.bls.gov/timeseries/LNS14000000 (accessed March 23, 2012).

“President Barack Obama’s Economic Promises.” Tracking Barack Obama’s Campaign Promises – The Obama Watchers Wiki. http://obamawatch.wikidot.com/economy promises (accessed March 23, 2012).

“Regulation.” Mitt Romney for President | Mitt Romney for President of the United States of America in 2012. http://www.mittromney.com/issues/regulation (accessed March 23, 2012).

Smailowski, Brian. “Unemployment Rate Key to 2012 Election – ABC News.” ABCNews.com – Breaking News, Latest News & Top Video News – ABC News. http://abcnews.go.com/blogs/politics/2012/01/unemployment-rate-key-to-2012-election/ (accessed March 23, 2012).

Trading Economics. “United States GDP Growth Rate.” Economic Data for 196 Countries. http://www.tradingeconomics.com/united-states/gdp-growth (accessed March 23, 2012).