Economic policy in Obama's first year

This appears to be the season for retrospectives on the Obama Administration's economic policies one year in. Joshua Green at the Atlantic and John Cassidy at the New Yorker profile Treasury Secretary Tim Geithner and George Packer at the New Yorker explains why the Administration has failed to turn its accomplishments on the economic front into political hay.

The story that emerges from these pieces is one of an Administration that has been amazingly competent at handling the most challenging economic crisis the country has faced since the Great Depression; but one that has been hamstrung by its focus on halting the economic slide rather than using the crisis to transform our economic institutions.

The government's response to the crisis had three major elements. First, the Federal Reserve took creative steps to halt the financial crisis and keep credit flowing to households and businesses. Second, a large fiscal stimulus package to stimulate aggregate demand. Third, a recapitalization (or bailout if you prefer) of large financial institutions, first through TARP and then with private money following the Treasury's "stress tests" of major banks. The Obama Administration gets full credit for about half of this suite of policies - the fiscal stimulus and stress tests - and partial credit for the other components. It could, after all, have forced the Fed to reverse course or abandoned TARP, but instead it supported these initiatives. And the program has been remarkably successful. A year ago most forecasters were predicting that the economy would not begin recovering until 2010 and that there was a real chance of a major depression. Instead, economic growth returned in the summer of 2009. While we have not seen job creation yet, the turnaround in that department is happening about as fast as anyone could reasonably have hoped.

Throughout, the Administration has chosen the practical measures most likely to stabilize the economic situation quickly. And this has been the source of its political troubles. The Administration may well have been better off politically had it taken a tougher line against the banks. Many observers from both the left and the right were calling for nationalization of the largest and most irresponsible banks. But Geithner and Obama calculated, rightly, that this would cause so much disruption in the banking system (for one thing, once the government nationalized one money center bank it would probably have ended up having to nationalize all of them) that the recovery would have been delayed by months or years. As Geithner put it, had we gone the nationalization route the government would have ended up owning 18 AIGs. Instead, the Administration sought to shore up existing institutions, trading off political damage for a quicker economic recovery. The same desire not to unnerve the financial system has led the Administration to propose a financial reform plan that restrains the activities of big financial institutions but does not break them up.

The design of the stimulus package also reflects the practical-mindedness of the Administration. The Administration's goal was to get a package through Congress as quickly as possible so that it would begin immediately to have an impact on the economy. As a result, the program was probably too small and contained sops to Senate moderates like the fix for the alternative minimum tax that would do nothing to stimulate the economy. Furthermore, the package forsook high-visibility projects that might have garnered political advantage for an under-the-radar approach that, while arguably more effective, have put Obama's entire agenda in peril. The Administration chose to focus spending on projects that would either have maximum short-term impact like road repair or grants for research into green technology. Fine ideas, but new buildings and new infrastructure would be a more visible demonstration to the public of how their money is being spent. The Administration did not help itself when it decided to put up big signs at highway construction sites touting the role of the ARRA - put the signs up when the road is completed you morons, not when they only serve to remind drivers why they're stuck in a traffic jam on I-95. Similarly with the tax cuts: the Administration chose to implement tax cuts by reducing the amount withheld from paychecks on the theory that consumers would spend more of the tax cut that way than if it came announced with fanfare in a shiny envelope with a picture of a smiling Barack Obama. But of course if you want people to appreciate the money you're giving them, the shiny envelope and the smiling picture is exactly what you want. In the end, the Administration accomplished with the fiscal stimulus something I would have thought impossible: it managed to spend $800 billion without getting any political benefit for it whatsoever.

I'm a big admirer of the Administration's economic efforts. It crafted a sensible and effective economic plan with a degree of maturity and practicality that we haven't seen from a presidential administration since - hmm, I can't even think of a precedent. (My one beef is that the Administration has not done enough to fight the foreclosure crisis that has been unfolding gradually over the last two years.) In one sense, I think Americans are getting better governance than they deserve. We're incredibly impatient and ignorant, often willfully so. We're quick to look for scapegoats and believe charlatans peddling crackpot economic theories. We have a government that tries to rise above this and has paid a steep political price. On the other hand, part of governing is leading - convincing the public to buy into your agenda so that it has some staying power in the long run. Obama's failure in this regard - his failure to put his policies into a context that people can understand and that lays the groundwork for his future agenda - is a real one. Ronald Reagan did it right: while his economic policies were wildly unpopular in the first two years of his administration, he kept hammering on the ideology, and when the economy turned people gave him and his policies the credit. Obama needs to do the same or he will pass up an enormous opportunity for progressive change in the years to come.