Obama's First Year: Progress, but a Long, Hard Road Remains
%%DynaPub-Enhancement class="enhancement contentType-HTML Content fragmentId-1 payloadId-61603 alignment-right size-small"%% As an economist colleague noted, the U.S. had so many economic and other problems facing it in January 2009 that one presidential term wouldn't be enough to solve them. Two full-length administrations -- 16 years -- would be needed instead. Under such circumstances, any new Commander in Chief might reasonably lament: Why did I run for this job in the first place?
Making Up for Lost Time
Looked at in the light of the above issues, the Obama administration's year-one personality was that of a man trying to make up for lost time: the eight years of errors and policy failures that created many of the problems that greeted the nation and Obama in January.
And it's a good thing the administration took that stance, because it led to actions that history may ultimately show were the correct decisions, made in the nick of time.
From the outset, Obama successfully reassured the financial markets by expressing his administration's support for the financial stabilization/bank bailout proposed by his predecessor, George W. Bush, and passed by the previous Congress. The $700 billion bank bailout, although flawed and controversial, nevertheless was and is stabilizing the banking sector. Combined with special credit facilities created by the Federal Reserve, the bailout prevented more major financial institutions from following Lehman Brothers, the collapse of which had deepened the financial crisis, into failure.
Obama's commitment to the bank bailout signaled to Wall Street and international markets that the U.S. would maintain a stable monetary policy -- something that institutional investors demand, and have come to rely on.
A Key Vote for Ben Benanke
Equally significant, Obama let the financial markets know that he and Fed Chairman Ben Bernanke were of similar minds, and that the administration would neither attempt to restructure the Fed nor alter its monetary policy authority. This signaled to the markets that the Fed would remain the Fed, and that Bernanke, a Harvard scholar and expert on the causes of the Great Depression, would have wide latitude to deploy new tools to combat the financial crisis. More than any other action, this vote of confidence in the Fed, and its role in the economy, may have proved pivotal in keeping the nation from falling into the financial abyss.
This doesn't mean Obama's fiscal policy hasn't been important in getting the nation's economy moving again. It has, and in a big way. In February, Obama, supported by his Democratic congressional coalition, passed a $786 billion fiscal stimulus package. Even though the U.S. economy at the end of 2009's third quarter wasn't growing robustly, the trajectory of U.S. GDP had not only changed but it had reversed. An economy that had been experiencing a severe contraction grew modestly in the third quarter at a 2.2% annualized rate.
Further, state government balance sheets were bolstered by federal aid, an act that averted hundreds of thousands of public sector layoffs at the state and local levels. Unemployment insurance was extended -- which served as a modest economic stabilizer and helped put a floor under the economy. And businesses and individuals received more than $275 billion in tax cuts and credits to help stimulate U.S. GDP growth.
More Stimulus Would Have Been Better
The stimulus package's primary flaw -- that it probably was too small -- was something Obama could hardly change. Given the size of the GDP hole created by the recession, it probably would have taken a $1.2 trillion to 1.4 trillion stimulus package to move the economic needle to robust growth, but moderate and conservative Democrats wouldn't support a package that large, so the Obama administration compromised down to the $786 billion total.
Then in March, Obama supported the government bailout of General Motors and Chrysler, renewing loans for them. Like the bank bailout, the automakers' was highly controversial and hotly contested in Congress, with a majority of Americans saying the government shouldn't not provide such aid because they felt the carmakers' problems were largely of their own making.
Still, the cessation of GM's and Chrysler's operations during a deep U.S. recession was considered by Obama and other officials to be an unacceptable option. It would have led to millions of additional layoffs in auto-related industries. As of the end of 2009, the nation still doesn't know how much of that government aid GM and Chrysler will repay, but one thing is certain: The bailouts bought time for the manufacturers to determine their niches in a global auto industry, and it kept thousands of support factories and suppliers from being idled.
Foreclosures and Scant Credit Availability Linger
Still, all this doesn't imply that the Obama administration was perfect. Indeed, it has had its share of policy failures and mistakes. Its most glaring underperformance lay in its efforts to encourage banks and mortgage lenders to refinance home mortgages. Quite simply, banks aren't voluntarily refinancing enough at-risk mortgages, writing-down loan principles or otherwise restructuring loans to help keep more American families in their homes. As a result, the foreclosure rate remains too high, and a new wave of foreclosures could occur if unemployment doesn't decline in 2010.
Second, credit markets may have healed from a banker-to-banker standpoint and are in much better shape than they were at the end of 2008, but they're still not normal yet for borrowers. Small and midsize businesses still find it tough to get financing to expand their operations, even demand is increasing. Given that these businesses account for most of the new jobs created in a recovery, this problem could weigh on both GDP and job growth if it's not solved.
Facilitating job growth remains Obama's great task ahead. If money is the mother's milk of politics, then job growth is the lifeblood of high presidential approval ratings. All of Obama's achievements to-date -- including the landmark, civilization-advancing, health care reform legislation -- won't make him a success in the eyes of the American people if job growth doesn't resume. That's because for most Americans, a good job with a future is the key to achieving the American dream of a better life for themselves and their children.
It All Comes Down to Job Creation
Hence, whether it's via organic growth, American ingenuity, increased exports, tax credits and/or stimulus spending, Obama must find ways to help the nation create millions of new jobs annually to reduce unemployment to normal levels. There are no exceptions to this performance requirement: If Obama fails, he'll be voted out of office in 2012. If he guides the economy in a direction that creates millions of jobs, the American people will reelect him.
Obama gets this. He recognizes the link between economic success and presidential success. He has the look of a man who understands the weightiness of his times and the enormity of the problems facing the nation. Even amid a partisan, polarized Washington, he's ready for year two.
Financial editor Joseph Lazzaro is writing a book on the U.S. presidency and the U.S. economy.