Is Obama stuck in the Bush trap?
By Daniel M. Ryan
In order to see what I'm driving at, try to remember what life was like eighteen months ago. Back then, the recession was mild; there was real doubt that there would be a recession at all. Good feelings promoted by the Bush stimulus, or so the story went, had turned second-quarter '08 GDP positive: 1.9% annualized. Those who noted that the bulk of the stimulus checks didn't affect second-quarter growth had even more reason to be optimistic. If the Bush stimulus wasn't responsible, then the growth rebound was natural.
Fourth quarter 2007 GDP was negative, but the first quarter of '08's was effectively zero. The second quarter's postivity indicated to many (including myself, admittedly) that there wouldn't be a recession. It was going to be 2001 all over again, only a little bit better. The only serious dissenters, outside of partisan Democrats, were the doomster circuit. They kept pointing to the housing market and calling it a collapsing bubble that still had a long ways to go. They extrapolated outright carnage in the housing market, widespread defaults, a credit collapse, and a new Great Depression. And they were right with the first three. Few people would doubt the claim that, had the U.S. government not thrown everything including several kitchen sinks at the crisis, the housing-bubble doomers would have had a perfect score. The day Lehman Brothers failed, September 15th, everything changed.
Undoubtedly, there will be arguments about whether or not Lehman's collapse merely shed light on the coming carnage or changed a mild recession into a near-depression. AIG imploded a month later, dragged down by a confidence crisis in the derivative market engendered by Lehman's collapse. That firm is notorious for (amongst other things) being the trigger for the second Bush Administration stimulus, TARP. Dubbed a "rescue package," it was a thinly-disguised bailout. But it was also designed to repair the teetering credit system and prevent more serious economic declines. The underlying idea behind TARP was similar to what's in this paragraph and the last: lack of confidence in the financial system is what turned another '02 into another '74, which came close to being another '31.
That view did not prevail. Instead, the more gut-level view prevailed: the financial crisis was an accident waiting to happen because the early- and mid-'00s were a bubble economy. Bubbles implode, and a bubble economy wrecks the economy once it deflates. With this view comes the conclusion that Lehman, AIG and the others were merely the most visible symptoms of a structural economic problem. Major failures were all-but inevitable. Had the day of reckoning been averted in the Wall Street part of the woods, the carnage would have manifested itself elsewhere. It's this view that's been taken to heart by many.
TARP, of course turned into a "TRAP" for the Republican Party. It proved to be the second manifestation of the Bush Trap.
The Dog That Didn't Wag Its Tail
If you saw President Obama speaking with a group of small-business owners last Friday, you may have seen a certain look in his eyes when he mentioned fourth-quarter GDP and the most recent unemployment data as being positive. He did so while going out of his way to be cautious about the implications. This caution, he picked up from the street; when the GDP figure was released last Monday, he was unabashedly optimistic.
The amount of skepticism and number of second guesses, which have accompanied reports that would have made earlier Wall Streeters yell "yippee!", is unprecedented in my memory. The dog should be wagging its tail, but it isn't. There are good Obama-centered reasons why there's so much skepticism and cynicism: third quarter 2009 GDP ended up being downgraded in three stages from 3.5% to 2.2%. That's enough of a revision gap to make people wonder if the fourth quarter's number was too good to be true. Ostensibly, the revisionist rakeovers of the latest GDP and unemployment figures are simply rooted in optics. This interpretation coheres with the partisan element in the muckrakings of the GDP and unemployment reports. Although more intense than usual, they could be cast as yet another round in the political fight.
What's unprecedented this time, though, is the unpartisan contingent. This debunking comes from NBC Business, not a conservative think tank. The recent near-correction in the U.S. stock market, one that really was overdue, is not the result of a right-wing cabal infiltrating Wall Street. The GDP revisions are the latest in a series of trust-eroding overoptimism through the last eighteen months, not just over the last twelve.
The Bush Trap, And The Question Answered
Some may think that the Bush trap means being blithe while approaching an economic precipice. This impression, though, belies the haste at which TARP was put before Congress. There's a case to be made that the Bush Administration erred by being precipitous: too fast instead of too slow. The carte blanche nature of the original three-page bill made it seem not only precipitous but peremptory. The resulting populist outrage, perhaps surprisingly, has had a libertarian flavor to it. Paul Volcker is one of many who have early-'80s experience with a different kind of populism, one devoid of libertarianism. He was nobody's hero back then (except for Friedmanites.) It was the older kind that the Obama Administration and current Congress tried to assuage with the Home Affordable Modification Program. The undercurrent has not been assuaged, and that disgruntlement points to a sea change in American politics. Many of those still hostile are not that way because fat cats got the gravy and the ordinary Joe got crumbs. They're hostile because the bailout process itself is being questioned.
The Bush Trap is getting behind and enacting stimulus measures that would have been met with cheers in olden days but are now counterproductive. The counterproductivity may be economic, as with the '08 Bush tax-rebate stimulus and at least arguably the TARP, but it's primarily political. The political aspect comes in part from a more dyspeptic assessment of the Japanese stimulus plan. Granted that they did learn from the Great Depression – the Japanese unemployment rate never got above single digits - but their "Lost Decade" has now turned into two. Government debt as a percentage of GDP is estimated to be a sky-high 197% as of this year. The stimulus programs were riddled with "Bridges to Nowhere." The Japanese savings rate has plummeted over that timeframe to about 3%. The government doesn't have a lot of domestic capital to tap anymore. Japanese growth is still tepid, and Japan is still on track to having a "Lost Generation."
And the stimulus measures put forth by the Obama Administration, both enacted and proposed, resemble Japan's. Those measures run a risk of not priming the pump but crowding out the pump. That's what happened in Japan.
Is Obama in the Bush trap, economically speaking? I may brook controversy for my answer, but I would have to say "no." Yes, the most recent statistics contain some overstatement that'll be whittled back later. However, the GDP and jobs reports, along with other indicators such as the recurrent surveys, show that there are some green shoots developing right now. The recovery is likely to be tepid, but there is a real one blooming.
Politically is another matter. Unfortunately for Obama, the GDP overstatement and the dubiousness of jobs-saved claims make it easy to peg Obamanomics as "The Audacity of Hype." Yes, Republicans are running with this ball.
The trouble is, so are many other people who don't have a partisan dog in the fight. They're the "leading indicator" to watch.
Daniel M. Ryan is currently watching The Gold Bubble.