Friday, December 10, 2010

Why Obama Is Right

Like most people, the part of me that likes to perceive myself as being infallible doesn't like being humbled by the part that suddenly pick up on a major error. That is why I'm ashamed to admit that I posted this quote on my Facebook status a day-and-a-half ago:

"Looks like the Bush Era tax cuts for the wealthy will continue thanks to the courage of a strong Republican leader... Barack Obama."
- Jay Leno

No, my embarrassment doesn't come from an implicit admission to watching Jay Leno's Tonight Show (I think he's funny regardless of what 95% of my generation believes); rather it comes from the fact that I, like Leno and a growing number of other liberals, endorsed the notion that Barack Obama made a terrible mistake when he gave Republicans the tax handout to the wealthy for which they've been barking and salivating since he first took office.

In my anger, I assumed he was wrong. Now that I've calmed down and had an opportunity to more closely inspect the deal he struck, I realize that he was absolutely right.

Let me explain:

Like most liberals, I am disgusted that tax rates on the top earnings of the wealthy keep being lowered, thus lining their pockets while shifting the tax burden to working class Americans. Although conservatives like to claim that fattening the rich fosters job creation, statistics have not only decisively disproved this assertion, but even demonstrated that a whole host of ills can be connected to it, from the inordinate concentration of wealth in the hands of an upper class (today the top 20% of Americans own 85% of our nation's wealth, with the top 1% owning more than one-third of it) to the explosion in our budget deficit. Nevertheless, tax cuts for the rich have become a staple of right-wing economic policy, explaining why the 39.6% rate that existed during the presidency of Bill Clinton was lowered to 35% by George W. Bush... and at the not inconsequential cost of $1.3 trillion (Obama's economic recovery package, by comparison, only cost $787 billion, or slightly more than half that amount).

In short, liberals were absolutely right in arguing that those tax cuts should have been allowed to expire, just as conservatives were blatantly pandering to the wealthy by insisting that they be rendered permanent. So how could Obama have been right for conceding to them?

1) He didn't render the tax cuts permanent, despite demands from most Republicans that he do so. Instead he only extended them by two years, which - though costing working class taxpayers a whopping $120 billion - nevertheless provides us with an opportunity to repeal them by the end of 2012.

2) In order to win the pro-rich tax cuts, Republicans had been holding the poor and jobless hostage, threatening to cut off unemployment benefits, college tuition aid, and humanitarian relief for the victims of the Great Recession unless Obama capitulated. Now that they've received what they wanted, all of those programs have been extended, something that was morally as well as practically critical in a time of economic hardship like this one.

3) Obama also included $360 billion in tax cuts for working class Americans, thus guaranteeing that at least some of the benefits normally given to the wealthy would also go to those who genuinely needed them.

While each of these reasons is important, none of them can alone, or even collectively, vindicate Obama's actions. That said, there is one oft-overlooked factor that not only trumps every single one of them, but is undoubtedly the single most salient legacy of this agreement:

4) It will end the Great Recession and thus greatly improve Obama's prospects for victory in 2012.

To explain this, it is first necessary to understand how an incumbent's reelection chances are impacted by the state of the economy, a subject I dissected in a blog article last October:

The last three presidents who failed to win second terms - Gerald Ford in 1976, Jimmy Carter in 1980, and George H. W. Bush in 1992 - all lost when unemployment was between 7.1% and 7.5%.

Three of the last four presidents who succeeded in winning second terms - Richard Nixon in 1972, Bill Clinton in 1996, and George W. Bush in 2004 - won when unemployment was between 5.2% and 5.6%.

As of September 2010, President Barack Obama is confronted with an unemployment rate of 9.6%.

In light of the aforementioned data, this is predictably causing liberals to mourn and conservatives to crow over what both perceive as his impending political demise.

Both of them are doing this prematurely, however, since they're forgetting the one recent president I haven't yet mentioned: Ronald Reagan, who was reelected in 1984 even though unemployment was at a "loser" rate of 7.4%.
Indeed, the parallels between the economic circumstances of Reagan's first term and those currently facing Obama are strong enough that they deserve further exploration.

(1a) In 1980, the year in which Ronald Reagan defeated Jimmy Carter, unemployment rose from 6.3% in January to 7.5% by Election Day, a rise of 1.2%. This undoubtedly contributed to Reagan's election.

(1b) In 2008, the year in which Barack Obama defeated John McCain (serving, politically speaking, as a stand-in for George W. Bush), unemployment rose from 5.0% in January to 6.6% by Election Day, a rise of 1.6%. This undoubtedly contributed to Obama's election.

(2a) When Reagan was inaugurated in January 1981, unemployment was at 7.5%.

(2b) When Obama was inaugurated in January 2009, unemployment was at 7.7%.

(3a) Twenty months into Ronald Reagan's presidency (September 1982), unemployment had risen to 10.1%, an increase of 2.6%. Reagan's approval rating was at 42%.

(3b) Twenty months into Barack Obama's presidency (September 2010), unemployment has risen to 9.6%, an increase of 1.9%. Obama's approval rating is at 46%.

(4a) When Reagan was reelected in November 1984, unemployment was at 7.4% - roughly the same rate at which it had been both when he defeated Jimmy Carter in November 1980 and when he had been inaugurated in January 1981.


Starting in the summer of 1983, unemployment began to steadily decline during Reagan's presidency, starting with a sudden drop from 10.1% in June '83 to 9.4% in July '83 and continuing at a rate of 0.2% - 0.4% per month for ten of the next twelve months until, by July 1984, it had reached 7.2%. At that point it steadied out, neither rising nor falling at any meaningful rate for the rest of the year.

That said, the period of economic growth from July 1983 to July 1984 was such that the American public, rather than focusing on how things had not actually improved from what they had been before Reagan took office, instead simply gave Reagan credit for the sudden perceived progress. By the summer of 1984 his approval rating was in the 50s and, capitalizing on this in such a way as to give the impression that things had changed for the better since Carter's tenure, Reagan was reelected by a landslide.

What does this tell us about Barack Obama's situation?

(4b) It is by no means too late for him to salvage his political fortunes. When Ronald Reagan was at a comparable chronological point in his presidency, unemployment was higher than it is for Obama today, his approval ratings were lower than Obama's are at present, and defeat in his campaign for reelection seemed all but certain. Yet even though no one knew it at the time, events would begin ten months later that, within a year after that, had transformed Reagan from an unpopular leader into a surefire winner.

Of course, the next question to be asked is why the economy began to improve halfway through Reagan's first term. As I wrote:

What ended the recession in 1983 was the ability of a Democratic Congress to push through spending programs that stimulated the economy while the Federal Reserve (led at that time by Paul Volcker) kept interest rates at an artificial low. Although the Democratic stimulus measures did cause an explosion in the budget deficit (due mostly to Ronald Reagan's insistence on cutting taxes for the wealthy and increasing spending on the military-industrial complex in conjunction with them), that deficit failed to cause rapid inflation due to the Federal Reserve's actions, while the stimulus succeeded in triggering a period of massive job creation sufficient to constitute what many perceived as a "recovery." In short, even though Ronald Reagan's specific policies (tax cuts for the wealthy and increased military spending) were at best unsuccessful and at worse exacerbated the problem, he lucked out by having other people in power - namely Paul Volcker of the Federal Reserve and Democrats in Congress - pursue policies that would cause a recovery just in time for him to be reelected.

The good news for Barack Obama here is that the Federal Reserve (led now by Ben Bernanke) is currently keeping interest rates at the lowest possible level; in that respect luck is on his side, just as it was with Ronald Reagan. The bad news, though, is that the stimulus package Obama passed was inadequately small compared to the needs of the recession he is facing...

Hence the important point being overlooked by liberals is that, while Obama's initial stimulus package was only partially effective due to its inadequate size...


In case you think I am succumbing to undue optimism, bear in mind that this assessment is shared not only by prominent liberal economic thinkers (including Robert Greenstein, Lawrence Mishel, and John Podesta), but also by conservative intellectual Charles Krauthammer, who pointed out that over the next two years "the package will add as much as 1 percent to GDP and lower the unemployment rate by about 1.5 percentage points."

It's worth noting, by the way, that Krauthammer the Republican does not view this alleviation of American suffering as good news. Why?

That could easily be the difference between victory and defeat in 2012.

As the earlier exploration of history shows, Krauthammer is absolutely right - when the stimulus starts to take effect it will aid Obama's reelection prospects much as the comparable turnaround gave Ronald Reagan a win nearly three decades ago. To top it all off, the fact that Obama only agreed to a two-year extension of the tax cuts means that, assuming he is reelected, they will be ready to expire again not only while he is still in office, but right at the time when a recent electoral victory will give him the political capital to force Republicans and conservative Democrats to accept their death.

That is why liberals like Jay Leno are wrong for feeling that Obama has given the Republicans a great victory. In fact, historians may look back on this decision as the moment when he began to defeat them.


Kevin said...

It isn't that Krauthammer doesn't view a possible 1% increase in GDP and 1.5% decrease in unemployment as good news, it simply isn't good news that it comes at the cost of an additional $660 billion dollars that we DON'T HAVE. Like he said, "Stimulus II will still blow another $1 trillion hole in the budget."

Matthew Laszlo said...

1) While I agree that our national debt needs to be paid off, our foremost priority in times of economic hardship must be to end the chief features of that crisis (in this case high unemployment, stagnating wages, and a growing wealth disparity between the rich and the rest of America) before focusing on other issues.

2) That said, even if I did feel that lowering our national debt was our chief priority, it intrigues me that conservatives are only willing to consider cutting spending that helps working class Americans. After all, we could make significant progress toward paying off the debt if we (a) reduced the size of the military-industrial complex by creating a latter day Truman Committee and having it cut spending on everything that isn't absolutely essential, (b) ended the war on drugs, and (c) increased taxes on the wealthy back to Eisenhower era levels (91%) or even Nixon era levels (70%). If conservatives were honest about wanting to fix our budget, they would consider these options; the fact that they don't proves that they are less committed to America's fiscal solvency than they are to lining the pockets of their interest groups (i.e., the rich and right-wing ideologues on cultural and international issues) at the expense of everyone else.

Matthew Laszlo said...

PS: We could also fix Social Security by declaring that, for all Americans born after a certain date, benefits would only go to those whose financial circumstances warranted it. That said, the AARP would have conniption fits.