President Obama inherited the scariest and most dangerous economic situation in more than 50 years. The economy was in free fall in the spring of 2009, with GDP plunging and employment declining at the rate of 700,000 jobs a month. The financial sector was on the verge of collapse, both in the United States and around the world.
The two big policies used to turn around the economic situation, the Troubled Assets Relief Program (TARP) and the stimulus package, were the right ones, and they have worked as well or better than could have been expected.
The TARP was initiated by then-Treasury secretary Henry Paulson working with Federal Reserve Chairman Ben Bernanke and future Treasury secretary Tim Geithner at the Fed. There were false steps taken in the early use of the TARP, but injecting capital in to the banking system was the right thing to do, and Geithner, when he became Obama’s Treasury secretary, instituted the bank stress tests, which marked a turning point in the struggle to restore the financial system. The large banks are now stable and growing back to health, and while many smaller banks remain troubled, there is no longer any serious danger to the system. Helping the financial sector recover was an essential step towards recovery in the rest of the economy.
The key priorities with the stimulus package were to make sure that it went out quickly and that it was large enough to increase total spending. With a total package at $862 billion spent mostly in 2009 and 2010, it met those goals. With only limited guidance from the White House and individual members of Congress each wanting money to come to their district or state, the details of the package were a mess. It was a lot of money, and it did little to deal with longer-term problems, such as the weak infrastructure and an over-dependence on fossil fuels. However, it did contribute to spending at a time when the collapse in aggregate demand was threatening possible depression.
The economy is still lousy. Unemployment is over 9 percent, and the rate of job creation is low, especially in the private-sector. GDP is depressed and will take some years to get back to its full potential. With the turmoil in Europe, there is a chance there will be a double-dip recession here later this year. So if the policies were the right ones, how come the recovery is not stronger?
First, the crisis and the recession were really bad and history shows that recovery from such events takes a long time. This was like getting typhoid, not just an upset stomach, so recuperation is bound to be slow. There was no way policymakers could get back to full employment quickly. Second, reckless fiscal policy in the years leading up to the crisis meant that there were budget deficits even before the crisis hit. Add to this the fact that recessions always worsen budget deficits, and the result is a limit on how much fiscal stimulus is possible. A second substantial stimulus to the economy this year would be a way to avoid a double dip, but it is not advisable, because of borrowing constraints. There are consequences to the irresponsible policies of the past.
You do not expect the bear to dance well; it is a miracle if it dances at all. The policies that helped turn around this deep recession and financial crisis were not pretty, but they were the right policies. They have not restored full employment, but they helped us move from a scary economic collapse to a growing economy that is creating jobs. The continuing high unemployment, weak housing market and volatile stock market are making the administration unpopular. It is too bad the electorate does not give credit for the progress made so far. It should.