Most of the coverage of the economy this campaign season will revolve around the question, “Is the economy doing well enough to get Barack Obama re-elected?” And to be sure his chances are just a little better than a coin flip given our current electorate. However, when historians look back at this period 25, 50, 100 years from now, they will be telling your children and grandchildren how Obamanomics worked.
For proof, look no further than Europe, which in response to debt crises in a few of the Eurozone’s members (Greece being everyone’s favorite example) embarked upon a continent-wide program of austerity. The idea behind forcing austerity on your citizens during an economic slowdown is that somehow by balancing government budgets, it will prove to the private sector that everything’s okay, and companies will start investing again...or something. Paul Krugman derisively calls this believing in the “confidence fairy.”
It's basic Keynesianism: when there is a lack of aggragate demand, the only entity that can spend money to prop up demand is the government. When both consumers and government slow their spending simultaneously, disaster ensues.
Now under David Cameron’s (or is it Rupert Murdoch’s?) stellar leadership, the UK has slipped back into recession. Britain’s economy shrank by .3 percent in the fourth quarter of 2011 and .2 percent in the first quarter of 2012, marking the start of its double-dip recession. Greece, Portugal, and Italy continue to be totally dysfunctional, Spain is back in recession, and Germany and France will likely end up there as well.
Meanwhile, the U.S. rescued the banks under George W. Bush, the Fed pumped enough cash into the economy to drown Godzilla, and in 2008 Obama restructured the auto industry to save the industrial Midwest and implemented a large fiscal stimulus that put somewhere between 2-3 million people back to work. All of these actions have paid off. To be sure, there is a fair critique that the stimulus should have been larger, that Obama should have been more aggressive with congress (half the stimulus was the largest middle-class tax cut ever, which was less efficient stimulus than direct spending and for which Obama got no credit from the shrieking yahoos who still think he raised their taxes).
Instead of slipping into a double-dip recession, though, the U.S. economy has grown for eleven straight quarters, and as Daniel Gross argues in this week’s Newsweek cover story, the dirty secret of the U.S. economy is that it has come out of the worst financial crisis since the Great Depression surprisingly resilient, adaptable and strong. Unemployment remains too high, but compared to Europe’s basket case and even the slowing fates of rapidly developing countries like China and Brazil, there is a case to be made that the U.S. has braved the last five years better than most of its peers.
In fact, all of our most recent job losses (since the stimulus) have come in the form of public sector layoffs, mostly because austerity-minded governors in cash-strapped states have been laying off teachers, firefighters, nurses, and policeman. If the federal government had given more aid to the states (or if Obama’s proposed American Jobs Act had somehow passed), those public sector layoffs wouldn’t be an anchor on the economy.
In “This Time Is Different: Eight Centuries of Financial Folly” University of Maryland economist Carmen Reinhart and Harvard economist Kenneth Rogoff give an expansive overview of sovereign-debt crises (like Greece) and banking crises (like the U.S. in the Great Depression and the crisis of 2008). The thrust of the book is that everyone thinks they’re the first people under the sun to watch their economies blow up, but the causes and the results are all pretty typical.
Most strikingly, they point out that following a banking crisis, unemployment spikes along with government debt due to a sudden fall in tax revenues, as has happened with us. They point out that on average unemployment rises for five years after a serious financial crisis. In our case, the unemployment rate topped out not long after Obama’s policies took effect. Tackling deficits in a time of high unemployment—as Europe tried and as Republicans want to try—makes no sense.
The irony of austerity measures is that they are triple-stupid. They deprive a hurting citizenry of a safety net that is sorely needed in hard times while doing nothing about employment. Therefore tax revenues remain low and even draconian cuts in government spending fail to make up that difference. The deficit barely shrinks or continues to grow anyway. We are seeing this exact scenario play out in Europe, where political turmoil has arisen and unemployment remains over 20 percent in some countries. The U.N.'s International Labor Organization has slammed Europe for this counter-productive approach.