Obama’s Performance On The Economy

This election is a referendum on Obama’s stewardship of the economy. What has Obama done on the economy? To address this question, I first considered a few numbers that inform the conditions under which he assumed office: (1) On Jan 20, 2009, the day of Barack Obama’s inauguration, the S&P500 closed at 805.22 and had lost about 40% of its value over the previous 6 months; (2) According to the Bureau of Labor Statistics, the unemployment rate in February 2009 stood at 8.3%; only a year ago, in February 2008, the unemployment rate had been 4.9%; (3) In January 2009 alone, employers in the private sector had shed 818,000 jobs, and they would cut 2.2 million more jobs over the next 3 months; (4) The federal deficit for the fiscal year 2009 was $1.4 trillion, whereas the deficit for 2008 was $440 billion.

Together, these numbers define the challenge on Obama’s hands. The challenge becomes even more tenuous when one considers that Obama had no money at his disposal. For years, his predecessor, George W. Bush had been running budget deficits. The wars in Afghanistan and Iraq cost about $1.5 trillion dollars during his tenure, to which his tax cuts added another $1.8 trillion. Moreover, due to the recession, government revenue from individual and corporate taxes in 2009 dropped by 20% and 54%, respectively, compared to the previous year. Taking this into account, it becomes obvious that no matter what Obama did, he wouldn’t be able to avoid increasing the federal deficit.

So what did Obama do? Many things! In this post, I will focus on one example. On February 17, 2009, less than a month after taking office, Obama signed into law the American Recovery and Reinvestment Act, better known as “the stimulus”. With a goal to create and save jobs, the bill disbursed a total of $840 billion into the following areas:

  • $297.8 billion went into various tax benefit programs. Some major highlights include: (1) the American opportunity tax credit that allowed individuals to claim on undergraduate educational expenses for either themselves or for their dependents; (2) a first time homebuyer’s tax credit, which was an attempt to stabilize the collapsing housing market which had largely contributed to the recession in the first place (3) a $400 tax credit for working individuals, and (4) Numerous tax incentives for businesses that hired new employees, including veterans.
  • $244.3 billion went towards various government contracts, loans and grants. The biggest chunk of the funds in this department went towards providing aid to states and preventing them from cutting back on education services (about $91 bilion). Other major recipients were grants to improve transportation and infrastructure (highways, bridges, railroads, airports, expanding broadband infrastructure etc).
  • $235.7 billion went towards entitlement services. Again the biggest chunk of this money was given to states to allow them continue providing services for medicaid recipients (about $90 billion). About $60 billion went towards providing unemployment benefits for those who lost their jobs during the recession. Another $43 billion went towards providing assistance to needy families, including food stamps, child care, and foster care and adoption assistance.

One impressive aspect regarding the recovery act is that the Obama administration has provided extremely detailed information on how the money was exactly spent. In fact, projects that were funded by this act can be searched by zipcode.

More importantly, did the stimulus succeed in its objectives? A clear majority of studies conducted by leading economists (7/9) arrived at the conclusion that the stimulus did in fact spur economic growth and may have saved and created thousands of jobs. In addition, a number of these studies have attempted to quantify the success of the stimulus by trying to estimate how many dollars of economic activity was produced for every 1$ in stimulus spending (a.k.a how much bang for the buck?). Here is an estimate from a paper by Alan blinder (Princeton University) and Mark Zandi (Moody’s Analytics):

It is interesting to note that of all the policies that were part of Obama’s stimulus, spending measures such as food stamps, aid to state governments, increased infrastructure spending, and extending unemployment benefits were found to produce the most effective  results. On the other hand, measures such as making the Bush tax cuts permanent, cutting  corporate taxes, capital gains taxes, and the alternative minimum taxes, all of which are the central tenets of Mitt Romney’s plan for economic growth were found to be the least effective.

Finally, what of those numbers that I mentioned at the beginning of the post? How have they changed? (1) On Friday, the S&P500 closed at 1414.20, a 175% gain over its close on Jan, 20, 2009; (2) The latest jobs report on Friday found the unemployment rate at 7.9%; (3) the economy added about 171000 jobs this October. Here is a chart depicting job creation numbers over the last 4 years:

Overall, given the economic circumstances under which he assumed office, the political climate, and the extent of control a president can have over the economy, I personally think that Obama has performed rather well, especially during his first year in office. Are there things that could have been done better? Certainly. Is there room for improvement in the president’s policies? Absolutely. But are republicans under Mitt Romney poised better poised to grow the economy and employment? I think not.

5 thoughts on “Obama’s Performance On The Economy”

  1. I can see that the economy has become the number one issue in this election. An issue that should also be very important is the environment and specifically climate change and what the US can do. I know it’s not a popular issue there and I can see why Obama isn’t discussing it. Still, I bet in a decade or two we’ll look back and wonder why our priorities were so short-sighted. What do you think? You’re a scientist.
    – a concerned Canadian

    1. Hi Steff,
      I agree with you that in light of the current concern over the economy, several important issues, especially, the environment and climate change have taken a backseat, and this is indeed disappointing. While the benefits of environment protection cannot be overemphasized from ecological and public health perspectives, it should have been included as a vital part of the discussion on the economy itself. Currently, republicans have argued in favor of dialing back the regulatory power of the EPA and overturning some its past directives. The rationale for this argument is that these regulations stand in the way of economic progress. However, such arguments largely fail to factor the indirect costs associated with ignoring environmental concerns. For instance, drilling the ocean floor to harvest oil might seem profitable at first glance. But as the BP oil spill in the Gulf coast revealed last year, misadventures in this area can prove very costly not only for the environment, but also for various industries that thrive on the sea, and for BP itself. There are numerous examples pertaining to the same theme.

      Having said this, there are some examples which suggest that the Obama administration has not been completely negligent of the environment. The stimulus package referred to in my post, did contain a number of incentives for energy efficiency and environmental protection. For instance, $10.9 billion was used to provide individuals with tax incentives for using alternative sources of energy in their homes, credits for using public transportation, replacing existing appliances with more energy-efficient alternatives, business credits for renewable energy properties, etc.. In addition, of the $244.3 billion in the stimulus package that went into contracts, grants and loans, about 10% ($27.6 billion) was directed towards bolstering various divisions within the EPA, retrofitting federal buildings, the national park service, and both defense and non-defense-related environmental cleanup programs. In addition, there has been a definite push to invest in more renewable sources, especially wind and solar energy, and the administration successfully negotiated with automobile companies to nearly double fuel efficiency standards by 2025 (to about 54.5 MPG). There are also encouraging signs that the US and Russia will significantly reduce their nuclear weapon stockpiles. This was part of the “restart” program initiated by Hillary Clinton.

      1. Thanks for the great reply. Now on to the fun part- watching the results pour in tomorrow night. Hopefully the results will be cut and dried and not drag on.

        In 2008 we had an election night party at my parents’ house. It was a real celebration for us as Obama won. I remember my dad that night getting quite emotional as we celebrated Obama’s victory. After having marched on Washington with MLK Jr and being a part of the civil rights movement he was in awe that there was now a black President. It seemed anything was possible. My dad passed away in 2010 so he won’t be with us tomorrow night. We’ll all miss him but are hoping at least the election results are the same. Enjoy the night!

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