It is easy to forget how different a world we inhabited the last time Barack Obama took the oath of office.
The unemployment rate was 7.8 percent, the same as it is today—but then, it was rising by half a percentage point each month; now it is gradually drifting downward. The U.S. economy contracted at a 5.3 percent rate that quarter. Now it has been growing around two percent for three straight years. The Dow Jones Industrial average was at 7,949. It has risen 5,647 points since then, or 71 percent.
There was a very real chance that the economic collapse would spiral into a global depression; had things gone worse, joblessness could have kissed 25 percent, as it did in the 1930s, not the 10 percent that was the peak in this lesser depression.
The Obama economic agenda was in every way shaped by this reality.
His first weeks in office were dominated by pushing the $800 billion stimulus legislation through Congress. There were elements of the legislation that reflected longstanding Democratic party goals, such as funding clean energy investments (“Never let a serious crisis go to waste,” as Chief of staff Rahm Emanuel memorably put it.) But the urgency and scale of stimulus was determined by the depth of the economic contraction that Obama greeted on Day One.
But the sense of crisis haunted and constrained the first-term Obama administration more profoundly than simply by demanding that several weeks of debate and negotiation over stimulus, even accounting for the attendant political scars that resulted.
The economic bleeding stopped in the summer of 2009. Reasonable people can disagree over how much of the credit for that can be assigned to the Bush administration’s bank bailout legislation, the work of Ben Bernanke and the Federal Reserve, natural self-correcting forces in a market economy, and the Obama administration. But however one doles out the credit, a panic that seemed to have no end in sight on inauguration day had turned to recovery by summer.
But while the crisis was over in a narrow sense, its impact on the Obama presidency was still very much underway. By the time the economic bleeding stopped in the summer of 2009, the damage was so bad that it hung over everything else the president had hoped to achieve.
The recovery was sluggish, as those in the wake of financial crises tend to be, and the sense of discontent across the country weighed on the president’s popularity, emboldened his hardest-line Congressional opponents, and drove the budget deficit high enough that further stimulus, even if justified by the economics, was a political nonstarter. It was the crisis that necessitated the major push for financial reform that was the Dodd-Frank Act. It was the miserable post-crisis economy that led to the rise of the Tea Party, a Republican House Majority after the 2010 elections, and a series of stand-offs to avert a government shutdown and debt ceiling default.
The nation’s economic crisis was the central fact that shaped Obama’s first term domestic policy. But the good news is that the nation now seems to have turned a corner.
First to acknowledge the bad news: The U.S. economy is still producing out put at something like $1 trillion below its potential, the level of GDP that would prevail if unemployment were back near 5 percent and all the proportion of idle factories and office buildings back toward normal. There is still a crisis of long-term unemployment that Washington seems either unwilling or unable to tackle with any gumption.
But this is, thankfully, a post-crisis economy. The economic weakness we are experiencing is more, dare it be said, normal. The 7.8 percent unemployment rate is the same as the peak hit after the 1991 recession. Growth may be uncomfortably slow, but it seems well-entrenched. The fourth quarter expansion expected to be reportednext week will be the fourteenth consecutive quarter of growth. Investors and businesses no longer seem to interpret each day’s economic data or news from Washington as a referendum on whether the world will end or not. The Vix, a measure of expected stock market volatility, is at its lowest level in half a decade.
Consider how things played out in the negotiations over the fiscal cliff at the start of the year, an episode that makes plain this new pattern we are in: There was a hard-fought battles over the size and scope of government, pitting the president’s negotiating skills against those of House Republicans demanding steep fiscal retrenchment. But while businesses fretted over the standoff, it was always with the expectation and confidence that there would be some decent resolution that would keep the government operating and not invoke such severe austerity as to trigger a recession. And they were right.
The greatest economic challenge for President Obama in his second term are to manage these negotiations with House Republicans so as to enact deficit reduction in a careful, gradual way that doesn’t cause an austerity-induced recession. He showed a remarkable calm in the storm of four years ago, but this is a different type of challenge; it demands a skilled legislative tactician more than a crisis manager. Obama is, it should be noted, surrounded by aides who spent years in exactly this sort of jockeying in the 1990s as aides to Bill Clinton. The budget battles that are now underway are a remarkably close replay of those that Clinton fought, and in the 1990s is was evident that threats of government shutdown and so forth do not necessarily have to mean a terrible economy.
It is a far cry from saving the world, which seemed the impossible task of January 20, 2009. But it’s better for all of us that this is now the president's job ahead.