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The Great Depression that wasn't

Sunday, September 26, 2010; A24

POLITICAL DEBATE is not the same thing as fair debate, as the current discussion of the U.S. economy and President Obama's efforts to repair it illustrates. Amid a bruising, polarized election campaign, the president claims credit for both saving America from another Great Depression and laying the basis for future prosperity. And Republicans blame the stubbornly high unemployment rate entirely on him, asserting that it is but a prelude of misery yet to come. What would an objective analyst conclude?

Mr. Obama is right that the Great Recession was well under way when he took office in January 2009. He is also right to claim credit for the fact that it did not get much worse. The president's policies, including the $814 billion 2009 stimulus bill, the Treasury Department's bank stress tests, foreclosure prevention, and the bailout of General Motors and Chrysler, propped up demand for goods and services when the private sector could no longer do so. Whatever their deficiencies, for an economy in free-fall these interventions were the equivalent of a parachute.

Some caveats are in order: First, much depended on the Troubled Assets Relief Program (TARP), for which Mr. Obama must share credit with his predecessor, George W. Bush. Second, the Federal Reserve's near-zero interest rates and massive bond purchases probably did even more than the administration's policies to prevent a crash. In fact, the National Bureau of Economic Research said last week that the recession technically ended in June 2009, before the bulk of the stimulus spending.

Nor is Mr. Obama or his economic policy to blame for the economy's inability so far to resume robust, job-generating growth. The economy faces a painful, protracted process of deleveraging. Households and companies must work off a huge overhang of debt built up during the boom, and they can't resume spending and investing in the meantime. That deleveraging will hamper growth for -- well, for as long as it takes. Government efforts may ease deleveraging, but to the extent they succeed, it is generally by postponing the day of reckoning and making it more expensive when it inevitably arrives.

In other respects, Mr. Obama's leadership may have slowed recovery. Like any such massive effort, health-care reform had both benefits and costs, not all of which can be foreseen. We think that the pluses eventually will outweigh the minuses, if the government exploits the legislation's cost-bending potential -- but for now the minuses include a more uncertain business climate that may have retarded investment. Financial regulatory reform, too, was necessary but has roiled business decision-making in the short term. Thanks to poor design and avoidable red tape, the stimulus plan did not produce as much bang for the buck as it could have. The water and transportation departments of Los Angeles, for instance, have so far created just 55 jobs with $111 million in stimulus money, mostly because of bureaucratic obstacles to spending the cash.

In short, Mr. Obama, his predecessor and the Federal Reserve have succeeded in soft-landing the U.S. economy. The benefit is obvious: no Great Depression II. Equally clear is the price we paid: a massive conversion of accumulated private-sector liabilities into federal obligations.

The question now is what policies can deliver America from the debt-burdened stagnation that looms dangerously. Clearly, part of the answer lies in a structural shift from engines of growth that government policy long favored but that are now exhausted -- such as housing and financial services -- to more sustainable sources of jobs and income. Too often, though, Mr. Obama speaks as if "green" industries can sprout wherever Washington subsidizes them. Republican cries for massive cuts in capital gains and other taxes seem no less fanciful. Instead of this partisan impasse, the country needs a serious debate about its long-term economic challenges.

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