Economic and Domestic Policy

Private markets make up the core of Obamanomics

By Ezra Klein
Friday, December 31, 2010

We're two years into the Obama administration, and "change we can believe in" has become "continuity we can believe in." So far, five senior members of the president's team have resigned their posts - and not one has been replaced with a candidate from outside the administration.

That isn't to understate the differences between members of the administration: Christina Romer, its first chair of the Council of Economic Advisers was a macroeconomist. Austen Goolsbee, her replacement, is a microeconomist. Rahm Emanuel loves cursing. His replacement, Pete Rouse, loves cats. Ben Bernanke, who chaired the Federal Reserve when President Obama entered office, is a specialist in the Great Depression. Ben Bernanke, who Obama renominated when Bernanke's term expired is, well, the same guy.

But two years into the Obama administration, the president seems confident in the people around him and the approach they've persuaded him to take. "When I reflect back on the last two years," Obama told the New York Times, "we probably spent much more time trying to get the policy right than trying to get the politics right." That self-assessment is a long way from, "It's time for some new ideas." And it raises the question: What is the overarching policy they spent so much time getting right? What is Obamanomics?

When I asked participants and observers that question, they all started with the same premise: The administration didn't have time for philosophy. It had to put out fires - and fast. But faced with the greatest economic crisis in generations, a crisis that spread across many sectors, their response, in retrospect, was remarkably consistent.

Isolate the eight key economic decisions of the Obama presidency: The intervention in the financial sector, the intervention in the auto sector, the intervention in the housing sector, the stimulus package, the health-care bill, financial regulation, and the tax deal. The financial and auto interventions, it should be noted, were begun under George W. Bush but carried out and expanded under Obama.

In each case, the Obama administration sought to support or improve private markets. It refused to leave the market to sort itself out, as some on the right would have preferred, and resisted entreaties to take it over, as some on the left advocated.

Where there was a market that they considered functional-but-frozen, they worked to unfreeze it. That's what TARP was, and the stress tests. It's not quite right to group the Federal Reserve's actions with the administration's. But the Fed and team Obama were in close contact, and the basic philosophy was the same: Get the market for securitized assets moving again, restore confidence in the banks, give participants some assurance that it was safe to keep borrowing, lending and investing. Calls to remake the financial sector were also rejected, and regulation focused on new safeguards and emergency procedures rather than a new way of doing business. Calls to nationalize the banks were rejected.

That wasn't true in the auto bailout. The government essentially took over General Motors and Chrysler. But the administration says it did so because the market for debtor-in-possession financing - the money that keeps you running through bankruptcy - had dried up. Bankruptcy in a credit freeze would become liquidation rather than reorganization. Members of the administration believe they did what a working market would've done, shepherding the automakers through a modified bankruptcy process, with the intention of selling off the government's stakes in the companies and returning them to the private market.

The stimulus followed a similar theory: There was no particular reason that people had stopped buying and making things. There wasn't a plague of rust or coordinated sabotage of the nation's storefronts and factories. Rather, the markets had frozen, and no one knew what disaster would next befall the economy. So people were hoarding cash. The government's role was to pump demand into the economy and create sufficient confidence to get the market functioning again.

In housing, this approach was perhaps clearest of all. Rather than fundamentally reform the market, the administration and Federal Reserve focused on backstopping it. Buying a house in 2009 and 2010 was little different from 2004 and 2005. What had changed was the Fed keeping interest rates low, the federal government handing first-time home buyers $8,000 to get into the market, and Fannie Mae and Freddie Mac buying virtually every mortgage that was issued.

Elsewhere, when a market didn't exist but needed to, they tried to create one. In the health-care overhaul, the administration looked to construct a functioning market for individuals and small groups, to replace one where for people with preexisting conditions, health insurance wasn't available at any price. Although the administration supported a public option, neither it nor Medicare-for-All figured prominently in the reforms. The focus was on constructing a better private market not replacing it with a government program.

What's missing from this list is cap-and-trade environmental legislation, which is perhaps the most notable failure of Obama's first two years. But the administration, though failing to pass cap-and-trade, followed a similar theory: The market should factor in the cost of the damage that carbon-intensive activities do. It's failing to do so. That should be fixed.

But the moment that made Obamanomics possible is over. When the administration took office, markets were failing left and right. Democrats held such large majorities that ambitious interventions and reforms were suddenly, and unexpectedly, possible. The question is what comes next?

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