Benjamin M. Friedman is the William Joseph Maier professor of political economy and former chairman of the Department of Economics at Harvard.
On March 4, 1933, at the bottom of the worst financial and economic crisis to afflict the United States since the Civil War, Franklin D. Roosevelt took office as president. Two days later, Roosevelt acted to stanch the collapse by suspending gold payments, imposing a four-day “bank holiday” and arranging emergency assistance for banks when they reopened.
Over the next three months — FDR’s legendary “100 days” — the new administration initiated further measures, including federal job creation, welfare relief, aid to homeowners unable to pay their mortgages, and securities and banking reform. By the end of Roosevelt’s first term, the list of fundamental and lasting innovations, all responses to the crisis, included unemployment insurance, Social Security and the Federal Deposit Insurance Corp.
Barack Obama took office Jan. 20, 2009, during the worst financial and economic crisis since World War II. By then, the Federal Reserve System had already acted to prevent the collapse of the banking system, and so the new president moved forward promptly to spur the depressed economy. The fiscal package he signed Feb. 17, 2009, allocated $787 billion — more than 5 percent of a year’s total U.S. income — to infrastructure investment, job training, aid to low-income workers, tax relief in various forms and other measures aimed at stimulating economic activity. The money could have been better directed, so as to achieve greater impact, and in retrospect the amount was too small. But in the face of opposition from Republicans in Congress, Obama’s fiscal stimulus was about as much as any president could have done.
After pushing through the stimulus, however, the Obama administration entered a period of quietude on the economic front. Despite large Democratic majorities in both houses of Congress, there was no other significant economic legislation during the new president’s first 100 days. Nor in the 100 days following that, nor in the 100 days after that.
Financial reforms to prevent a repeat of the disaster that had just happened were on hold. The administration took no advantage of the potential leverage the government had gained through its infusion of taxpayer money to recapitalize banks that would otherwise have failed. (By spring 2009, the U.S. Treasury owned 38 percent of the equity in Citibank.) Other potential economic policy initiatives, such as tax reform, remained out of sight.
Instead, once the economic stimulus became law, the Obama domestic agenda shifted to health care. When the president took office, roughly one in six Americans — 50 million in a population of 307 million — had no health insurance. The Affordable Care Act, passed in March 2010, has now provided coverage to 20 million of those 50 million. If more states expanded Medicare, as was permitted under the new law and clearly expected by Obama, the number would be significantly greater. Moreover, some of the 30 million remaining uncovered are in the United States illegally and are therefore ineligible.
Raising the insured total to more than 90 percent of all Americans will likely stand as a historic achievement, but the cost was a diversion of the administration’s energy and attention from other economic problems badly in need of remedy.
The most pressing among them was, and remains, financial reform. Rather than advance its own set of proposals — especially during the president’s first year in office, when the Democrats held a filibuster-proof supermajority in the Senate — the administration largely left the matter to Congress.
The result, the Dodd-Frank Act, passed in July 2010, represented a reasonable first pass at fixing a dangerously defective financial system. Among other useful contributions, the new legislation called for higher bank capital requirements; strengthened procedures for resolving the failure of banks and other financial companies; restricted banks’ latitude to invest in risky securities; and established a new, centralized mechanism for trading some of the financial derivative instruments that had been at the center of the crisis.
By contrast, some of the act’s provisions, most importantly the weakened ability of the Federal Reserve and the FDIC to rescue banks in any future crisis, may well prove counterproductive.
Overall, if Dodd-Frank were merely one in a series of financial reform packages aimed at addressing what had happened from 2007 to 2009, it would have been a laudable first step. But as the nation’s principal response to the worst financial crisis in two generations, it paled. Further, the specifics of many of the intended reforms were left to agency-level rulemaking exercises — at one point more than 300 of them were in process — that, predictably, enabled industry lobbyists to blunt their force, if not thwart them altogether.
As the crisis and its immediate aftermath receded, the Obama administration’s economic policy agenda shifted to mostly defensive actions domestically, combined with negotiating what have proved to be highly controversial trade agreements abroad. The main achievement of the intensely political 2011 budget deal with the by-now-Republican House of Representatives was simply to avoid the U.S. government’s defaulting on its debt. In 2013, the president succeeded in increasing the tax rate for top-bracket earners from 35 percent back to 39.6 percent, where it had been in the Clinton years; in exchange, he agreed to extend, indefinitely, the rest of the Bush administration’s 2003 cuts for taxpayers with annual earnings of up to $450,000 per couple. (Later in 2013, in the course of a further dispute over budgets and debt, House Republicans shut down the government for 17 days.)
The president also pressed forward with two large-scale trade agreements: the Transatlantic Trade and Investment Partnership (TTIP), between the United States and the European Union, and the Trans-Pacific Partnership (TPP), with most of the major Pacific nations other than China. If implemented, these agreements would lower tariffs, remove various other trade barriers, and make cross-border investment easier and safer. Whether they will ever take effect, however, remains uncertain. As often happens when the economy stagnates, to many citizens free trade seems more a threat than an opportunity. Donald Trump made opposition to TPP a centerpiece of his presidential campaign, and Hillary Clinton, who supported TPP as secretary of state, now opposes it, as well.
The TTIP negotiations with the E.U. remain to be completed, so there is nothing for either candidate to oppose.
What remains for the next president to accomplish? During Obama’s presidency, the country made little or no progress on long-standing issues such as tax reform and assuring the long-term viability of Medicare in the face of spiraling costs. The U.S. financial system remains too large, too expensive and too risky. Although Obama took some limited steps toward arresting the relentless widening of economic inequality — raising top-bracket tax rates, extending the earned-income tax credit and expanding the child tax credit, for example — the election campaign to replace him, in both parties, shows that the American public remains deeply unsatisfied.
Most important, the pace of improvement in America’s productivity — how much the nation produces per person, or per worker, or per hour worked — has been slowing for the past four decades. With more rapid growth, many of today’s economic challenges, especially widening inequality, would seem less worrisome. But with stagnating productivity, the resulting frustrations are rising toward boiling points. We know fairly little about how to boost an economy’s productivity growth, although some identifiable measures would clearly help. Rebuilding the nation’s physical infrastructure; restructuring education, especially in the early grades; providing prekindergarten to more “at risk” students; and restoring the government’s shrunken funding for research are all good choices. All cost money.
Obama made progress in some areas of economic policy, perhaps as much as the country’s increasingly divided politics would allow, and on each of those fronts — economic and political — his successor will not lack for challenges.