He’s gotten more done in three years than any president in decades. Too bad the American public still thinks he hasn’t accomplished anything.
But most reputable economists say it did. According to the Congressional Budget Office, the stimulus added anywhere from 500,000 to 3.3 million jobs and boosted GDP by between 1 and 4.5 percent. Indeed, within weeks of the stimulus going into effect, unemployment claims began to subside. Twelve months later, the private sector began producing more jobs than it was losing, and it has continued to do so for twenty-three straight months, creating a total of 3.7 million private-sector jobs. On the first key test—whether it helped the economy when the economy needed it most— the stimulus passed. And if the current recovery continues to pick up steam, then the stimulus will be remembered as having helped lead America out of the Great Recession.
But the potential significance of the stimulus may go even beyond that. First off, thanks to innovative management, the administration has been able to spend $787 billion with minimal fraud. (By comparison, FDR’s early New Deal spending was so fraught with waste and abuse that the term “boondoggle” arose to describe it.) Not only that, but the way the administration has chosen which projects to fund has itself been revolutionary. Instead of spending all the money in the usual manner—by formula, with each state and congressional district getting its “fair share”—the administration used a sizeable portion of the stimulus to create a dozen or more giant competitive grant programs. Potential recipients, be they state and local governments, nonprofits, or corporations, had to vie for the money by proposing their own entrepreneurial strategies for meeting federal goals, as well as procedures to measure the results of their efforts.
The best known of these is Race to the Top, the much praised $4.35 billion Education Department grant program. It is one of the few policies of this administration praised by left and right—and yet almost no one mentions that it was part of the stimulus bill. Just to be eligible to win the competition, cash-strapped states were suddenly willing to enact reforms they’d hitherto resisted. Dozens upgraded the quality of their student performance tests, tied teacher pay to those tests, adopted a common set of strong academic standards, and took caps off the number of charter schools allowed in their states. Whether these changes eventually improve student outcomes remains to be seen, but Race to the Top has arguably brought as much change to state and district laws and procedures as George W. Bush’s No Child Left Behind law. And there are a dozen other similar competitive grant programs embedded in the stimulus, in areas ranging from digitizing medical records to expanding freight rail capacity to spurring the creation of an advanced battery-manufacturing sector.
How will history judge the stimulus? Not so well if the economy stays weak or sputters out; quite well if it continues to improve. But beyond that, if some of the bets Obama has placed on education reform or transportation or energy pan out, and if the competition-based model of federal spending becomes more common, the “temporary” stimulus will have left an enduring mark on government and the economy.
Another major (and much-reviled) aspect of Obama’s economic legacy is how his team handled the meltdown of the financial sector. This is another achievement he made no mention of in his State of the Union address—and no wonder, because it’s complex, still unfolding, and involves the rescue of bankers. But it’s worth slowing down here to remember the crisis as Obama inherited it. As you will recall, the actual bank “bailout” took place in the fall of 2008, when the Bush administration created the Troubled Asset Relief Program, or TARP. By injecting more than $300 billion into hundreds of banks, and especially the nation’s biggest, TARP bought the economy some breathing room and gave the incoming administration some resources— another $350 billion in unspent TARP funds—to work with. But with consumers increasingly unable to make their mortgage and credit card payments—the economy was shedding upward of 800,000 jobs the month Obama was inaugurated—losses at the big banks were mounting faster than Washington could force-feed dollars into them, and no one really knew what they were carrying on their balance sheets. Any number of institutions looked like they could collapse, and that extra $350 billion was not enough to stabilize the system and pay for other crucial emergency programs, like mitigating foreclosures.
The advice the administration was getting from economists like Joseph Stiglitz, who had seen the crisis coming years before, was to use the moment to completely reshape the financial sector: nationalize the biggest, most troubled banks; toss out their management; break them up into smaller banks; have the government strip out and sell off the “toxic” assets on their books; downsize executive salaries and bonuses; and, in general, shrink the size of Wall Street, the better to limit its baleful influence on the rest of the economy.
Obama’s top economic advisers thought such a dramatic overhaul was both unnecessary and reckless to consider in the midst of an economic crisis; firemen don’t rethink sprinkler regulations while an apartment building is ablaze, after all. Instead, Timothy Geithner’s Treasury Department crafted a much more targeted intervention, aimed at stabilizing the financial markets and getting the economy back on track at the lowest possible cost to government. Rather than have the taxpayers assume the risky and expensive burden of taking over the banks—an expense that Congress, having already approved TARP and the stimulus, was in no mood to authorize—Geithner’s plan was to convince investors to come in and recapitalize them. His plan had three main parts. First, the Treasury, working with the Fed and other agencies, ran “stress tests” of the banks to determine the fragility of their books and how much more capital they’d need to be able to survive and lend in an even more dire economic scenario than was expected at the time. Second, it gave banks six months to raise that amount of capital from private investors, and said that, if they failed, Treasury would use taxpayer dollars to buy ownership shares of the banks at a preset price, effectively establishing a floor for private investors. Third, it created a fund, with both public and private dollars, to buy the toxic assets on the banks’ books, thereby giving some assurance that there would be a market for those assets.
The politics of the plan were dreadful. It looked like more mollycoddling of Wall Street. But, as Joshua Green noted in the Atlantic, it had the desired effect. Private money, $140 billion of it, flooded into the nineteen biggest banks; the lending markets unfroze; and, with the help of low interest rates from the Fed, the banks paid back the TARP funds, with interest. In 2008, the International Monetary Fund studied past financial crises in forty-two countries and found that their governments spent, on average, 13.3 percent of GDP to resolve them. By that measure, it would have cost the U.S. government $1.9 trillion. The Obama plan got the banks back on their feet at essentially zero cost to the government, and in historically near-record time. Let that sink in.
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