Today's theme is, yes, the economy. The economy which a lot of people think is Obama's greatest weakness, but in fact is one of his strengths.

Please don't show up and just make a comment like "but the economy sucks right now" without reading the rest of this.

How the Recession Started

The Housing Bubble and the Investment Banks

First, let's recall the story of the economy leading up to Obama's election. The housing market was in a bubble, meaning that it was making tons of wealth for tons of people because housing prices kept going up. Everyone knew this was a bubble, and that it would break sometime soon. Every real estate person and every economist said it would. But while it was going on, it was great. Everyone was making money hand over fist. In many ways, it was like the internet bubble under Clinton, except even more intense and even more widespread, in the sense that not everyone had internet stocks, but almost everyone with a house saw their assessment rise.

This bubble was enabled in part by mortgages that were given to people who could not pay for them. The banks who gave these mortgages certainly knew the mortgage-holders were going to default eventually, and certainly some of the mortgage-holders knew that too. Some other people were essentially tricked into taking the mortgages and told they would be fine. I believe both the banks and some of the people were to blame for this. However, this was not the biggest problem.

Investment banks took these mortgages and bundled them into investments that people could buy and trade. Then they took those investments and bundled them together. And then they bundled them together. This went on until the people at the investment banks literally didn't understand what they were selling any more. They were enormously risky investments, because they were built on mortgages that would eventually default, but barely anyone realized the extent to which that was true. The stock market kept going higher.

Then, eventually, the mortgages started to default, and the investments started to tank. The stock market tanked, and huge banks like Lehman Brothers went bankrupt. The economy basically crumbled. The banks had put way too much money in these investments, and lost it all, and had nothing left, and in fact they were massively in debt. But, we still need these banks in order to keep our modern economy running, so when they went down, so did the economy. Plus, housing prices all tanked at the same time. This meant that not only was our economic infrastructure down, but all the individual everyday members of the economy lost a ton of money too. Many people who thought they were doing great were in huge debt within a week. Tons of businesses went under, and tons of people lost their jobs.

I can offer a personal story here. I was trying to sell a house at the beginning of the housing recession. It took two years to sell it. It was basically a $100,000 house, and I lost $50,000 on it before I sold it. And compared to a lot of people, I got lucky.

Lessons

Now, why did this happen and what lesson can we learn from it? Basically the mortgage banks and the investment banks screwed up--they took too much risk. And they did this because in America its the law that any publicly held company has to maximize its profits, which leads to risk taking. They are in a sense required to take risks. The only ethical standards they are kept to, in terms of their customers or the other people they affect, come from government regulations. Both of these industries were highly unregulated at the time. This is because the Republicans controlled the government for most of the preceding years, and they are ideologically against regulation. They believe the free market should be free, not regulated. However, when something is not regulated, it does not necessarily act responsibly or ethically. It may make more money, but it won't be better for the people of the country. This is what happened to the mortgage and investment banks. The mortgage banks made mortgages they knew were bad mortgages. The investment banks made investments they knew were bad investments. But because they were not required to take anything into account other than their bottom line, they were allowed to do this.

So, the economy crashed essentially due to a lack of regulations, and due to the presence of risk-taking incentives, on the mortgage and investment banks.

President Bush then signed the TARP law which bailed out the banks and essentially saved the economy from even further collapse. No one wanted to do this but the banks were so inextricably tied into the rest of the economy that if they tanked, there would have been no credit in the system and literally almost no financial transactions could have taken place. So it was a good thing to do pragmatically, however distasteful to everyone. This money has mostly been recouped, incidentally.

Obama Takes Office

The Stimulus

In January Obama took office. He passed a stimulus bill made up of about one-third tax cuts and the rest was investment-based spending, including a lot on infrastructure--which the country needs whether or not it's part of a stimulus bill, since our roads and bridges usually get rated D or F by the engineers.

The stimulus bill worked pretty well, contrary to most people's belief. Here's just one analysis. It's an interesting bill, because the vast majority of every-day people think it didn't create any jobs, while the vast majority of economists think it did create millions of jobs. Was it perfect? No. But it did a pretty good job at what it was supposed to do, considering the context.

When Obama took office, we were losing a staggering number of jobs per month. We kept losing jobs for a while, but we lost less each month, and eventually began gaining jobs each month. Have we gained as much as we'd like? No. For three reasons, essentially: one, the Republicans have blocked pretty much every other one of Obama's attempts to fix the economy because they wanted to be able to say Obama failed. Essentially they preferred a political victory to fixing the country. This is not something they really deny, they make the case that the short-term loss during Obama's term will be offset by later gains under a GOP president.

Two, the economy can't really be fixed until the housing market has been dealt with, and this has been a real bear to do. Partly because the Republicans have blocked pretty much every attempt to do so, first because they don't want Obama to have any success, and second because they are ideologically against regulation, and it would take regulation to do it. Obama did get some regulation through, and that has worked to some extent, but not enough. This is also partly due to the banks' recalcitrance. Obama hoped that the banks, having destroyed the economy, would accept some responsibility for it and make it easier to fix the housing market. They have not, and it has ended up being a real problem. Now I do actually think Obama could have done more here, partly to force the banks to act, and partly to make house refinancing easier; I believe the process is too complicated (which I say as someone who has recently refinanced his house). But, it was a super-complex situation and nobody was going to get it perfect.

Three, Obama has been trying to put the economy back on a non-bubble path. No more internet bubbles, like the 90s, and no more real estate bubbles, like the 00s. This means slower, but more solid growth.

Eventually the stimulus money ran out, which was unfortunate. The now-Republican-controlled congress wouldn't accept another round of stimulus, because they were too focused on the long-term debt, which was not a real issue, and were ideologically against spending (although they weren't when they were in control of congress).

What's interesting is that you can actually track the effect of the stimulus by the schedule for when it ran out of money. Essentially, as it ran out of money, the growth of the economy slowed. It still grew, but not as fast. There's a pretty direct correlation between the stimulus and economic growth. A lot of the stimulus went to the states, and when they stopped getting the federal money, they started really having financial problems. The states, unlike the federal government, can't have a budget deficit, so they had to cut their budgets like crazy. This meant firing a lot of people. Now Obama tried to pass a jobs bill that would provide money to rehire a lot of these people, but the Republicans blocked it, so the decrease in the unemployment rate slowed down. Actually, if you just rehired all the government workers, like teachers, cops, and firefighters, that lost their jobs due to state budget cuts over the last few years, the unemployment would go down by about a full percentage point, which is another argument for more stimulus.

False Republican Arguments

Now Republicans currently argue against the stimulus for two reasons: that it increased the deficit, and that government doesn't create jobs.

The deficit is an issue, but it is a long term issue and pretty much every serious economist says that the first job is to improve the economy in the short term, so that the economy is healthy enough to deal with the deficit later. Obama has solid, moderate plans for dealing with the debt that includes both spending cuts and raising revenue. Pretty much every economist agrees that you need both to deal with the debt. If you just cut spending, the economy will tank. If you just raise revenue, you won't get enough money. Obama has the most responsible plan here.

Incidentally, when it comes to the debt, Obama has not added nearly as much as many people believe:

Gallery

The charge that government doesn't create jobs is silly. Government creates jobs by hiring teachers, fire fighters, and police. It creates jobs by starting building projects for roads, bridges, and energy infrastructure that wouldn't happen unless the government paid for it. It creates jobs through the military and the defense industry. It creates jobs by running the national parks. It creates jobs in scientific research and development, both directly and by giving grants to other entities. The list goes on and on. Some of these are state jobs, but they only exist because the federal government gives the states the money so they can hire the teachers, etc.

Of course, they had a hard time arguing against the part of the stimulus that was tax cuts, because the entire Republican economic plan is based on tax cuts, so they partly tried to pretend they weren't in there. But they also said that the tax cuts that were in the bill were the wrong kind. The tax cuts in the bill basically went to everyday people and small businesses. Almost every economist will tell you this is exactly where you want tax cuts to go for a stimulant effect, because when a relatively poor person gets a tax cut, they spend it right away, and it goes back out into the economy. Poor/middle class people spend the money right away because ether don't have a choice--they are continually spending all their money just to take care of basic stuff like housing and food and college and whatnot. Whereas when the rich get tax cuts, they are much less likely to spend it. They save it instead, because they can. So it has no stimulative effect. Yet the Republicans thought the rich and the big businesses should get the tax cuts. They like to call the rich and big business the "job creators," but in reality they're just not the start of the job-creation train. They can't create jobs until there's demand, and there's no demand unless everyday people can afford to buy stuff. And they can't afford to buy stuff unless they get jobs, or they get tax cuts like the ones in the stimulus.

Now the Republicans used to believe this too. Bush worked his way out of the far-smaller recession in the early 00s through tax cuts. Economically speaking, tax cuts and spending are fairly similar. They both put money out into the economy. There's some benefit to spending because it doesn't last forever, while tax cuts are hard to get rid of once the emergency is over. There's also some advantage to tax cuts because they get into the hands of consumers immediately. Both of these techniques are part of what's called Keynesian economics. Basically the idea is that if you put more money out there, it stimulates the economy. So both the early Bush tax cuts and Obama's stimulus are Keynesian, and essentially the same economically. But now many Republicans are suddenly anti-Keynesian, and just don't believe government can do anything about the economy. Which is strange because the government certainly affected the economy when Bush tried it, and also in the New Deal, etc. It's pretty much obvious that it works. So this is another absurd reason why they are against it, even though it goes against almost all modern economic theory, not to mention almost all of the Republicans' actual history in congress.

Other Economic Strategies

Now one difference between the Bush and Obama tax cuts was how they gave the money back. Bush sent everyone a check, whereas Obama just took less money out of everyone's pay check each week. This was because a recent branch of economics called behavioral economics said it would work better--basically if you get a little bit of extra money each week, you'll spend it on essentials, whereas if you get one big check, you'll buy something random like a new TV. This makes a lot of sense. But unfortunately it also means that no one realized they were getting a tax cut, because they didn't look at the details of their paycheck. So tons of everyday people got a lot of money back--a family with an income of $50,000 got $3600 in cuts--and it helped the economy, but the stimulus bill didn't get the credit for all the positive effect it was having.

Another important tactic was the car company bailout. This saved General Motors and Chrysler, and in the process saved millions of jobs--not just the ones for the car companies themselves, but all the auto businesses that are related to it. They've gotten most of the money back from this, and it was a huge success. The companies are doing better than ever, which is great for American manufacturing and industry in general. This was originally portrayed as controversial, but now it's acknowledged as a great move on Obama's part.

Obama has also been trying to close the gap between the rich and the poor. The gap is far larger than it has ever been before. This causes a huge amount of social friction, but also means that the economy is less dynamic. This is partly due to the stagnant wages people get; people have not had true wage increases in some time, due to Republican blocking of any bills that attempt to fix that, because Republicans are against regulating the free market. Of course, when the free market gets the chance, it does what happens in any power system: the powerful take advantage of the powerless, and the everyday people get screwed. The free market is rarely good for everyday people. Unions, on the other hand, which Obama has supported--although not blindly--are basically responsible for all the improvements the modern worker has over his counterpart a hundred years ago--decent hours, decent pay, decent working conditions.

The gap between rich and poor has increased for a variety of reasons, but deregulation of corporations, leading to increased CEO salaries, and huge tax cuts for the rich, are certainly part of it. The tax rate for the rich used to be much, much higher in the recent past, as you can see below.

Taking this into consideration, it's ridiculous that the GOP is trying to say that increasing the rates on the top tier from the mid-thirties to the high-thirties is going to somehow hurt the economy. There is all kinds of data that shows that high taxes don't hurt the economy, and can actually help it. See here for a very in-depth look.

This gap is hard to close, but making the tax code more fair, trying to create higher-paying jobs in areas like energy and science, supporting unions, and raising the minimum wage are all things that he's been working on, and which are often antithetical to the GOP, which talks a good game when it comes to the education needed for high-tech jobs, but actually spends most of its time cutting education budgets and attacking science as a discipline. Obama has also created the Consumer Protection Bureau, which I'll talk about more tomorrow, which has already helped many many people against predatory lenders and credit card companies, which helps the finances of ordinary Americans. By working to improve the health care system, he's also reducing the amount most Americans will spend on this expensive part of everyone's budget. He's even signed a financial reform law that allows shareholders to vote on CEO pay, which was unheard of before.

He has also been working to make this a non-bubble economy, as I said before. A big part of this is his push for green energy. Green energy is clearly the long-term future for energy. It may become the majority of energy in 10 years, or 20, or 50, but eventually it's going to take over. We need to be on the ground floor of this if we want to take the lead in its production and science patenting in the future. It will not only help our position in the energy market, which is very important, but it will also help make jobs that are here in the US. Energy is a bubble that doesn't break; it's not like we'll ever need less energy. He's also tried to put an emphasis on infrastructure improvement, as in the stimulus. Our roads, internet communication pathways, and energy lines are all substandard compared to the past and to other countries. High speed rail is just one of the examples of something that can really improve this country's transportation, and which the GOP is against for god-knows-why. All of this investment is a place where government involvement is really needed, and the Republicans are ideologically against such investment. In fact, by putting in place new fuel efficiency standards for cars, the average family will save $8200 in gas over the life of a car!

I should point out that in general, Democrats have a better record for creating jobs than Republicans. In fact, Obama has created more jobs than Bush's entire 8 years (net). Here's a chart, and check out here for more info.

Today

In the long run, Obama has done as much with the current economy as anyone could. He approaches the economy by dealing with experienced, pragmatic experts, not ideologues who just advocate random tax cuts whether the economy is doing well or poorly. He greatly increased job growth from what it was when he started, he has gotten the economy out of recession, he has improved the real estate market and car companies, he has regulated the mortgage banks and investment banks so they don't cause such havoc again, he has invested in the future of our energy and physical infrastructure, and tried to make the country's tax policies more fair. On top of that he's made it easier for women to get paid equally with men, which helps entire families out, not just women in particular.

In terms of Romney, let me just quote this week's Doonesbury: "You know, it just amazes me that only a few years after the economy was brought to its knees by a gang of predatory Wall Street plutocrats, that the GOP would nominate a predatory Wall Street plutocrat!" I mean, this is a guy whose entire job that he's basing his run for the presidency for was based on buying companies, then firing a bunch of people in order to make more money for the CEOs and shareholders. This is a guy who is somehow going to help get people jobs?

Anyway. Obama has done a very solid job with this economy. I know it's not great yet, but it is much better than it was, much better than it might have been under other hands, and it is clearly going in the right direction. If he gets another term, he can stop fixing Bush's problems and actually move us in the direction of a long-term, non-bubble prosperity with well-paying jobs and a reasonably-regulated financial system.

EDIT: I should also point out that Obama was just endorsed by the Financial Times, which is probably the most-respected financial media outlet, as well as by Michael Bloomberg, who is also very well respected for his economic knowledge.