A little less than four years ago — not long after Barack Obama was elected President — I was having lunch with a friend who is also the smartest businessperson I know.
“Of course, Obama has no chance of getting a second term in this economy,” my friend said definitively.
“And whoever gets elected in 2012 will be a one-term President too.”
Other friends — including some really well-educated ones — seemed to think the economy would come roaring back as soon as Obama took the oath of office. Given the nature of the financial crisis and the housing bust, those were just dreams.
I get a lot of responses to my City Talk columns and blog posts about economic trends (usually local ones in print pieces, broader ones here on the blog), and sometimes I’m viewed as overly optimistic. But several years ago I was seen as “Mr. Doom and Gloom” by many local readers for my many articles both chronicling and predicting housing market woes.
But I just try to go where the arithmetic leads. Things were really bad and getting worse when my friend and I had that memorable lunch four years ago. It looked like things might get catastrophically worse.
Now, four years later, the economy is still very weak but getting better — in some cases quite markedly. I’ve lately been chronicling incredibly positive signs in the sheer number of major investments in Savannah’s greater downtown area.
And, despite a terrible performance in the first debate and a surging campaign for Mitt Romney, Obama is still a slight favorite to be re-elected according to the statistical model of polling by Nate Silver at FiveThirtyEight.
The economy is certainly better right now than I thought it would be at this point in the recovery. Recoveries from financial crises are notoriously choppy and weak. Even if the financial system had not teetered on the verge of complete collapse and even if we didn’t have almost 900 banks still under some sort of FDIC formal action, the overbuilding during the boom years and the bursting of the housing bubble would have been a drag on the economy for many years.
The Obama administration has made some errors, in my opinion, including a few big ones. One huge one that created unreasonable expectations was the claim that the 2009 stimulus package would arrest the unemployment rate at 8 percent. That prediction was made before the President took office and before we knew the full depth of the GDP decline in the last quarter of 2008, but the statement was still laughable, even at the time. I’ll do an entire post about that before the election.
But on the whole, I’m betting that both the Obama administration and the Fed are going to get decent grades from history for their handling of the economy, especially given the entrenched opposition in Congress.
So are you better off than you were four years ago?
Let’s recall where we were four years ago.
The economy entered recession at the end of 2007 (see graph from Calculated Risk) primarily because of the housing bubble bursting — although “deflating” might be a better term given the stickiness of home prices and the poor understanding of the issues in many U.S. metros, including Savannah.
By fall 2008, the economy had been in clear decline for almost a year. In September, Lehman Brothers filed for bankruptcy, which in part led to the full-fledged financial crisis as chronicled in 2010 by Robert Samuelson at The Washington Post:
Consider what happened after Lehman:
– Credit tightened. Banks wouldn’t lend to each other, except at exorbitant interest rates. Rates on high-quality corporate bonds went from 7 percent in August to nearly 10 percent by October.
– Stocks tanked. After its historical high of more than 14,000 in October 2007, the Dow Jones industrial average was still trading around 11,400 before the bankruptcy. By October, it was about 8,400; by March 2009, 6,600.
– Consumer spending and business investment (on machinery, computers, buildings) — together about four-fifths of the economy — declined sharply. Already-depressed vehicle sales fell a third from August to February.
– Employment collapsed. Five million payroll jobs disappeared in the eight months following Lehman’s collapse. The unemployment rate went from 6.2 percent in September to 9.5 percent in June 2009.
In mentioning Lehman, I don’t mean to suggest that there was some easily preventable chain of cause and effect here. In the thorough timeline of the financial crisis created by the St. Louis Fed, there are 21 significant developments in just one month — October 2008.
By summer 2009, a combination of factors — the stimulus plan (more than a third of which was tax cuts, btw), the auto industry bailout, bold moves by the Federal Reserve and the Treasury, and other stimulative measures — ended the economic freefall.
John McCain was promising a stimulus package too, but a smaller one. It’s also likely that his administration would have taken a more hands-off approach as major corporations verged on failure. Almost certainly, that approach would have led us to a far worse spot than where we are right now.
I don’t know how the collective memory of the 2007-2009 recession and the broader understanding of the difficulty of recovering from a financial crisis will impact November’s vote.
But I can virtually guarantee that — at best — we’ll still have the sense of shaking off a sluggish recovery when 2016 rolls around. That’s going to be the case no matter who wins. And it won’t be such a bad place to be, considering the alternatives.