Presidents are rarely able to accomplish much in the last two years of a second term. Tuesday’s election results guaranteed that President Barack Obama will not be able to accomplish anything legislatively in the remainder of his term. The Republicans will demand that he surrender his firstborn just to get an undersecretary through the Senate approval process.
If Obama recognizes this reality, perhaps he can take the opportunity to spend his remaining years more constructively by permanently transforming the shape of the economic debate in the United States and overseas.
In 2008 the economy collapsed for a simple reason: There was an enormous shortfall in demand created by the collapse of the housing bubble, which had propelled a massive building boom as residential construction hit a record share of GDP.
The bubble also led to a boom in consumption. It generated $8 trillion in ephemeral housing equity. Homeowners treated this bubble wealth as real wealth, using equity in their homes to pay for everything from cars and vacations to their kids’ education. When the bubble burst, this equity disappeared, along with the spending that it supported.
This meant that the central problem when Obama took office was replacing the demand that had been generated by the bubble. By my calculations, we lost approximately $1.2 trillion in annual demand.
It would be great if the private sector could jump in and fill this sort of demand gap, but the world doesn’t work like that. Families don’t say, “Sure, our house price has plummeted, but let’s go out and buy a new car to support the economy.” Similarly, businesses don’t rush out and double their investment when demand for their current production is already weak.
The reality is that the private sector does not spontaneously generate the demand needed to keep the economy near full employment. This is the rationale for stimulus spending: The government has to fill the gap in demand with spending of its own.
The stimulus pushed through by Obama partly accomplished this task, but it was less than half as large as needed, as many economists clearly said at the time. And it mostly ended in 2010, which was far too soon.
As a result, the economy continues to suffer from a shortfall of demand. While recent job growth numbers are encouraging, even if we sustain the October rate of job growth indefinitely, we will not fill the employment hole created by the downturn until 2018.
This is where Obama the former professor comes in. He can use his bully pulpit to explain to the country how we need additional government spending to bring the economy back to full employment. Rather than being some burden on our children, additional spending (even financed by dreaded debt) will be a blessing to them.
Additional spending can address long-term needs that are being neglected, such as rebuilding our infrastructure, improving education, reducing the cost of college and retrofitting tens of millions of homes and offices to make them more energy efficient. Additional spending today will also do our children the great favor of giving their parents jobs. Furthermore, by virtue of tightening the labor market, it will give tens of millions of parents jobs at higher wages.
Obama can explain this to the country as he lays out proposals for additional public investment that the Republican-controlled Congress will promptly ignore. He can also explain that the country has nothing to fear from higher debt, just as the large debt after World War II didn’t prevent the country from having the most rapid period of growth in its history. As the financial markets keep telling us by lending to the country at incredibly low interest rates, the government can easily borrow more to meet its short-term and long-term needs.
The deficit hawks will scream bloody murder if Obama calls for spending to put the country to work again. They will spew nonsense about how putting people to work, improving infrastructure and educating our children will impoverish our kids. The deficit hawks will undoubtedly resort to racist rants about how China is going to own the United States because of the money it is lending us.
Obama can explain to the country the relatively small amount of U.S. assets held by China. More important, he could point out that China’s purchase of U.S. government bonds and other assets is due not to the budget deficit but to the trade deficit. Those who want to reduce China’s purchases of U.S. assets should be focused on getting the value of the dollar down against the Chinese yuan, not yelling about budget deficits.
By making it very clear that Obama can accomplish nothing by working with Congress, the elections last week put him in a situation where he has nothing to lose. This gives him the opportunity to step away from the Washington political nonsense and try to permanently change the nature of economic debates domestically and internationally.
If he succeeds, he will have done an enormous service to the country and the rest of the world. He can create a political environment in which his successors can talk honestly about the country’s economic problems and then work to fix them.