To win reelection, Barack Obama can’t just persuade voters the economy is improving.

He has to make them believe he’s the reason why

By Joshua Green and Peter Coy

On March 9, President Barack Obama flew to Petersburg, Va., to tour a Rolls-Royce aircraft engine plant. He’d been to Petersburg before as a candidate, when he stopped his campaign bus to grab lunch at a burger joint. That was in 2008, when he could still blame someone else for the misfortunes of the people he met inside.

On this visit, the president was long on optimism and short on promises, despite all the recent good news about the economy. That morning, the Bureau of Labor Statistics reported 227,000 jobs had been created in February, capping the best six months of job growth since 2006. The stock market had doubled over the past three years. Unemployment was falling. But Obama took care not to boast. The economy has gotten off to a good start each of the past two years, only to slump in the summer, and in Petersburg, Obama cited the favorable jobs report only in passing. “Day by day, we’re restoring this economy from crisis,” he said. “But we can’t stop there.”

Between now and Election Day, Obama must convince people he has steered the economy well enough to warrant another term. He can make a strong case that he’s gotten some big things right. His administration halted the worst downturn since the Great Depression and rescued the financial sector plan that drew on private, rather than public, funds recapitalize ailing banks. Despite the best efforts of an intractable Congress, he kept the government from shutting down or defaulting on its debt, which bought the economy time to heal.

But Obama and his advisers also failed to recognize the shape and scope of the crisis and hesitated to push for new jobs programs once they did (FIG. 1). Even with overwhelming assistance from the Federal Reserve, growth remains tepid and unemployment, though falling, remains high at 8.3 percent. No modern president has been reelected with a rate above 7.2 percent.

Unlike Ronald Reagan or George W. Bush, Obama isn’t identified with a clear economic philosophy. During his presidency, he’s advocated spending more money to create jobs, cutting the deficit, and investing for the long term — sometimes all at once. “President Obama’s economic approach is deeply pragmatic,” says his former adviser, Lawrence Summers. Others are less generous. “I can’t infer a theory,” says Glenn Hubbard, Columbia Business School dean and former economic adviser to Bush. “I’ve watched the president for a long time, and he’s very smart, but he doesn’t have a policy rudder,” says Douglas Holtz-Eakin, who ran the Congressional Budget Office in the Bush years and advised Senator John McCain’s 2008 presidential campaign.

Obama’s reelection chances depend heavily on how many Americans are drawing paychecks this fall. But they’ll also be determined by how people assess the man who has overseen the economy these last three years. Did his actions hasten the recovery, or prolong the slump? His aides argue that things could have been worse; but could they have been appreciably better? And what exactly guides Obama’s decisions?

As the outlook has brightened, we put these questions to current and former members of his administration, and to some of their allies and opponents, to better understand the reasoning behind the president’s key economic decisions. The idea was to discern a theory of “Obamanomics” and an answer to the question: If the recovery is real, is it because Obama is good — or just lucky?

“We were planning for a world that was very dark, and we were very worried.” That’s how Treasury Secretary Timothy Geithner recalls the first meetings of the president-elect’s economic team in late 2008. The discussions at that moment — when expectations for the Obama presidency were rising in direct proportion to the collapse of the global economy — focused mostly on the size of the stimulus. Stretched out in an easy chair in his stately corner office, looking every bit the crisis-ravaged veteran, Geithner dismisses the charge, delivered most forcefully by New York Times columnist Paul Krugman other liberal critics, that the White House blew its first major decision settling for too small a package to bring about a strong recovery. “We believed we should put everything we could behind the initial response then keep at it,” Geithner says. “And on the stimulus, we were larger than anybody else on the relevant part of the political spectrum.”

During the transition, Christina Romer, who became chairwoman of Obama’s Council of Economic Advisers, calculated it take an astounding sum — $1.8 trillion — to return the economy full employment by 2011. An economist at the University of California at Berkeley and a scholar of the Great Depression, Romer was vigilant about avoiding the mistakes of the 1930s. But most of her colleagues feared the political shock of proposing anything nearly so large; they wound up agreeing on a figure of $800 billion. That was the magical line,” says Rahm Emanuel, Obama’s first White House Chief of Staff. “The Washington conventional wisdom was anything above that, you were crazy. Anything below, you were being prudent. We got as much as we could. We knew that we were going to have to do other things.”

Geithner may have been planning for a world that was very dark, but it turned out the administration’s projections weren’t nearly dark enough. The Department of Commerce initially reported the economy was shrinking at a rate of 3.8 percent at the end of 2008. Routine revisions of the data later showed the economy had actually been contracting at the far more alarming rate of 8.9 percent. “Economists across the political spectrum, and at least some of us in the White House, realized too slowly the severity of the crisis,” says Michael Greenstone, a Massachusetts Institute of Technology professor and chief economist of the Council of Economic Advisers at the time. “No one had experienced anything like it in their lifetime. Coming off a decade of what was clearly unwarranted self-congratulation about the ‘Great Moderation,’ that we had solved the problems about recessions — all of that created a terrible blind spot.”

The White House also made a faulty assumption about how long the recession would last. The economic team, led by Summers, the Harvard University professor and former Clinton Treasury Secretary who directed the National Economic Council, expected something close to a “V-shaped” recovery — a deep drop followed by a rapid climb back. Many of the leading macroeconomic models concurred. This scenario came to dominate internal discussions and produced a stimulus designed to deliver support quickly and then fade away.

But the U.S. was actually heading into a drawn-out “L-shaped” recovery — the type that typically follows a financial crisis, as economists Carmen Reinhart and Kenneth Rogoff documented in a widely read paper in early 2008. “The size of the stimulus delivered in 2009 has received lots of attention, but probably was less consequential than its ... design,” says Peter Orszag, former director of the Office of Management and Budget. “The timing matters a lot. The initial stimulus was mostly restricted to 2009 and 2010, when in the end more was necessary in 2011 and 2012.”

At the time, prominent economists including Nobel laureates Joseph Stiglitz of Columbia University and Krugman were warning of the dangers of a prolonged recession and criticizing the White House approach as insufficient. “It’s fair to say that there could have been more weight given to the possibility that the models predicting a V-shaped recovery were wrong,” says Orszag. “And if that central prediction is wrong, what are the consequences?”

At first, a V-shaped recovery did appear to be under way. The recession officially ended in June 2009. In January 2010 the government reported the economy grew a rate of 5.7 percent in the fourth quarter — the fastest pace in seven years. That figure, too, was later revised downward, to 3.8 percent.) But in the spring, when the sovereign debt crisis hit Europe, growth slowed and by yearend the stimulus was phasing out — just as the weakened economy was being beset by a series of foreign and domestic crises.

Summers had argued for a more modest stimulus, partly on the assumption that the White House could go back to Congress for more money later if necessary. “It is easier to add down the road to insufficient fiscal stimulus than to subtract from excessive fiscal stimulus,” he wrote in a December 2008 memo to Obama later published by the New Yorker. “We can if necessary take further steps.” That turned out to be wrong. Republicans and many Democrats recoiled at the idea of further government spending, and the next three years became a struggle to eke out any further support.

As early as May 2009, Obama had begun worrying about the possibility of a jobless recovery. He asked his economic team to assemble ideas. (The White House declined requests for an interview with President Obama for this story.) “I think he had a sense even then that the leftover effects from the financial crisis were straining the economy to a greater extent than I think professional economists had expected,” says Alan Krueger, a labor economist at Princeton University who was an assistant Treasury secretary and now heads the Council of Economic Advisers.

Had Obama resolved right then to make a concerted push, he might have altered the shape of the recovery. Government could, in theory, create additional jobs through further spending, and his advisers sifted through the options, devising models to predict how they might perform. These included funneling more money to state and local governments to prevent layoffs forced by the collapse in tax revenue; programs to “green” buildings and improve roads and bridges that could employ the legions of idle construction workers; and a hiring tax credit for employers who added new workers, a favorite because some models suggested this could add as many as 1 million jobs at the relatively cheap cost of $30 billion. “The available evidence was it would have been very low cost per job created,” Greenstone says. “The question was, what is the cheapest and fastest way to get the most jobs?”

The debate dragged on for months without resolution, even though the optimal economic response wasn’t really in dispute: It was “accelerator now, brake later,” Romer’s phrase meaning more stimulus followed, later, by deficit reduction to ensure the economy’s long-term health. But Obama concluded that what was economically desirable wasn’t politically feasible. “The system had come to a point politically — maybe not economically, but politically — where those lines diverged,” says Emanuel.

The White House was selling the first stimulus as a success. Calling for more stimulus would have undermined that. It might also have soured lawmakers on the health-care bill wending its way through Congress, which was Obama’s priority. And he still held out hope that a V-shaped recovery was on track. In December 2009, when Romer broke the news only 11,000 jobs were lost in the prior month, down from 800,000 in January, Obama hugged her (FIG. 2).

By then the country’s tolerance for more government spending was wearing thin. In summer 2010 the deficit had replaced jobs as the locus of public anger when Tea Party activists across the country assailed their members of Congress at town hall meetings. “At that point,” says Jared Bernstein, Vice President Joe Biden’s former chief economist, “you had GDP beginning to grow, and you had what some started calling green shoots, and the gravitational pull toward politics became stronger. Presidents sometimes get different advice from their economic and political advisers. When the economy is careening off a cliff, they give extra weight to economic advisers. When things are improving, they might give more weight to political advisers. The problem was, things weren’t really improving that much. It wasn’t at that point where you have a virtuous cycle of growth.”

There’s no way of knowing whether Obama was really boxed in, as he believed, or whether he might have gotten the economy more help if only he’d campaigned to save teachers’ jobs or give businesses further resources to hire. But the decision not to try soon took on unexpected significance. In December 2009 the president still had a filibuster-proof majority in the Senate, and that same month the Democratic-controlled House pushed through a $154 billion economic aid package. A month later, Republicans won the Massachusetts special Senate election to replace Ted Kennedy, and with it the 41 votes needed to block Democratic proposals. That foreclosed the possibility of any more help coming on a party-line vote, which was by far the likeliest way to get any further stimulus.

Looking back, some members of his administration regret not trying for more while they had the chance. “I’ve never been convinced, given how sick the economy was,” Romer says, “that we couldn’t have gotten something through.”

Obama’s most vexing year may have been 2010, when domestic politics, world events, and economic conditions made it difficult to find a path forward. “It looked like they came to a fork in the road and took a year to decide which way to go — jobs or deficit,” says Vincent Reinhart, chief U.S. economist at Morgan Stanley and a former senior Fed official. “Whether to buy into fiscal consolidation or whether to direct efforts toward the labor market to reduce unemployment.”

Over the objections of Summers and Romer, the president began emphasizing the deficit, proposing Orszag’s idea of a three-year freeze on nonmilitary discretionary spending in his January State of the Union speech. “Like any cash-strapped family,” he said, “we will work within a budget to invest in what we need and sacrifice what we don’t.” By conceding his conservative critics’ main point — that austerity, not stimulus, was the proper path forward — Obama shrank his options.

Employers were reluctant to hire, the recession. “The small business sector froze in its tracks as it tried to digest the care bill,” says David Rosenberg, chief economist Gluskin Sheff & Associates, a wealth management firm in Toronto. “You can argue it was good social policy. But if the business sector is facing an uncertain outlook, they’re not going to add labor costs to their bill.”

The Republican talking point that Obama was hostile to business was also gaining currency, partly because his marquee initiatives — health-care and climate change legislation — involved daunting new regulatory schemes, and partly because he seemed perennially unsure about how to address business leaders. He’s lauded small businesses for “raising wages and creating good jobs” (2012 State of the Union), while simultaneously criticizing a culture where “a shrinking number of people do really well while a growing number of Americans barely get by” (same speech).

Obama knows he has fences to mend. On March 6 he spent more than an hour with about 100 CEOs from the Business Roundtable at the Newseum in Washington. In contrast to past meetings, the press was barred and the conversation was unscripted, says Motorola Solutions CEO Greg Brown. “It is that kind of engagement that he needs to do more of.” American Electric Power CEO Nick Akins attended the same event and says, “I think he does understand the issues that we’re facing.” But, he adds, “my own personal feeling is that you can’t just go around bashing corporations when corporations are doing very important things for the economy, providing jobs and so on.”

Geithner says that what really kept the economy from rebounding in 2010 and 2011 were “headwinds” beyond the administration’s control. To illustrate this, he has an aide retrieve a chart tracking monthly changes in private-sector employment since 2008. The chart shows steep losses that bottom out in January 2009 (Obama’s first month in office) and then improve almost as rapidly, with growth turning positive in February 2010. Then the line flattens — a reaction to the first tremors of a possible Greek default. Geithner’s point: Not our fault.

Absent these headwinds, he says, the recovery would have been stronger. Geithner’s critics contend the only thing the chart demonstrates is the administration’s naive faith that the upward trend would continue. “There was little warrant either in the historical record of the aftermath of financial crises or in the macroeconomic forecasts for such judgment,” says J. Bradford DeLong, a Berkeley economist and former Clinton Treasury official.

In the fall of 2010 the Democrats were routed in the midterm elections, losing control of the House. Yet in the immediate aftermath, an opportunity arose in the lame-duck session of Congress to trade a full extension of the Bush tax cuts for additional stimulus. This put Obama in a quandary. Republicans refused the administration’s entreaties to extend its package of tax credits for working families. But they did indicate they’d agree to a one-year payroll tax cut of similar size, an idea conservatives had been pushing for months. Although blunter and more costly than the jobs measures favored by Obama’s team, this option still promised what amounted to $120 billion in stimulus — though Republicans would never call it that. Geithner and Gene Sperling, a Treasury adviser and current director of the National Economic Council, recognized further that Republicans would be hard-pressed to oppose extending that tax cut when it expired a year later, meaning there was good reason to believe the White House would wind up with $240 billion in stimulus as it eventually did.

For Obama, this presented a tantalizing opportunity to secure something that had seemed well out of reach, but at the price of his reputation and standing with liberals in his party. He had repeatedly sworn to veto any extension of tax cuts for the rich. Now he was wavering. “We had started to think about the unthinkable — that we’d have to extend them all,” says Sperling. off an intense debate. “We had a series of meetings about strategy,” says Goolsbee, who succeeded Romer as chairman of the Council of Economic Advisers. “Should we have a giant battle, or should we make a deal?”

Obama took the deal and absorbed the Democratic outcry. It was a shrewd decision, and exemplifies his approach economic policy: get the necessary result, even at a painful cost (FIG. 3).

One of the great mysteries of Obama’s presidency is why he turned so aggressively toward deficit reduction when the economy was still ailing. With demand weak, unemployment high, and borrowing costs low, textbook economics called for more government activism, not less. “The president made the basic judgment,” Geithner says, “that the price of entry into the debate for more short-term stimulus or a sustained investment agenda is showing that you can afford it, and that required laying out a path to bring down the deficit.”

The emboldened Republican Party, with its new House majority, was fixated on spending cuts alone and exploited Obama’s desire to balance cuts with revenue. With the possibility of a government shutdown in April and a default on federal debt in August, Obama spent much of 2011 in an endless back-and-forth with Republicans over the size and scope of government. Obama had resisted the deficit-cutting prescriptions put forward by the Bowles-Simpson commission he’d appointed; these included steep spending cuts and eliminating tax loopholes (FIG. 4). But by summer 2011, Obama had begun negotiating in earnest with House Speaker John Boehner (R-Ohio), and he took up many of these same ideas.

Amid these delicate talks, the White House believed that continuing to campaign aggressively for jobs was nearly impossible because it might have poisoned the atmosphere. “Any time you’re locked in confidential negotiations,” Sperling told the Washington Post on Feb. 4, “you are to some degree sacrificing your ability to fully speak your heart and mind for the sake of trying to focus on getting one very important thing done.”

One reason Obama got stuck in deficit quicksand is that he had ruled out actions that might have forced a resolution — calling the Republicans’ bluff and permitting a shutdown, or invoking the 14th Amendment to unilaterally raise the debt limit — as too risky for the country’s fragile economic condition. “It would have been a strong political move, without question, to act independently,” says David Axelrod, Obama’s chief strategist. “Whether it would have been a strong economic move, given the uncertainty it would have created, is a different question.”

By July, as the deadline for default neared, the economy’s resilience was a pressing concern. Once again, the year had begun with forecasts of strong growth that failed to materialize, in part because new headwinds appeared — the Japanese tsunami and earthquake, the Arab Spring, and the slow-motion euro-zone debt crisis. With Republicans credibly threatening to force a default, Obama’s immediate task was staving off disaster at home. He acceded to $900 billion in spending cuts in exchange for raising the debt ceiling, without getting a dime of revenue in return (FIG. 5).

The low point in Obama’s stewardship of the economy came on Sept. 2, when Sperling and Katharine Abraham, a member of the Council of Economic Advisers, shared the unenviable task of informing the president that the economy had failed to create a single job in August. There were no hugs. This came on the heels of Standard & Poor’s downgrade of U.S. government debt, and the grim news that the chaos of the near-default had driven consumer confidence much lower than anticipated. A slide back into recession seemed possible. Republicans dubbed Obama “President Zero”; soon after, his Gallup approval rating reached its nadir, 39 percent.

This finally forced Obama to accept the futility of trying to compromise. “The only way we could move the Congress,” Axelrod says, “was to leverage public opinion in a much more direct way and take the case out to the American people. Sitting in a room with John Boehner and Mitch McConnell for hours a day, hoping that the gods of reason would come and kiss everyone on the cheek, was not that promising.”

Obama stopped negotiating with Republicans and set his sights instead on getting reelected. The White House decided to focus almost singularly on jobs, proposing a $447 billion American Jobs Act that suspended payroll taxes for employers and lower-income employees, and added unemployment benefits for the long-term jobless.

It’s Obama’s great luck that this new emphasis on jobs has coincided almost exactly with the recent turnaround in the economy. Just when things seemed hopeless, hiring began to pick up. That terrible August employment number — zero — was subsequently revised upward to 200,000 new jobs. The economy has been on a roll ever since. In the past six months, nonfarm payrolls grew by 1.2 million, the most in six years (FIG. 6). The unemployment rate has fallen to 8.3 percent.

The puzzling thing is, no one is quite sure why this is happening. Employment is coming back faster than growth can explain, which raises questions about whether the trend is sustainable. That’s the opposite of what happened in 2009, when the economy shed jobs even faster than the decline in the gross domestic product indicated it should.

Economists have several theories about why job growth has been so strong. Maybe GDP is growing faster than reported (good). Maybe employment is growing more slowly than reported (bad). Maybe the growth in workers’ productivity has slowed, which means more hiring (good in the short term — jobs! — but very bad in the long term because the U.S. will be less competitive). “Everyone has their favored explanation,” says Orszag, “but no one knows yet which is right.”

From the moment Obama took office, the economy has posed the greatest threat to his political fortunes. Often overlooked in assessments of his performance is the critical role played by his mostly silent partner at the Federal Reserve, Ben Bernanke. Over the past three years the Fed has taken extraordinary steps to stimulate the economy through monetary policy, even as Congress has blown hot and cold on fiscal policy. From the Fed’s unprecedented involvement in the 2008 rescue of Bear Stearns to its massive bond purchases to drive down long-term interest rates, Bernanke has shown a willingness to test the limits of his power.

If the recovery does slow this year, as it did after promising starts in 2010 and 2011, scrutiny will fall heaviest not on Bernanke but on Obama, who will be subjected to endless second-guessing about what he might have done differently. “Starting in June 2009,” says DeLong, “they should have taken steps to set up the game board so they could still maneuver after Congress got nervous about the next election.”

Had Obama appreciated the possibility of an L-shaped recovery, he might have designed a stimulus better suited to respond to it, possibly by tying support measures to cyclical indicators, such as the unemployment rate, so they’d last until the economy recovered. “That would have been relatively cheap to do,” Orszag says, “because CBO was assuming a V-shaped recovery, so it wouldn’t have cost much. Perhaps Congress wouldn’t have gone along, but that’s the kind of policy you’d pay a lot of attention to if you’re doing downside risk analysis, but that you don’t put a lot of emphasis on if you’re overly confident of your projection.”

The White House also failed to fill two vacant seats on the Fed’s board of governors. “For two years I had a Post-it note on my computer: ‘Hound Tim [Geithner] about Fed governors,’” Romer says. A more dovish Fed might have enabled Bernanke to act sooner, or more aggressively.

Not doing more to address cascading mortgage defaults also looks costly in hindsight. The White House economists didn’t appreciate that housing was a cause, not just an effect, of the lingering slump. Perhaps fearful of a backlash — a televised rant about undeserving delinquent homeowners launched the Tea Party — the administration never provided generous mortgage relief.

Obama could have used the $250 billion of leftover Troubled Asset Relief Program money as additional stimulus, possibly in the form of an infrastructure bank, a mass refinance program for underwater mortgages, or some other vehicle. But each of these ideas would have required a different sort of president — one who was more partisan, more radical, more inclined toward confrontation, perhaps equipped with more of a tragic sense of all that Washington could do wrong.

Obama often points out that he’s had to contend with the gravest financial crisis of any president since Franklin Roosevelt. One difference, though, is that Roosevelt consistently took up sweeping new policies if he thought they could help, even risky or unproven ones. Bernanke himself has hailed the value of “Rooseveltian resolve” in helping damaged economies to recover. In a famous paper, he wrote, “Roosevelt’s specific policy actions were, I think, less important than his willingness to be aggressive and experiment — in short, to do whatever it took to get the country moving again.”

Obama’s major economic policy decisions were guided by a much different spirit, a cautious, results-oriented pragmatism that is the heart of Obamanomics. Like John Maynard Keynes, Obama believes government can and should act to alleviate downturns with higher spending and tax cuts. But he’s disinclined to challenge political constraints, settling for what he’s able to get.

“Keynes was willing to change his mind and do things [in a crisis] that would otherwise be viewed as radical or inconsistent with conventional macroeconomics,” Reinhart says. Roosevelt went much further down this path than Obama would dare — for instance, by taking the U.S. off the gold standard. Where Obama has gone furthest is in his willingness to suffer to avoid damage to the economy.

His caution is a striking contrast to candidate Obama, who seemed to embody radical change. As president, he’s steered an imperfect course that has nonetheless brought the U.S. to a position of economic stability and modest growth. That’s far from ideal. But measured against other countries, whose leaders made different choices, the results don’t look half bad. “Europe is a compelling validation of our financial strategy,” Geithner says.

The choices Obama made helped bring about this result, even though he had help from the Fed, and even though they don’t quite explain the recent strength of the recovery. But the business cycle operates by a logic all its own. It cursed Herbert Hoover and blessed Ronald Reagan. Obama’s good fortune is that this sudden upturn is occurring just when he needs it most.


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