The Obama Economic Legacy

As President Obama prepares to leave office, it’s time to reflect on how the economy fared during his tenure. Because of the size and complexity of the U.S. economy, I have generally believed that presidents take too much credit or blame for what occurs on their watch. In many cases, bad luck or good fortune can play a larger role in a particular president’s economic performance than actual policy.

Bailouts: President Obama entered office, after the worst part of the financial crisis unfolded and amid the deepest recession since the Great Depression. With an economy in free fall, the Administration worked with the financial services industry (some would say the relationship was a bit too cozy) to ensure that banks and insurance companies adhered to the strings attached to TARP, which was passed under President Bush. The much hated bank bailout remains a hotly contested topic, but considering just how close these companies were to the abyss, most economists and analysts agree that allowing them to fail would have caused a much deeper and longer recession.

BUT, there were two major flaws associated with the bailouts. The first is that the government ultimately socialized losses (tax payers had to foot the bill), but allowed gains to remain privatized (shareholders reaped the rewards of the recovery). Sure, the banks repaid the loans with interest, but considering that bank stocks have quadrupled in value since early 2009, taxpayers missed out on a big upside. The second major flaw is that the government did not do enough to assist underwater homeowners. The original Home Affordable Refinance Program (HARP) didn't really help that much and the second version was only marginally better. (More on housing below.)

Regulatory: The Dodd-Frank Wall Street Reform and Consumer Protection Act, which was enacted in July 2010, did a couple of good things: it forced banks to keep more capital on hand and it created the Consumer Financial Protection Bureau. Unfortunately, the law was far too dense and did not go far enough in controlling the animal spirits of the banks. The nation’s largest financial institutions are still leveraged, complicated and interconnected, which makes them prone to inflict damage on the overall financial system…and they are still too big to fail.

Stimulus: Just a month after being sworn into office, Obama signed The American Recovery and Reinvestment Act, (the “Act”), into law. The Act was an “effort to jumpstart the economy, save and create millions of jobs, and put a down payment on addressing long-neglected challenges so that our country can thrive in the 21st century.” The effectiveness of the Act has long been disputed, but along with TARP, these actions likely saved the country from enduring a much worse outcome.

Economic growth: In the first quarter of 2009, Gross Domestic Product sank by an annualized 5.4 percent and for all of 2009, the economy contracted by 2.8 percent. There was progress from that low point, but pace of growth of the current recovery has been slower than the annual average post World War II growth rate of 3.3 percent. The economy has expanded by an average of 2.1 percent during the Obama years.

Jobs: In January 2009, the economy lost 741,000 jobs and the unemployment rate was 7.8 percent, on its way up to a peak of 10 percent in October 2009. According to the government, monthly job losses averaged more 712,000 from October 2008 through March 2009—the most severe six-month period of job losses since 1945. Despite the official end of the recession in June 2009, non-farm employment declined by another 1.2 million until reaching a trough in February 2010. Since bottoming out, the economy has added more than 15 million new positions and the unemployment rate is now 4.7 percent.

The news is not so good when it comes to the participation rate in the labor market, which remains near 40-year lows. While about half of the slide of in those in the labor force can be attributed to demographics, there is still a problem, especially among men, aged 25 to 54.

Income: With the labor market in free fall, median annual household income declined to an inflation-adjusted $54,478 in June 2009, according to Sentier Research – and reached low point of $50,722 in August 2011. As of November 2016 incomes had increased to $58,221, just below the January 2000 level of $58,410. Although average incomes have inched higher, income inequality continues to plague the economy.

Stocks: At the close of trading on January 20, 2009, the Dow stood at 7,949, the S&P 500 was at 805 and NASDAQ settled at 1,440. Stocks did not bottom out until two months later, but since then, have soared.

Housing: After peaking in 2006, housing prices finally bottomed out in early 2012. In the most recent Case-Shiller home price report, the National Index was reported as being at a new nominal high, but when adjusting for inflation, Bill McBride of Calculated Risk blog says the National index “is still about 15.3 percent below the bubble peak.”

Foreclosure proceedings have plunged 70 percent from the worst of the housing crisis in 2009, according to a year-end report from ATTOM Data Solutions. US foreclosure activity dropped to 10-Year Low in 2016 -- 0.70 percent of all housing units had at least one foreclosure filing in 2016, the lowest annual foreclosure rate nationwide since 2006, when 0.58 percent of housing units had at least one foreclosure filing.

P.S. I really enjoyed President Obama's final interview, on the Pod Save America show -- he seemed just like a boss talking to his former employees. Give it a listen!