Obama’s team know their history and they can read the opinion polls. These suggest that the race for the White House will be a close-run thing and that a stuttering economy between now and November could see Obama leave Washington as the first one-term president since Bush senior.
The case for Obama, who kicked off his re-election campaign in Ohio last weekend, is the one succinctly put by the vice-president: Osama bin Laden is dead; General Motors is alive. The administration can boast success on two fronts: eliminating public enemy number one while at the same time intervening to ensure that the Great Recession of the past five years has been less severe in the US than in Europe.
That’s not saying all that much, however. As the International Monetary Fund has noted, housing busts that result from an excessive build-up in personal debt tend to be long and painful.
Governments can help to ease the pain but there are no quick fixes. Falling house prices mean household wealth shrinks and rising unemployment makes it harder to keep up mortgage payments. Consumer confidence falls and spending dries up.
The US over the past decade fits this pattern perfectly. In the bubble phase, low interest rates resulted in both a house-buying spree and a residential construction boom. In the past five years, house prices fell by a third, the number of foreclosures rose fivefold and unemployment peaked at 10% of the workforce.
More detailed work at a local level showed that those counties that saw the biggest increase in household debt between 2002 and 2006 saw the biggest drop in consumption once the crisis began.
Slashed interest rates
US policymakers have pulled every available lever in an attempt to get the economy moving. As in the UK, the central bank has slashed interest rates and cranked up the electronic printing presses. The White House did its bit with a fiscal stimulus package, and — in a move that draws admiring glances from the Labour party in Britain — has delayed taking decisive action to tackle a rising budget deficit.
A study conducted by the Fitch ratings agency and Oxford Economics has estimated that the stimulus package boosted US GDP by 4% of national output over the past two years. This, the report says, has prevented the recession in the US from being deeper and longer but raises doubts about the sustainability of the recovery.
The point of the pump-priming is that the state acts as a substitute for consumers unwilling to spend and businesses unwilling to invest until such time as private confidence returns. In the US, as elsewhere in the developed world, this is taking a long time, although the IMF says that historically this tends to be the case.
Obama’s strategy has come under fire from both left and right. The left-wing argument is that the stimulus has failed to provide the necessary boost because it was not big enough.
The president paid too much heed to advisers such as Larry Summers when he should have listened to Paul Krugman. A bigger fiscal boost would have meant faster growth, a more rapid decline in unemployment and a rosier outlook both for the president’s re-election chances and the public finances.
Not so, say Obama’s critics on the right. What the president has done is throw good money after bad, borrowing money he doesn’t have to fund an expansion of inefficient government.
Alarm
The public have become so alarmed at the explosion in the national debt that they fear taxes will have to rise and this is stopping them spending. The answer is to shrink the size of the state, which will allow taxes to be cut.
There are many in the US who believe one or other of these stories. Obama’s problem is that few Americans seem to be convinced by his narrative, which is that things have improved a bit since his inauguration in 2009 and will carry on improving if he gets a second term. “It could have been worse” is not exactly the most exciting of campaign slogans.
It is certainly less gripping than “Are you better off than you were four years ago?”, which is the one Americans will hear from Mitt Romney.
Obama has made falling unemployment the key benchmark of his performance, but this may prove unwise. For one thing, unemployment is coming down only very gradually and could start to rise again between now and the election, either because the economy stalls or because the improved chance of finding a job encourages people back into the labour market.
A second potential weak spot is that, with the exception of those at the top, real incomes have been squeezed hard over the past four years.
Obama has done next to nothing to ensure that ordinary Americans share in the growth of the economy, with work by John Schmitt at the Centre for Economic Policy Research showing that the minimum wage would today be $21.72 an hour if it had been raised in line with productivity since 1968. Its actual rate is $7.25 an hour.
Private equity
So while Obama and his team will no doubt scoff at the idea that a man who made his money out of private equity should be expressing concern at the living standards of blue-collar America, Romney’s “are you better off now” question still has the potential to damage Obama.
So here’s how things stand.
Most studies suggest that the performance of the US economy under Obama has been pretty much par for the course. A study of 24 major housing busts in rich developed countries carried out by Goldman Sachs found that they tended to have a more sluggish than usual recovery in growth, exhibit persistently high levels of unemployment, and be prone to relapses.
The countries examined also had a long period in which the private sector gradually reduced its indebtedness, with this process matched by a sharp deterioration in the public finances. This describes the US today, even down to the unusually low levels of bond yields for an extended period.
It would, therefore, be unwise of Democrats to imagine that a rapidly improving economy will make Obama a shoo-in come November. Recovery will remain tepid at best, with Europe and oil prices representing sizeable downside risks.
Any signs of the economy faltering will be exploited by Romney, who will tack to the centre now the Republican nomination is in the bag in the hope that he can exploit the strong anti-incumbency political tide evident around the world since the start of the financial crisis. — © Guardian News and Media 2012