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What the GDP numbers tell us about the election

presidentialapprovallong.jpg

Today's GDP numbers are a good way to understand Tuesday's election. Start with who Barack Obama isn't: Franklin Delano Roosevelt. You hear people say that if Obama could only sell his vision, his agenda or his commitments the way FDR could, he'd be safe right now. And the comparison is understandable: Like FDR, Obama took office shortly after a financial crisis. But unlike FDR, who took office after three years in which GDP shrank by an average of 9.6 percent each year, Obama -- and his predecessor -- responded effectively enough and quickly enough to stop the economy from collapsing. Our worst year was 2009, when GDP shrank by 2.6 percent. And that was the only year in which we actually lost ground.

FDR, for his part, took office after the worst of the Great Depression was over, and -- in part because of his efforts -- when the real recovery was beginning. In 1934, the year of his first midterm election, GDP grew by more than 10 percentage points. Obama took office in 2009, which was our worst year. And this year, the year of his first midterm, we're on track to grow by 2.5 percent. That is to say, it isn't a vision thing. If Obama could get FDR's numbers, and if he could've dodged the worst years of the crisis, he could go mute and still win the election.

Obama is also not Bill Clinton. Clinton lost 54 seats in 1994, but the economy wasn't doing particularly badly. It was the third straight year of growth, and when all was said and done, we'd expanded by 4.1 percent. Democrats hold almost exactly as many House seats in 2010 as they did in 2004, and if Nate Silver is right and they lose 53 of them, they will, given the economy, have outperformed Clinton's Democrats quite substantially. Maybe passing health-care reform actually helped?

The best comparison, it turns out, is between Obama and Ronald Reagan. The 1982 midterm election also came amid a weak economy. We'd shrunk by 1.9 percent, although we'd grown -- slowly -- the year before. The two presidents were also posting similar approval numbers: According to Gallup, Reagan had 43 percent at this point in his presidency, and Obama has 44 percent.

There is, however, a difference: Reagan's party was in the minority in the House. They had 192 seats and lost 26 of them. That's a 15.6 percent loss. If Democrats lost the same percentage of their 256 seats, they'd lose 40 seats this year. But because having a large majority means, by definition, holding many more vulnerable seats, the likelihood is that Republicans would have lost much more than 15.6 percent of their seats if they'd had another 54 seats to defend, and if unified government had left all the blame on their shoulders.

So Obama can't show the progress that either Bill Clinton or FDR could in the months before their first midterm elections. He's got more growth than Ronald Reagan did, but also more seats and unified control of government. He's got, in other words, a pretty bad situation. Reagan did too (though the cause of his recession was the Federal Reserve, and so recovery was easier to attain after the election), but Clinton really didn't. It's his losses that really stand out.

Graph credit: Gallup.

By Ezra Klein  | October 29, 2010; 3:11 PM ET
Categories:  2010 Midterms  
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Comments

Looks like we are about to get QE2.

I have a question for those knowledgeable about the subject.

Part of the point of QE is that it is temporary, and that the Fed will sell whatever it bought to get the cash out of the economy.

So the following:

1. Banks have $1.5 trillion of stinky MBS with a 'fair' value of say 10% ($150 billion).

2. Fed enters QE1 and buys that $1.5 trillion of MBS. Did they pay full price?

3. Assume they did. Say the Fed now has $1.5 trillion worth of stinky MBS that maybe is worth 30% on the dollar, so $450 billion.

4. It's 2016. Time to exit QE1 and QE2.

How exactly does the fed remove $1.5 trillion of cash from the economy by selling its MBS stock? No private entity is going to pay full value for something that isn't worth full value, right?

Posted by: krazen1211 | October 29, 2010 3:29 PM | Report abuse

"FDR, for his part, took office after the worst of the Great Depression was over, and -- in part because of his efforts -- when the real recovery was beginning. In 1934, the year of his first midterm election, GDP grew by more than 10 percentage points. Obama took office in 2009, which was our worst year. And this year, the year of his first midterm, we're on track to grow by 2.5 percent. That is to say, it isn't a vision thing. If Obama could get FDR's numbers, and if he could've dodged the worst years of the crisis, he could go mute and still win the election."

Let's look at a few stylized facts.

The federal budget deficits as a % of GDP in the early 1930s:

Hoover:
1930: +0.96%
1931: -0.17%
1932: -2.78%

FDR:
1933: -3.27%
1934: -3.11%

Federal budget deficits in nominal dollars in the early 1930s:

Hoover:
1930: ($0.87 billion surplus)
1931: $0.13 billion deficit
1932: $1.63 billion deficit

FDR:
1933: $1.84 billion deficit
1934: $2.06 billion deficit

Federal budget deficits in inflation-adjusted dollars (2005) in the early 1930s:

Hoover:
1930: ($8.56 billion surplus)
1931: $1.41 billion deficit
1932: $20.18 billion deficit

FDR:
1933: $23.41 billion deficit
1934: $24.73 billion deficit

Federal government spending in nominal dollars in the early 1930s:

Hoover:
1930: $3.96 billion
1931: $4.11 billion
1932: $4.27 billion

FDR:
1933: $5.10 billion
1934: $5.94 billion

Federal government spending in inflation-adjusted dollars (2005) in the early 1930s:

Hoover:
1930: $38.73 billion
1931: $44.83 billion
1932: $52.75 billion

FDR:
1933: $64.82 billion
1934: $71.51 billion

Total government spending (federal state local) in the early 1930s, nominal dollars:

Hoover:
1930: $11.92 billion
1931: $12.18 billion
1932: $12.44 billion

FDR:
1933: $12.62 billion
1934: $12.81 billion

Total government spending (federal state local) in the early 1930s, in inflation-adjusted (2005 dollars):

Hoover:
1930: $116.72 billion
1931: $132.89 billion
1932: $153.78 billion

FDR:
1933: $160.34 billion
1934: $154.15 billion

Change in Real GDP:

Hoover:
1930: -8.6 percent
1931: -6.5 percent
1932: -13.1 percent

FDR:
1933: -1.3 percent
1934: 10.9 percent

From this, it's hard to buy into the 'stimulus was too small' story or for that matter Hoover was a do-nothing president.

The trend in GDP doesn't seem primarily determined by budget deficits, total government spending or federal spending.

http://www.usgovernmentspending.com/downchart_gs.php?year=1920_2015&view=1&expand=&units=b&fy=fy11&chart=F0-total&bar=1&stack=1&size=m&title=&state=US&color=c&local=s

Posted by: justin84 | October 29, 2010 3:40 PM | Report abuse

What the difference between FDR, Clinton and Obama is that FDR and Clinton did not surround themselves with economic advisers who insisted they were brainy, and thought everything would be okay if Americans put their trust in the elite to work through the economic problems. The elites failed. Their plan clearly didn't work and since this is a democracy, there will be a referendum on the Obama brains trust Tuesday that I think Obama won't like and will deeply regret. Presidents do not talk down to Americans. FDR and Clinton both had the ability to communicate with Americans that Obama lacks. There is no feeling your pain with this guy, no fireside chats. Obama's economic brains trust has now been dismantled, Larry Somers is gone, but there has been absolutely no effort to talk to Americans about what is happening as it looks like we are slipping into a double-dip recession. All we get is political buck passing, heaping blame on do-nothing Republicans and blaming the legacy of George Bush. It is two years now of economic turmoil, and it is not Bush's problem. Obama is heading into the history books as another Herbert Hoover, a decent guy who just didn't know how to deal with events overwhelming him.

Posted by: edwardallen54 | October 29, 2010 3:47 PM | Report abuse


Leftists think Barry the inept bungler's problem is that he does not talk enough.

Posted by: screwjob22 | October 29, 2010 3:55 PM | Report abuse

I'm no fan of Obama's economic braintrust, but c'mon now! When Obama took over, we were in one of the worst recessions ever; second year growth. Maybe, two years is too soon to judge whether a $10 trillion plus economy turns around to expanding after a huge financial crisis.

Posted by: bravestar360 | October 29, 2010 4:04 PM | Report abuse

krazen1211,

The Fed bought agency backed MBS. So it presumably paid market price for the securities which would be near par. To the extent the MBS had poor collateral, that is FNMA/FHLMC/GNMA's problem, not the Fed's.

"Guaranteed by Fannie Mae, Freddie Mac, and Ginnie Mae. Current face value of the securities, which is the
remaining principal balance of the underlying mortgages."

http://www.federalreserve.gov/releases/h41/current/

In the case of defaults, the Treasury will (continue to) transfer money to the agencies.

For the most part, balances will decline due to refinancing. As these loans are refinanced, the money is sent back to the Fed.

Also, the details aren't out yet but I thought QE2 would be done by purchasing treasuries, not MBS.

If the Fed does buy risky assets which creates the scenario you describe, I presume the Fed can hike the federal funds rate to partially offset the excess liquidity it can't mop up by selling assets (though obviously easier said than done).

All in all, I doubt the Fed will embark on a QE2 plan without an exit strategy.

Posted by: justin84 | October 29, 2010 4:07 PM | Report abuse

GNP figures shouldn't be over-interpreted in analyzing elections (or stimulus impact, for that matter). One interesting model looks at personal income growth prior to mid-term elections (h/t Jonathan Chait):

http://douglas-hibbs.com/house2010election22september2010.pdf

I believe using today's announced preliminary BLS estimates for the third quarter of 2010, the model would predict the Dems to win 215 seats--plus or minus about 11. The model indicates the Dems only slightly underachieved in 1994--if Silver and Cook are right, the Dems this year will do much worse relative to the model's predictions.

Posted by: pjro | October 29, 2010 4:18 PM | Report abuse

Yes, Mr. Klein, Clinton has it so much easier. As Brad De Long observed (http://delong.typepad.com/sdj/2009/09/health-care-reform-memories-of-1994.html):

"There were not even 50 votes available in the U.S. Senate for any health-care reform bill sponsored by President Clinton. It did not matter what the bill included or how good the policy might be, because key Democratic senators placed a higher priority on teaching the hick from Arkansas that he was not their boss; they were determined to vote against it."

With "allies" like that, what a wonder he couldn't do better!

Posted by: amileoj | October 29, 2010 5:18 PM | Report abuse

"FDR, for his part, took office after the worst of the Great Depression was over, and -- in part because of his efforts -- when the real recovery was beginning."

Doesn't the aside contain the entire issue in dispute?

If the Depression was ending on its own, then FDR was just the luckiest President of the century, and is no kind of political exemplar.

But if the recovery by the fall of 1934 was substantially due to FDR's actions, then he did exactly what Obama has failed to do, and the difference in how long things were bad beforehand is irrelevant.

Posted by: amileoj | October 29, 2010 5:25 PM | Report abuse

Hogwash!

Tuesday's election is a referendum on Pelosi's performance. If Republicans win a majority in the house, the progressive movement is dead: if Democrats win a majority in the house, the ill-conceived concepts of socialistic tax-and-spend survive another day.

The upcoming election has nothing to do with economics; instead, it evaluates governance. Do Americans want to cede control of themselves to a distant "they"? Do Americans want businesses controlled by a distant "they" unchecked by the very instrument giving rise to "them"? Or, do Americans want to rule their own world -- to control their own fortunes and destinies, free from the hand of a "big brother" telling them what to do?

If Republicans do win on Tuesday, it marks the worldwide end of the FDR era -- the end of union bosses controlling the will of hard-working people. The notion of FDR the savior -- and of LBJ the "savior" -- will be replaced with sane, fact-based images of two thieving mass murderers who created debacles which have yet to be solved.

Economics -- not really important: life and freedom, however, are really important.

Posted by: rmgregory | October 29, 2010 6:19 PM | Report abuse

Ezra,

First, trying to change the narrative, as Reagan did so successfully and harmfully, is a long term thing -- it didn't help him in his first midterm with the economy still in recession, but it did succeed when the Fed and time turned the economic cycle later. Obama should try to change the narrative from the cancerous one of the last generation not for the midterm, but for the long term.

Second, regarding my last comment/question, which I know you read, you say, "and if unified government had left all the blame on their shoulders." Please see the recent interesting and informative discussion on this at:

http://www.themonkeycage.org/2010/10/why_divided_government_is_bad_.html

Posted by: RichardHSerlin | October 29, 2010 6:35 PM | Report abuse

"In the case of defaults, the Treasury will (continue to) transfer money to the agencies.

For the most part, balances will decline due to refinancing. As these loans are refinanced, the money is sent back to the Fed.

Also, the details aren't out yet but I thought QE2 would be done by purchasing treasuries, not MBS."


Ah, I didn't realize uncle barry was backstopping the entire deal.

So the process is then pretty simple.

1. Issue new t-bills.
2. Use t-bills to cover residual Fannie/Freddie liabilities. Send checks to the Fed.
3. Fed retires MBSes as they mature and shrinks the balance sheet, destroying the excess cash.

In the end, the MBSes at the fed are replaced by tbills in the open market.

Posted by: krazen1211 | October 29, 2010 7:37 PM | Report abuse

Obama's mortgage bailout:
HUD Emergency Homeowners Loan Program
This new program will complement Treasury’s Hardest Hit Fund by providing assistance to homeowners in hard hit local areas that may not be included in the hardest hit target states. Those areas are still being determined.

The program will work through a variety of state and non-profit entities and will offer a declining balance, deferred payment “bridge loan” (zero percent interest, non-recourse, subordinate loan) for up to $50,000 to assist eligible borrowers with payments on their mortgage principal, interest, mortgage insurance, taxes and hazard insurance for up to 24 months.

Under the program, eligible borrowers must:

1.Be at least three months delinquent in their payments and have a reasonable likelihood of being able to resume repayment of their mortgage payments and related housing expenses within two years;
2.Have a mortgage property that is the principal residence of the borrower, and eligible borrowers may not own a second home;
3.Demonstrate a good payment record prior to the event that produced the reduction of income

Wow, this is "really sound lending", NOT.

A loan that can't be enforced, with no interest to someone who has no ability to repay it at the time it is approved? Loaned by the taxpayers? What a crock.

This is the kind of mismangement, irresponsible use of tax dollars this Administration continues to employ.

There are far better uses for this money. Such as paying for their overpriced health reform bill. Paying down the debt, reducing ordinary income taxes for all families and individuals.

You can't continue to bailout and offer loans and incentives to homeowners that are unemployed or simply can't afford their mortgage payments no matter what the amount. That is insame.

As a former Realtor, I have seen housing prices fluctuate drastically, interests rates at 21 plus % in the 1980's(which is why "creative financing" such as ARMS's, Negative Amortization Loans and "Buy downs by new home builders"; became popular. These types of loans where the only way many couples could afford a home. The implications of these loans had both good and bad outcomes. Many of you purchased your homes with these loans and later were able to refinance at better rates and terms. Right?

Home value to amount owed has historically flucuated as does most investments such as Stock value, money market rates and the like.

When you purchase a home it should always be considered as a "long term" investment of your money and first and foremmost the place you call home.

With the failure of economic growth that began long ago, I would say from personal experience in the 1990's. That is when my earnings became flat and subsequently I have to work more hours to receive the same income that I earned working less hours in the early 90's. I have experienced a decrease of 45% in my AGI since 1993. To be continued.....

Posted by: fedupwithgovernment | October 31, 2010 12:21 AM | Report abuse

Ezra, your topics are "out of your league".

Either you fail to adequately researh the subject of your articles or you simply have no clue.

You are uninformed on the majority of the issues you report on. You fail to do you "homework", and it amazes me that you actually are paid for you "opinions".

Posted by: fedupwithgovernment | October 31, 2010 12:31 AM | Report abuse

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