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Martin Neil Baily: Obama's economic policies were not pretty, but they were right

economic-viewpoints(2).jpg In just over 18 months on the job, President Obama has tackled a domestic economic agenda as ambitious as any president's in half a century -- signing a record $787 billion stimulus package and pushing a far-reaching financial regulatory overhaul bill through Congress.

The Washington Post asked Martin Neil Baily, a senior fellow at the Brookings Institution, and Michael Boskin, a Stanford University economics professor, to grade the Obama administration on how well they believe it has performed in stimulating the economic recovery.

Baily served as the chairman of the Council of Economic Advisers in the Clinton administration, and Boskin was chairman of the same council under George H.W. Bush.

Here's Boskin's view.
Below is Baily's view:

President Obama inherited the scariest and most dangerous economic situation in more than 50 years. The economy was in free fall in the spring of 2009, with GDP plunging and employment declining at the rate of 700,000 jobs a month. The financial sector was on the verge of collapse, both in the United States and around the world.

The two big policies used to turn around the economic situation, the Troubled Assets Relief Program (TARP) and the stimulus package, were the right ones, and they have worked as well or better than could have been expected.

The TARP was initiated by then-Treasury secretary Henry Paulson working with Federal Reserve Chairman Ben Bernanke and future Treasury secretary Tim Geithner at the Fed. There were false steps taken in the early use of the TARP, but injecting capital in to the banking system was the right thing to do, and Geithner, when he became Obama's Treasury secretary, instituted the bank stress tests, which marked a turning point in the struggle to restore the financial system. The large banks are now stable and growing back to health, and while many smaller banks remain troubled, there is no longer any serious danger to the system. Helping the financial sector recover was an essential step towards recovery in the rest of the economy.

The key priorities with the stimulus package were to make sure that it went out quickly and that it was large enough to increase total spending. With a total package at $862 billion spent mostly in 2009 and 2010, it met those goals. With only limited guidance from the White House and individual members of Congress each wanting money to come to their district or state, the details of the package were a mess. It was a lot of money, and it did little to deal with longer-term problems, such as the weak infrastructure and an over-dependence on fossil fuels. However, it did contribute to spending at a time when the collapse in aggregate demand was threatening possible depression.

The economy is still lousy. Unemployment is over 9 percent, and the rate of job creation is low, especially in the private-sector. GDP is depressed and will take some years to get back to its full potential. With the turmoil in Europe, there is a chance there will be a double-dip recession here later this year. So if the policies were the right ones, how come the recovery is not stronger?

First, the crisis and the recession were really bad and history shows that recovery from such events takes a long time. This was like getting typhoid, not just an upset stomach, so recuperation is bound to be slow. There was no way policymakers could get back to full employment quickly. Second, reckless fiscal policy in the years leading up to the crisis meant that there were budget deficits even before the crisis hit. Add to this the fact that recessions always worsen budget deficits, and the result is a limit on how much fiscal stimulus is possible. A second substantial stimulus to the economy this year would be a way to avoid a double dip, but it is not advisable, because of borrowing constraints. There are consequences to the irresponsible policies of the past.

You do not expect the bear to dance well; it is a miracle if it dances at all. The policies that helped turn around this deep recession and financial crisis were not pretty, but they were the right policies. They have not restored full employment, but they helped us move from a scary economic collapse to a growing economy that is creating jobs. The continuing high unemployment, weak housing market and volatile stock market are making the administration unpopular. It is too bad the electorate does not give credit for the progress made so far. It should.

bailym_portrait.jpgMartin Neil Baily is the Bernard L. Schwartz chair in Economic Policy Development at the Brookings Institution. He was chairman of the Council of Economic Advisers during the Clinton administration from 1999 to 2001 and one of three members of the council from 1994 to 1996.

By Ariana Eunjung Cha  |  July 19, 2010; 8:00 AM ET
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this boob tries to pass off criticisms of obama's economic policy as somehow focusing on the frivilous. if george bush had passed a $787 billion tax cut promising to keep unmployment at one level and it went nearly 3 percentage points higher (amounting to a gap of over 4 million jobs in a labor force the size of ours) democrats would demand his head on a stick. trying to shift the goal-posts at this point assumes american are dumb - or dont know how to use youtube.

Posted by: dummypants | July 19, 2010 5:09 PM | Report abuse

The Only thing that I agree with mr. Baily is the fact that President Obama inherited the scariest and most dangerous economic situation in more than 50 years. The President immediately showed that campaign promises of transparency and allowing the people to sound off on legislation before it's vote was completely squashed. Although he acknowledged that trickle down economics truly didn't help, he rewarded the now too big to fails with free money from the Federal Reserve at the discount window but predictably the banks did not increase lending liquidity to the average small and large American Businesses. Instead the money was used by the banks to gamble on wall street and make huge profits on the backs of taxpayer dollars. The American People instead of being helped by it's government in this time of need had all of the toxic assets that were aquired thru previously greedy lending practices shoved onto their backs. Because we are a nation of laws it was quite disconcerting to have the president break laws to hasten the take over of car manufacturers. Business requires stability and predictability to flourish via investment and this administration creates neither. Instead this president has been more devisive than inclusive and now suffers the wrath of those voters that he has let down. The banks today are nowhere near healthy and the bank stress tests were mearly smoke and mirrors rather than a real test of health and that was stated many times by banking experts and members og the FDIC. When money moves through the states down to the people it loses much of the money in bureaucracy and actually very little actually reaches the people. If this president was the peoples president the US government should have established a Federal Bank body to lend money at low interest to worthy business ventures. This alone would have started new businesses and helped get people back to work and would have been an interest bearing investment that would have also indirectly saved small to middle size banks and allow the to big to fails to fail allowing darwins theory of survival of the fittest in the business world to apply it's self. Now we have more debt, no jobs and fat banks that won't lend because Americans keep defaulting on their mortgages and loans. Great job Mr. Frekin Obama. We of course are on a course for Economic collapse because of the ineptitude of our representatives. The two party system continues to kill off American freedom and productivity for corporate support. However, after the dust clears these parties will be dead or dying and the American people will rise from the ashes with guns in hand and rebuild their country from the rubble of what's left and freedom for the individual will again be seen in this land we call home.

Posted by: newamericanow | July 20, 2010 11:03 AM | Report abuse

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