So, the 20 trillion-dollar question is this: Which president owns this booming economy? Obama or Trump?
The argument in favor of former-president Obama, often heard among the Democrat Party cocktail set as they scramble to somehow put a left-wing veneer on the good times, goes something like this:
President Obama inherited an absolute mess. At the time of his election in November 2008, the stock market was in a free-fall, having tumbled from a high of roughly 14,000 to 6,500, a -53% decline that took some of Wall Street’s oldest and most venerated institutions like Lehman Brothers down with it. The shock to the credit system created a deep freeze. The 2008 crash was not just in equities but in a speculative real estate bubble fueled by criminally easy-to-obtain mortgages that placed millions of unqualified borrowers in peril as their home values collapsed and the equity upon which their predatory loans were based disintegrated right at the same moment teaser rates kicked in; this cocktail of disaster made it easier for them to just leave the keys in the mailbox for the bank than try to service their loans. Consumer confidence plummeted, unemployment began its unrelenting march from 5% at the beginning of 2008 to the October 2009 high of 10%.
This was the chaos bequeathed to President Trump’s predecessor. Democrats will offer that from November 2008 to November 2016 the USA rebounded dramatically. The stock market was at 18,300. Unemployment at 4.6%. Consumer confidence up. Home values on the rise.
This all happened on Obama’s watch, and if the rooster crows as the sun rises, it must be the rooster’s doing. But was it really?
First, let’s take a look at how the economy outside of Wall Street, big government, and the college campus fared in the so-called “Obama recovery.” Here are some general observations. Home ownership: down. Labor force participation: down. Student loans: up. National Debt: up. Health care costs: up. Median family income: flat. People on food stamps: up. Workers’ share of economy: down. These trends do not paint a rosy picture for the working middle class. Is it any wonder that the fabled Democrat “blue wall” crumbled in 2016?
So what gives? How could the overall economy improve and yet not benefit the average American? One would think if Americans were truly happy with the Obama years, they wouldn’t have turned over the levers of power from the statehouse to the governors’ mansions, to the Congress and the White House to the Republicans during Obama’s tenure.
Let’s look at the overall economy in 2008-2009 when Obama took over, which first and foremost needed a shot of credit confidence to get moving again . . . after all, if Lehman collapsed and AIG was on the brink of insolvency, were any firms safe? Thus, did investment capital, the grease in the country’s economic machine, dry up and move to cash. So, what did Obama do to unfreeze credit? Actually, the most important government intervention in those critical times was the Bush administration’s Troubled Asset Relief Program (TARP). In a move right out of Hamilton’s playbook, Hank Paulson at the Treasury Department assumed the bad debts of private institutions onto the only balance sheet large enough to hold them while all got sorted out: the federal government’s. Among any government actions, it was TARP (one this disciple of Adam Smith grudgingly supported under the “desperate times call for desperate measures” category) that stopped the collapse and stabilized the economy. Once capital felt like it was safe to get back into the water, the foundation for a recovery was in place. ARP was also something President Obama inherited.
So why the steady stock market rally during Obama’s term? Surely Obama should be credited with that. Well, unlike the weeks after Trump’s election, those following Obama’s saw the DJIA shed an additional 3,000 points, or another 30%. What set the equities markets on a tear was not so much White House fiscal policies such as the wasted $800 billion on a stimulus package with a face that only a die-hard neo-Keynesian could love, but rather monetary policy courtesy of the independent Federal Reserve. The Fed Funds rate fell from 5.25% in October 2008 to as low as 0.05% in December 2009 and remained below 1.0% until July 2017, in effect making it nearly costless to borrow money. The subsequent miniscule proceeds of debt instruments prompted a chase for yield. And where could one earn more than the nominal rate of inflation? Equities of course. And which country’s markets are the safest and most secure? The United States’. Hence the bull market. (Obama could, in fact, be called one of the greatest presidents Wall Street ever had . . . which doesn’t help a trucker, or machinist, or oil rig worker . . . something the Democrats failed to understand as their power in middle America slipped away.)
Equity valuations got a shot in the arm not just from the stampede for better returns but also in the boost in earnings, as companies that laid off workers in droves in the depths of the recession realized that they didn’t need so many on the payroll after all, and thus did the savings in personnel costs move to the black column of the ledger. The rally begat more investment begat more rally. We saw this in commodities as well, and this was not good for the average American not in hedge funds or alternative asset funds (or slinging crude oil futures on Globex). The speculative bubble in commodities, again an off-shoot of chasing yield that zero interest rates denied in safer debt instruments, led to spike in higher prices at the pump, the supermarket and in utility bills. Not a recipe for helping the working man/woman already under a tight budget.
Very often a president’s mantra when acting as de facto steward of the world’s largest economy is, "first do no harm." Did Obama adhere to this tenet? No. In his brief window of opportunity when Democrats controlled Congress, he pushed through a slew of punishing, anti-business “reforms” and regulations. The ill-conceived Dodd-Frank law (brought to us by the two legislators whose dirty fingerprints were on the real estate debacle more than any others’), the assumption of control of one-sixth of the economy in the already-imploding Affordable Care Act, which spawned no fewer than 20 separate tax hikes, the war on coal and even Keystone XL in favor of as-yet unprofitable green start-ups, poor trade deals, a climate accord that punished us while giving our chief economic competitors a free pass for a decade, etc., did nothing to spur economic growth. It did create an entirely new layer of costly public and private sector bureaucracy dedicated to navigating the new world of compliance with government activism.
So why did the economy improve? Because no one man can stop it. He can only impede its progress. Economic cycles are part of the ebb and flow of business, and, as a rule, the more precipitous the fall, the quicker and steeper the recovery. But not so in the case of the Obama years, where the U.S. economy never achieved an annualized GDP of above 3%. By contrast, not only has the first year of the Trump administration produced an annualized GDP of above 3%, the Atlanta Fed projects a GDP in the first quarter of 2018 to be as high as 5.4%.
Perhaps it was a mere coincidence that the very day candidate Trump was elected, the stock market went on a tear that lasted for over 15 months, as did the economy as a whole. Did Trump merely catch the trend, which was already on an upward trajectory? It’s a fair question.
The trend was up, yes. But it accelerated steeply as bona fide reform after reform, from cutting regulations, to freeing up space for energy exploration to, most important, tax reform that both puts more money in most consumers’ pockets to spend and dramatically reduces corporate taxes to a level that makes the U.S. competitive again, hit the tape. These are major substantive changes, and their impact, indeed even the mere promise that they would be forthcoming with a GOP-controlled Congress, which catalyzed the stock market explosion of the past 15 months, are real and measurable.
But it is still early, so it will take time to see whether Trump’s economic growth will make up for the lost initial revenues to the Treasury or end up saddling us with wider deficits and thus leading to an unsustainable expansion of the already $20 trillion national debt. It is no surprise, given his business past, that Trump is unconcerned about debt. But he may find the impact on a government different than an individual business. And far more lasting and damaging.
We have already seen what even a whiff of the Fed’s eventually returning to its more normalized lending rates in the roughly 5% range can do to a heated stock market in the form of a 1.700-point sell-off in two days as of this writing. Furthermore, as the government will need to borrow more to make up a shortfall in cut tax revenues, investors will demand higher yields, and this may also initiate a flight to the security of well-paying, and U.S.-backed, debt, away from riskier stocks that have already returned 40% since Trump’s surprise election. The ten-year treasury, in fact, has hit a four-year high. We shall see.
The U.S. economy is resilient. It can endure the stifling effects of neo-Keynesian folly and tap into the animal spirits (ironically a term coined by Keynes himself) to propel the engine of growth forward. It is not that Obama deserves no credit for where we are. Indeed, many of the charts went from the lower left to upper right under his watch. But one can certainly argue that his stubborn adherence to failed left-wing statist dogma acted as a sea anchor on what should have been a far more robust recovery given the steep recession he inherited. When investors woke up on November 9, 2016, they saw before them a more business-friendly government. One they did not expect. The proof is in what those charts look like since that day. Trump’s policies since have merely removed the sea anchors, allowing the USA to reach its previously untapped potential.
One must, of course, ask, if we were in a year of a Hillary presidency, would we have seen such an economic renaissance? The answer has to be a resounding "no". And since she was marketed as a continuation of the previous administration’s polices of expanded government, high taxes, and mountains of regulations, perhaps we should give credit for this impressive year where it’s due. So far. Whether we are in 1983 again or 1928 still remains to be seen.