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If An Economy Recovers and No One Cheers It, Does It Make a Sound?

Yesterday, the House passed HR 4173, the Wall Street Reform and Consumer Protection Act of 2009, which would impose a series of significant new regulations on the financial services sector. Such measures have the potential to be very popular. A Time/SRBI poll in October found 59 percent of Americans favoring greater regulation of Wall Street, with 13 percent wanting less and 23 percent favoring the status quo. Previous polls on the subject — some coming during a more acute point of the financial crisis — revealed even more support for such initiatives. An ABC/Washington Post poll in February found 76 percent of Americans supporting stricter regulations on banks and financial services companies versus just 22 percent opposed; a Harris Poll, also conducted that month, found an even greater 87-10 majority in favor of stricter regulations.

In spite of this, the bill was rejected 175-0 among Republicans in the House, with allegedly “populist” groups like FreedomWorks strongly urging a vote against passage. The House vote would seem to undermine any Republican claims to be champions of Main Street, and potentially to form a key pivot point for Democrats as we head into next year’s midterm elections.

And yet, the bill has received scant praise, and indeed very little attention, in liberal circles. Some of this is based on legitimate concerns that the bill did not go far enough — although it does do quite a lot. Some of it is based on a not-unreasonable assumption that although the House bill is fairly adequate, it is likely to be significantly watered-down by the Senate.

Even so, there seems to be extreme reluctance among the left, and particularly the online left, to praise any economic successes achieved by the Congressional Democrats and the White House.

I do not expect Democrats, certainly, to be cheering the roughly 35 percent run-up in stock prices that has been achieved since Obama took the Oath of Office (we can pose an interesting counterfactual about whether Republicans would be touting the bull market if the roles were reversed). There have, however, been some other successes.

Last week, for example, it was revealed that the government is likely to recover all but $42 billion of the loans made under the TARP program. Of the losses, about $30 billion comes from the interventions in General Motors and Chrysler, a program which liberals largely supported. In fact, the government actually expects to render a profit on loans made to banks, although it will probably lose money overall because of the monies allocated to the auto firms and to AIG.

Third-quarter economic growth was reasonable, even after a downward revision to an annualized rate of 2.9 percent. Fourth quarter economic growth is expected to be better, with private forecasts recently having been revised upward and centering on a range of 3.5 to 4.5 percent. The manufacturing and housing numbers have generally been decent, and retail sales numbers have been moderately encouraging.

Of course, there is the 8 million job gorilla in the room: the economy is perhaps 7-8 million jobs short of what ordinarily would be considered full employment, leaving the U3 unemployment rate at 10.0 percent. Laid off workers are suffering and, in many cases, have gone the better part of a year without a paycheck. And the hemorrhaging of jobs has yet to reverse itself, although it very nearly did last month.

Even here, however, there have been some economic interventions that you’d think liberals would be inclined to cheer. The first and foremost is, of course, the $787 billion stimulus passed this winter, which according to CBO estimates has contributed between 0.6 million and 1.6 million more jobs than would otherwise exist (meaning that unemployment would be somewhere between 10.4 percent and 11.1 percent without it). Unemployment benefits were extended last month and are likely to be extended again; meanwhile, the White House has gotten on board with a $200 billion jobs program that would be paid for, directly or indirectly, out of the savings that were achieved from the better-than-expected performance of the TARP program.

To be clear, the jobs market is by any reasonable stretch of the imagination still really horrible. That the economy has regained its footing is uncertain; forecasts have been horribly wrong before, and recovery is hardly inevitable. And even if the recovery does occur, progress in jobs growth may be halting.

Moreover, this is not purely a debate over the efficacy of the efforts of the White House. Some of this, rather, is a debate about objectives and philosophy, and ultimately the “big” questions about (a) the optimal level of government intervention into the economy and (b) the optimal level of wealth (re)distribution within the country. On those questions, as long-time readers of this website will know, I am almost certainly to the right of the consensus of the liberal blogosphere, although I share the opinions that the initial stimulus effort was too small; that further jobs-creating interventions would be helpful; that tax rates ought to be re-engineered to reduce the relative burden on the middle class; that the country is wealthy enough to provide universal access to health care; that markets are prone to bouts of irrationality and, occasionally, outright failure; that an unfettered free market does not adequately price in the carbon externality, and that the substantial systemic risk in the banking system has yet to be addressed.

(Where are my substantive differences? I believe that a tax rate structure substantially steeper than that in place during the Clinton era is liable to be counter-productive; I am not persuaded that unions contribute to economic growth (although I think workers have a Constitutional right to form them); I am not inherently distrustful of markets; I am largely uninterested in one-off punitive measures toward the banks (although I recognize their political efficacy); I am not necessarily persuaded that financial institutions have to be broken up (although I am not necessarily persuaded that they shouldn’t be); and I think the issue of executive compensation is best handled by changing structural imperatives rather than through direct intervention.)

But mostly, I tend to focus on achievements rather than philosophy when evaluating an Administration’s economic policy — albeit a fairly careful reading of achievements which is couched in an understanding of both the political constraints and systematic and cyclical factors which are largely outside of the White House’s control. And from a results perspective, I tend to see the Democrats’ performance as having been pretty good.

There are, basically, three policy imperatives that emerged from the economic crisis of last year. The first and most pressing was to put out the fire — to prevent a complete or near-total meltdown of the financial system, which was in crisis. The second was to facilitate, to the extent possible, a recovery in the broader economy. And the third was to put adequate safeguards in place to prevent such a meltdown from occurring again.

It is important to separate out these imperatives, because they require rather different sorts of interventions, sometimes involving different institutions within the government.

Putting out the fire. On the first imperative — that of averting a meltdown — I would give the Democrats high marks. Not only did we avoid Armageddon, but we did so with relatively little contribution — “only” about $42 billion — from future taxpayers. At the time these interventions were undertaken, this would have been regarded as an exceptionally good outcome. And with the advantage of hindsight, objective evaluations of TARP tend to be similarly rosy, including that from the very liberal (and smart) economist Elizabeth Warren, who chaired a Senate panel on the subject.

The recovery. As to the second objective, we have a split between the performance of the labor market, and that of other economic indicators. Back in February, when the stimulus was passed, the Wall Street Journal forecasting panel projected 3Q GDP growth of 0.7 percent; the actual figure, after revision, was 2.9 percent. They predicted 1.9 percent growth in the 4Q; the actual figure is likely to be closer to 4.0. On the other hand, they projected December unemployment to be 8.8 percent; November’s figure was 10.0 and December’s is likely to come in somewhere close to that.

Certainly, I think that the stimulus package ought to have been both larger and more focused on infrastructure-type programs that would have led to more direct creation of jobs. The stimulus, however, passed the Senate with just one extra vote (the tally was 61-37), suggesting that there may have been very little additional wiggle room. I think that is actually somewhat too narrow a reading of the political conditions in place at the time; more persuasion on the part of the White House (which was very popular then) might have moved the needle some, as might have the tactical gambit of throwing out a higher number rather than counting on the Congress to do the heavy lifting. Nevertheless, there probably wasn’t much room for improvement; an extra $100 or $150 billion, perhaps, which if directed toward infrastructure might have led to an unemployment rate that was 0.3 to 0.4 points lower than it is now. Moreover, some of the shortfall has been made up for with post-facto mini-stimuli like cash-for-clunkers and the unemployment benefits extension, and the forthcoming jobs bill.

In any event, such as it was, you have a stimulus that has tended to exceed expectations in terms of GDP growth. It would appear, on the other hand, to have fallen short in terms of jobs growth. But that conclusion is debatable. If the CBO’s estimates are to be believed — that the stimulus has reduced the unemployment rate by 0.4 to 1.1 percent — that would be in line with both the White House’s estimates (which had forecast an 0.7 percent improvement in unemployment through the 3Q as a result of the stimulus) and the CBO’s expectations in March.

Yes, the systemic conditions in the job market have been somewhat worse than most (though not all) private forecasters anticipated, and much worse than the White House seemed to anticipate. Certainly you can fault them for failing to frame the public’s expectations adequately, and also for aiming for too small a stimulus — although, again, it’s not clear that aiming higher would have substantially improved what actually came out of the Congress. But subject to those admonitions, the White House’s efforts at facilitating a recovery would seem to deserve a grade of somewhere between adequate and good, on the basis of the objective evidence.

Financial sector reform. Here, there is no grade that can be given other than incomplete — the Congress has yet to pass any substantial regulatory reform effort, and the systemic risk in the financial sector very much remains and could cascade at any time. Nevertheless, the bill that the House just passed has been a reasonably good start. The White House and the Senate will lay their cards on the table sometime early next year. Perhaps the most robust criticism of the White House is that it should have tackled regulatory reform before health care — a course of action that most liberals would have been very upset about.

* * *

Perhaps, if the unemployment rate has improved by sometime next year, with the economy adding something like 300,000 or 400,000 jobs per month, then liberals will start to more vigorously defend the White House’s economic policy, while the conservative critique will be somewhat mollified. But I’m not holding my breath. Liberals (and certainly conservatives) have tended to shortchange the successes that the White House has had thus far, and I would expect them to continue to do so.

This is for understandable reasons: the financial crisis was extremely traumatic; the economy is a complex system that does not lend itself well to snap judgments and punditry, and many liberals have concerns about the economy (such as the increasing inequality of wealth and income) that extend far beyond the recession of 2007-09. Nor, partly through their own doing, have the optics been especially favorable to the White House: the jobs-creating effects of the stimulus have tended to be swimming upstream relative to the underlying conditions of the labor market; there were some notable PR failures like the AIG bonus “scandal”, and the White House has been strangely reluctant to embrace populist rhetoric at a time when it would square well with the political zeitgeist.

At the end of the day, however, the piling-on in liberal circles does not match the objective evidence about the economy. And if it sets any precedent, you may have a robust recovery by the middle of next year, but with neither the White House’s conservative nor liberal critics willing to give them much credit for it. Voters may stay away from Democrats as a result, pushing the country toward more conservative economic policy and ensuring that liberal critics of the economy aren’t lacking for greivances any time soon.

Nate Silver founded and was the editor in chief of FiveThirtyEight.