What could Obama have done differently to create jobs and improve the economy?

Zachary Roth
Senior National Affairs Reporter
The Lookout

When President Obama stands before Congress on Thursday to lay out his new ideas for the improving the economy, he will face a daunting task. Job growth ground to a halt in August, unemployment remains above 9 percent, and the president's approval ratings have fallen to around 40 percent. How much blame does Obama deserve for the bleak position the country is in?

For the last year or so, a debate has unfolded about where--and whether--the president's policies went wrong in trying to revive the economy. The implications are anything but academic.

The latest volley took place over the past couple of weeks, when Bloomberg View's Jonathan Alter and the Washington Post's Ezra Klein each called on Obama's critics, on the left and the right, to get specific about what they would have done differently if they were the president. In response, David Frum, who served as a speechwriter for President Bush but lately has been sharply critical of the Republican Party, and Mickey Kaus, a self-described contrarian liberal who blogs for the conservative Daily Caller website, took up the challenge. And in response to that, Jared Bernstein, a former top economic adviser to Vice President Joe Biden, pushed back against Frum's criticisms.

What are Obama's critics suggesting he should have done to improve the economy? And what's the evidence that their favored approaches would have been more effective?

A FLAWED STIMULUS? Much of the debate centers on the $787 billion stimulus, passed in February 2009, that tried to give the faltering economy a shot in the arm. Among the sometimes contradictory criticisms that have emerged are three big arguments: the stimulus failed to boost the economy; it was poorly designed; and it wasn't big enough.

The notion that the stimulus failed has hardened into Republican orthodoxy, but it doesn't hold up. A study released last week by the nonpartisan Congressional Budget Office confirmed that as of June, between 1 million and 2.9 million people are working who wouldn't otherwise have been, thanks to the stimulus. That study wasn't an outlier. Several others came to similar conclusions, including one by the economists Alan Blinder and Mark Zandi. As Jared Bernstein notes, the analysis by Blinder and Zandi found that the stimulus was responsible for roughly 2.7 million jobs and increased the GDP in 2010 by a healthy 3.4 percent.

Still, the stimulus has fallen short of expectations. White House officials--including Bernstein when he was there--predicted before the stimulus was passed that it would reduce unemployment to below 8 percent by the end of 2009. That didn't happen. Frum and Kaus say the problem was that it was poorly designed.

That's a more persuasive critique. But how exactly might it have been better designed?

Perhaps it should have relied less on infrastructure projects and more on "large, quick, payroll tax cuts," as Kaus argues. President Obama has admitted that few infrastructure projects turned out to be "shovel-ready."  But a payroll tax cut has been in effect since the start of the year, and as Bruce Bartlett, who served as a Treasury official in President George H.W. Bush's administration, wrote this week, "There is no evidence that the lower payroll tax has done much of anything to stimulate either spending or hiring." The Obama administration has proposed extending the cut into next year. Republicans oppose the idea.

Frum, by contrast, thinks more of the stimulus should have been devoted to infrastructure projects, and less to things like Pell Grants and individual tax rebates. Assuming there were enough projects that could have been started quickly--something that's far from clear, as Obama's concession on "shovel-ready" projects indicates--that approach might have had more impact on unemployment, because those projects create jobs directly. The White House's recent, belated embrace of an "infrastructure bank" for that purpose suggests that the president and his advisers might agree.

The idea that the stimulus should have been bigger has gained support from The New York Times columnist Paul Krugman and also from economists with more centrist reputations, including Lawrence Summers, who served as one of President Obama's top economic advisers during the time at issue, and the former Clinton administration Treasury official Brad DeLong.

If you accept basic Keynesian theory--as most economists do--it's hard to deny: If deficit spending can create growth during a slowdown, then it follows that more spending, within reason, can create more growth. As Bernstein notes, the White House pushed for a larger package, but met resistance from lawmakers of both parties who were concerned about its cost.

PIVOTING TO JOBS Some of Obama's critics also charge that he waited too long to renew his focus on jobs. It was clear by the fall of 2010, if not earlier, that the recovery was faltering, but not until next week will the president get around to telling Americans in detail what he wants to do about it. For much of the intervening period, Obama allowed Republicans to move the political agenda to deficit reduction, which if anything will hamper growth in the short run even further. As Kaus puts it, in the most persuasive of his 10 criticisms: "In 2010, after the health care bill passed, Obama was going to 'pivot' to jobs but wasn't able to do that when … yeah, I don't remember what prevented him from doing it either."

Of course, "pivoting" more quickly to jobs wouldn't have magically given Obama free rein to do what he wanted. But if nothing else, it would have avoided almost a year of drift. The ideas Obama will propose on Thursday could likely have been floated last fall, with about an equal chance of gaining support. Back in January, Obama's supporters were pleading with him to turn his attention to the short-term jobs crisis, rather than longer-term ideas aimed at "winning the future." Had he done so then, he might have generated some momentum for the economy before the prospect of a double-dip recession arose.

HELP FOR HOMEOWNERS This one's hard to argue with. When President Obama launched his program to help struggling homeowners in 2009, he said it would help 3 to 4 million borrowers to modify their mortgages. That goal now seems unreachable: As of July, only 675,447 mortgages had been permanently modified. Consumer advocates say a better-designed program--for instance, one that required mortgage companies to participate, rather than making the program voluntary--would have stood more chance of succeeding. The evidence suggests they're right.

Right now, what's holding back the economy is a lack of demand, in the form of consumer spending. And that lack of demand stems largely from the enormous loss of housing wealth that occurred in recent years. Until the housing sector picks up, the economy as a whole will struggle. And a successful mortgage modification program could have helped quite a lot.

But there's something else worth keeping in mind: Economic shocks like the one we went through with the housing bust and the financial crisis take a long time to recover from.  In a paper written last year for the Federal Reserve Bank of Kansas City, the economists Carmen and Vincent Reinhart, experts on the history of such crises, concluded that the effects typically linger for around a decade. "Income growth tends to slow and unemployment remains elevated for a very long time after a severe shock," they wrote, predicting "a lengthy period of retrenchment."

It's more than fair to point to shortcomings in President Obama's efforts to further the economic recovery. We've just named several. But even if policymakers had designed the perfect response, the economy would be a long way from healthy right now.