November 8, 2011 – Speaking to a roaring crowd of nearly 2,000 supporters, Sen. Hillary Clinton launched her campaign earlier today to deny President Barack Obama the Democratic nomination for next fall’s presidential election. Promising a “restoration of the Clinton prosperity of the 1990s,” Senator Clinton lashed out against the president, calling his embattled administration “hopeless.”
The president’s supporters, who only three years ago swept then-Senator Obama to a close victory over Sen. John McCain, are at a loss to explain why the once hugely popular president now finds himself in this precarious political situation. But to President Obama’s detractors, the explanation is simple: “It’s the economy, stupid.”
Dogged by a deepening recession and rising unemployment, President Obama now faces what many pundits say will be the most serious primary threat to an incumbent president since Sen. Ted Kennedy unsuccessfully sought to wrest the nomination from Jimmy Carter in 1980.
The seeds of Obama’s political troubles were inadvertently planted in late 2005, when the housing sector began its inevitable retrenchment following the boom of 2002-05. That retrenchment spawned a vicious cycle of falling home sales and starts, falling home prices, and rising rates of mortgage delinquency and default. When the subprime crisis erupted in August 2007, the financial shockwave reverberated throughout the economy. For a time, it seemed the country’s financial markets were on the verge of unraveling.
The final year of the Bush presidency was marked by economic sluggishness verging on recession. Although the overall economy muddled along, and even showed signs of recovery, public sentiment at the time held that it was in dire straits and worsening daily. Hesitant consumers and nervous investors unconsciously threatened to send the economy into a tailspin at any moment.
Anxious to “do something,” Congress and President Bush enacted a bipartisan economic-stimulus measure in February 2008 that largely consisted of handing checks to anxious consumers. The Congressional Budget Office predicted the stimulus would boost the economic growth rate 0.7 percentage points in 2008 and subtract 0.4 percentage points in 2009.
With the Federal Reserve pursuing a policy of negative real short-term interest rates, and with Congress pressing the fiscal gas pedal, the U.S. economy managed to avoid outright recession in 2008, growing 1.4 percent. But with unemployment rising, and food and energy prices rising even faster, voters turned to Barack Obama on Election Day to chart a new course for the nation, and the new president entered office amidst high, perhaps unrealistic, expectations.
There was no denying it: inflation had returned. While the media speculated about the economy — was the country on the verge of a 1970s-style stagflation, or was a “double-dip” recession à la 1980-81 just over the horizon? — Obama spoke convincingly of the need for change.
Drawing heavily from his 59-page Blueprint for Change, the new president and former freshman legislator called upon Congress to increase federal spending by more than $300 billion annually and to shift more of the tax burden onto “the rich.”
Although the 2008 elections produced sizeable Democratic gains in both the House and the Senate, Obama’s spending proposal was held hostage by a loose coalition of conservative Democrats and Republicans until an agreement was reached to trim its scope. Even with that agreement in place, Congress passed the largest domestic federal spending increase in U.S. history.
The president’s tax plan seemed simple and secure, but he faced a conundrum. Throughout the campaign Obama spoke of allowing the Bush tax cuts for “the rich” to expire and using the proceeds to fund new spending. The problem with that strategy was that expiration of the Bush tax cuts was already factored into budget forecasts — and the government could spend the money only once — so finding the money to finance additional spending proposals would require additional taxes.
So, what to do? Increase taxes on “the rich” even more, of course!
Even before Congress raised the overall tax burden and shifted more of it onto the rich, the top-earning 1 percent of taxpayers shouldered more than 39 percent of total federal income taxes. So there wasn’t a lot more revenue to get from the very rich. Inevitably, taxes were increased on those of more modest means.
During the campaign, Obama pledged to retain the Bush tax cuts for poor and middle-income families. That pledge, however, suffered the same fate as Bill Clinton’s 1992 pledge to pursue a middle-class tax cut. Faced with sizeable budget deficits and committed to his spending agenda, President Obama allowed the bulk of the Bush tax cuts to expire at the end of 2010 as scheduled. It was the largest tax increase in history (nearly $1.9 trillion over seven years), raising taxes on 115 million taxpayers and returning to the tax rolls 7.8 million low-and middle-income families who, because of the Bush cuts, paid no federal income taxes.
The combination of profligate spending and higher tax rates created a substantial drag on the economy. It didn’t help that President Obama has presided over one of the most protectionist administrations in decades. Three years into his presidency, Obama has yet to sign a single free-trade or trade-liberalization agreement. That, plus his efforts to “fix” and “renegotiate” the North American Free Trade Agreement (NAFTA), have cast a pall over prospects for significant growth in international trade.
Unfortunately, the Federal Reserve has been of little help. In a belated effort to extinguish the renewed threat of inflation, the Fed raised interest rates throughout 2009, just at a time when normally it would have expanded the monetary base in order to stimulate economic activity.
More and more it looks like a replay of 1980 and a lot like 1992. For some of the same, but also for some different, reasons, the economy is in the doldrums. America has lost its confidence. An embattled president is facing a forceful challenge from a member of his own party. And from the other party, is there emerging a person of competence and vision, capable of inspiring a nation yearning for leadership?
Stay tuned.
— James E. Carter, a deputy assistant secretary of the Treasury from 2002 to 2006, is an economist with the U.S. Senate. James C. Miller III served as President Reagan’s budget director from 1985 to 1988 and is now a senior adviser at Husch Blackwell Sanders, LLP.