Obama Rallies Markets With Policies That Resemble Rubinomics
By Mike Dorning
bloomberg.com
April 9 (Bloomberg) -- It’s never easy to separate politics from policy, and the past 18 months have only increased the degree of difficulty. The U.S. has been through a historic financial crisis followed by a historic election and a series of historic federal gambles -- from bailing out American International Group Inc. and General Motors Co. to passing a $787 billion stimulus and a $940 billion health-care reform bill. All that risk has made policy more complicated and politics more fraught.
Americans believe, by an almost 2-to-1 margin, that the economy has gotten worse rather than better during the past year, according to the March Bloomberg National Poll. The market begs to differ, Bloomberg BusinessWeek reports in its April 19 edition. While President Barack Obama’s overall job-approval rating has fallen to a low of 44 percent, down 5 points from late March according to a CBS News Poll, the judgment of financial markets has turned positive.
The Standard & Poor’s 500-stock index is up about 75 percent from its recession low in March 2009. Corporate bonds have been rallying for a year. Commodity prices have surged. International currency markets have been bullish on the dollar for months, raising it by about 10 percent since Nov. 25 against a basket of six major currencies. Housing prices have stabilized. Mortgage rates are around 5 percent, down from more than 8 percent in 2000, according to data from Freddie Mac, the McLean, Virginia-based mortgage buyer.
‘Phenomenal Run’
“We’ve had a phenomenal run in asset classes across the board,” said Dan Greenhaus, chief economic strategist for Miller Tabak & Co., an institutional trading company in New York. “If Obama was a Republican, we would hear a never-ending drumbeat of news stories about markets voting in favor of the president.”
Little more than a year ago, financial markets were in turmoil, major auto companies including Detroit-based GM were on the verge of collapse and economists including Paul Krugman said they were worried about the U.S. slumbering through a Japan-like Lost Decade.
While no one would claim that all the pain is past or the danger gone, the economy is expanding again, jumping to a 5.6 percent annualized growth rate in the fourth quarter of 2009 as businesses finally restocked inventories. The consensus view now calls for 3 percent growth this year, significantly higher than the 2.1 percent estimate for 2010 that economists surveyed by Bloomberg News saw coming when Obama first moved into the Oval Office in January 2009.
Expanding Manufacturing
The U.S. manufacturing sector has expanded for eight consecutive months, the Business Roundtable’s measure of chief- executive-officer optimism reached its highest level since early 2006 and the economy added 162,000 jobs in March, the most in three years.
“There is more business confidence out there,” said Jim McNerney, chief executive officer of Chicago-based Boeing Co., the world’s second-largest commercial-airplane maker. “This administration deserves significant credit.”
It is worth stepping back to consider how all of this came to be, and whether the Obama team’s approach amounts to a set of successful emergency measures or a new economic philosophy: Obamanomics.
The reigning economic approach in Democratic circles for most of the past two decades has been Rubinomics, a term coined to describe a set of priorities fashioned in the 1990s by then- President Bill Clinton’s Treasury Secretary, Robert E. Rubin, the former co-chairman of Goldman Sachs Group Inc. in New York.
Three-Legged Stool
Rubinomics was a three-legged stool consisting of restrained government spending, lower budget deficits and open trade, designed to reassure financial markets, keep capital flowing and put the country on a path to prosperity.
The Obama administration has amassed record deficits as it pursued the $787 billion fiscal stimulus on top of the $700 billion Troubled Asset Relief Plan for banks and automakers. And the president has occasionally riled Wall Street, including when he criticized “fat-cat bankers” on the CBS program “60 Minutes” in December.
That hasn’t stopped markets from rallying. Martin Baily, a chairman of the Council of Economic Advisers during the Clinton administration, said he believes Rubin and the rest of the Clinton economic team would have made similar decisions -- on bailouts, fiscal stimulus and deficit spending -- had they faced a meltdown of similar magnitude.
“I think we would have gone the same way,” he said.
The Obama team navigated the financial crisis while never losing sight of the importance of private enterprise and private markets, he added -- a point Obama stressed in his Feb. 9 interview with Bloomberg BusinessWeek.
Nationalize Banks
“A lot of people on the left were urging them to nationalize banks,” Baily said. “Instead they injected capital, and now they’re pulling capital out. That looks more like Rubinomics than a set of socialist or left-wing economic policies.”
The Obama economic team looks a lot like Rubin’s, too. Three of its most prominent members -- Treasury Secretary Timothy Geithner, National Economic Council Chairman Lawrence Summers and White House budget director Peter Orszag -- are Rubin protégés.
While the administration’s call for a consumer financial- protection agency has aroused opposition from banks, Obama’s regulatory-reform plan largely leaves the financial industry’s structure intact and ignores proposals to break up large financial institutions, unlike the reforms pursued after the market crash in 1929. Amid an uproar over bonuses at government- assisted banks, Obama, for the most part, has chosen to respect private-employment contracts.
Obama’s Instincts
In short, Obama’s instincts during the crisis were Rubin- esque. Even the $787 billion stimulus package, while large by historical standards, didn’t reach the scale called for by many economists, including the chairman of his own Council of Economic Advisers, Christina Romer, who initially advocated spending more than $1 trillion.
Today, while Romer doesn’t shy away from comparisons to the last Democratic administration, she also makes no claims about a new economic philosophy. What unites Rubinomics and Obamanomics, “is the focus on results, the pragmatism of what’s right for the economy,” she said. “We each took the policy that was appropriate at the time.”
The similarities go deeper. Like Clinton, Obama has tried to reduce income inequality. Clinton’s 1993 deficit-reduction plan raised tax rates for high-income families to 39.6 percent. Obama plans to return the top rate to the Clinton-era level. He also raised Medicare taxes for individuals earning more than $200,000 to finance his health plan.
Insurance Subsidies
Clinton aided the working poor with the Earned Income Tax Credit. Obama is doing the same with insurance subsidies in his health plan. A national health program was an aspiration of both presidents.
The Obama approach is “at least, in principle, closer to Rubinomics than was the Clinton plan,” Baily said. Obama’s team “is trying to use market incentives to raise the quality and lower the cost, and that looks like Rubinomics.”
Any comparison must take into account the vastly different circumstances each administration confronted. Clinton, 63, entered office as the end of the Cold War generated a peace dividend, then rode the tech boom -- and the tax-revenue- generating stock options that came with the run-up in tech-stock prices -- to a balanced budget. Obama, 48, inherited two wars and the worst financial crisis since the Great Depression.
Clinton’s Deference
Clinton’s deference to the bond market was necessary because long-term interest rates were high -- above 7 percent on 30-year Treasuries -- when he took office. Yields were below 3 percent when Obama became president, and the Federal Reserve has been keeping short-term rates near zero.
Even so, former Fed Chairman Alan Greenspan -- the tacit ally of Clinton and Rubin, 71, in the 1990s -- warned last month that a recent uptick in yields on 10-year Treasury notes might signal a surge in long-term interest rates, driven by investor anxiety over the budget shortfall.
Economic stabilization hasn’t been Obama’s handiwork alone. In the months before he took office, President George W. Bush and Treasury Secretary Henry Paulson halted a market free-fall with the bank bailout. Obama’s stimulus complemented the Fed’s aggressive monetary easing.
The central bank helped build a floor for housing prices by purchasing mortgage-backed securities, and the White House pledged unlimited financial backing for Freddie Mac and Washington-based mortgage company Fannie Mae. It also adopted tax credits for home buyers and mortgage-modification programs to stave off foreclosures. It’s the entire package that has made the difference.
‘Massive’ Response
“When you take it all together, the response was massive, unprecedented and ultimately successful,” said Mark Zandi, chief economist at Moody’s Economy.com. Even Obama critic Phil Swagel, assistant Treasury secretary for economic policy under George W. Bush, said White House policies have succeeded.
“They could have done a better job” by spending more of the stimulus on corporate tax cuts to boost hiring and investment, said Swagel, now an economics professor at Georgetown University’s McDonough School of Business in Washington. “But their economic policies, including the stimulus, have helped move the economy in the right direction.”
While jobs have been slow to return, the country has experienced “an incredible productivity boom” that strengthens the economy for an expansion, Greenhaus said. A measure of worker output per hour grew at a 6.9 percent annual pace in the fourth quarter, capping the biggest one-year gain since 2002, according to date from the Labor Department in Washington. Productivity growth, over the long run, helps raise living standards.
Rising Profits
Corporate profits also have been increasing, up 8 percent in the fourth quarter, putting businesses on a sounder financial foundation to invest and hire as customers return.
The public doesn’t see the signs of life economists do, as the downbeat views in the March Bloomberg poll demonstrate. And as long as job security remains a concern, it’s easy to understand why psychology may trump data. Among people who own stocks, bonds or mutual funds, only 3 out of 10 say the value of their portfolio has risen since a year ago, according to the poll, a near-impossibility given the size and breadth of market gains.
The early stages of an economic rebound don’t bring political safe haven for presidents. George H.W. Bush won a war against Iraq only to lose re-election a year after the 1990-91 recession ended. With seven months to go before mid-term elections and more than two years before he reaches his own re- election day, Obama may have reached a pivot point as the economy finally begins to add jobs.
“He can make great strides in short order,” said Steven Jarding, a former Democratic campaign strategist who is now a lecturer at Harvard University’s Kennedy School of Government in Cambridge, Massachusetts. “Any indicator he can build on is a good thing. He’ll be able to focus all his energy and attention to say, ‘Here’s what happened this year in the economy.’”
To contact the reporter on this story: Mike Dorning in Washington at mdorning@bloomberg.net
Last Updated: April 9, 2010 01:06 EDT |
