Economy, unemployment polarize candidates, voters as election approaches
Published: Tuesday, October 23, 2012
Updated: Tuesday, October 23, 2012 08:10
Two events of major historical significance defined the year 2008. The first was a recession with a level of severity unmatched by any economic downturn since the Great Depression. The second, the election of the nation’s first black president — a president who was elected at a time when the economy was hemorrhaging 700,000 jobs each month and who has since helmed an economic recovery that, while sluggish and susceptible to criticism, is still inching along.
Despite that progress, President Barack Obama faces the very real prospect of losing his re-election. Poll numbers have the President neck-and-neck with his opposition, former Massachusetts Governor Mitt Romney, who asserts that his breadth of experience in the economy’s private sector will allow him to steer America’s economy forward.
Much of what contributed to the severity of the 2008 recession President Obama inherited was that it was coupled with a financial crisis, according to Assistant Professor of Economics Arthur Chiang.
“There’s a lot of evidence that recessions that follow complicated financial crises tend to take longer to unwind,” he said. “In terms of what [Obama] was dealing with, it’s not your garden variety recession.”
To deal with an economy in freefall, Obama’s administration quickly enacted an $825 billion stimulus package, the logic behind which was to invest in projects that would create demand for new jobs, Chiang said. Jobs lead to increased income, which theoretically leads to people spending more money on goods and services, hopefully pulling the economy out of its downward spiral.
Similar rationale was the basis for Obama’s 2010 extension of both the Bush tax cuts and of the payroll tax cuts — more disposable income as a result of lower taxes would allow for increased spending, while the payroll tax cuts act as an incentive for hiring, according to Department of Economics Chair Daniel Richards.
“The payroll tax is something that employers have to pay when they hire you — they pay you a wage and they pay you a payroll tax,” Richards said. “If they don’t have to pay you a payroll tax, then that makes it a little bit easier for them to hire you.”
Richards added, however, that in a recessionary period, the uncertainty of the economy means that people tend to save more and spend less. Therefore, money saved from tax cuts goes into savings accounts, not back into the market.
Obama’s economic policies have not been without heavy criticism, most notably the assertion that they have continued to drive up the federal deficit. This is normal, though, according to Chiang.
“It’s sort of by construction that you’d associate a stimulus period with an increase in the deficit,” he said, explaining that increased spending is necessary for growing the economy.
“It’s the wrong time to worry about [cutting the deficit] when we’re still roughly in the recovery of a recessionary period,” Chiang said. “You should take care of growing the economy first in terms of jobs and GDP [Gross Domestic Product] and then once things are really booming, then you have to be responsible.”
Other criticisms of Obama, though, hold more weight, Richards said. The administration’s initial predictions for recovery were far too optimistic and underestimated the severity of the recession, according to Richards.
“They made statements during the first year that people could hold them to,” he said. “That was unfortunate, because the economy that they inherited from the Bush years was in much worse shape than they initially thought.”
Richards added that he felt the Obama administration was far more accommodative than it should have been to push the kind of economic policy that was necessary.
“It became fairly clear early on that the Republicans were going to block a lot of things, and I think [the administration] should have, instead of trying to appease them, they should’ve said, ‘Okay, nothing we do is going to please them,’ and then just been a bit more bold about what they were going to do,” he said.
Chiang agreed that Obama should have been more aggressive in pushing through a more effective stimulus, and added that another critique is that Obama’s priorities have not been as concentrated on the economy as they could have been — focusing on passing healthcare reform while simultaneously dealing with nine to ten percent unemployment, for example.
“It’s kind of like putting out the fire before you work on building an extension to your house,” he said.
Despite criticisms, the economy is moving forward — unemployment dropped to 7.8 percent nationally last month from a high of ten percent in Oct. 2009 — and Obama’s stimulus package has had a major effect on that, according to Max and Herta Neubauer Chair and Professor of Economics Yannis Ioannides.
“The [only other option] would have been to have the economy languish for years and years, just as Japan has for the last nearly 20 years or so, unable to get out of it,” Ionnides said. “But the United States’ economy is moving, the unemployment is going down.”
Although the economy is showing slow signs of growth, there are outcries for a new fiscal policy that immediately addresses the still high unemployment rate and creates more growth, faster. Romney has outlined a five-part plan — addressing energy independence, trade, the deficit, small business creation and investment in skilled workers — which he says will be responsible for the creation of 12 million new jobs.