Campaigns play political football with bailout, stimulus -- but did they help the economy?
This article first appeared in the St. Louis Beacon, Sept. 1, 2010 - If current political advertising is a sign of the finger-pointing to come, it appears that some candidates -- most notably the non-incumbents -- are taking a page from Bill Clinton's now infamous campaign dogma about the importance of the ailing economy, but with a twist.
With all due respect, it's the bailout, stupid.
Does the figure $700 billion come to mind?
Two years after economists and policy-makers prescribed massive emergency injections of taxpayer dollars to stabilize the nation's banks and a critically ill U.S. economy, a bitter aftertaste has stuck with pessimistic voters on Main Street.
It's open season on bailouts, including the emergency $700 billion Troubled Assets Relief Program (TARP) approved in October 2008, and the economic stimulus package that followed in early 2009, partly because these were complex programs that were put together on the fly and have proven far from perfect, says Steven Fazzari, an economics professor at Washington University. But perhaps more important is that most American says they personally have not seen or felt the benefits of all that government spending.
"The political problem is that the benefits are so indirect that people just don't recognize them -- and that makes the programs susceptible to all kinds of rather shallow but politically effective criticisms," Fazzari said.
In the Missouri Senate race, Secretary of State Robin Carnahan, the Democratic candidate, has labeled the Republican candidate, U.S. Rep. Roy Blunt, "Mr. Bailout," taking him to task for his part in passing the taxpayer rescue of financial institutions. Blunt was the minority whip in the House of Representatives at the time. If there's an irony to Carnahan's approach, it's that the legislation -- officially known as the Emergency Economic Stabilization Act of 2008 -- passed largely due to the support of Democrats after failing in its first congressional go-round.
Blunt has, in turn, criticized Carnahan for her support of the stimulus package.
Two years into economic hard times and counting, polls show that the majority of Americans see little sign of economic recovery, and they don't think the government's solutions have had significant effect. According to the Pew Research Center:
- Nine in 10 Americans surveyed rate the nation's economic conditions as poor (49 percent) or only fair (39 percent).
- Six in 10 (62 percent) say the economic stimulus package enacted by Congress in 2009 has not helped employment and nearly half (49 percent) say the loans to banks and financial institutions did not prevent a more severe economic crisis.
And here's an eye-opener: Just 36 percent of Republicans, 35 percent of independents and 34 percent of Democrats know that the government bailout of banks and financial institutions was signed into law by former President George W. Bush, according to a July survey by Pew. The study found that Democrats (46 percent) are just as likely as Republicans (50 percent) or independents (44 percent) to say -- incorrectly -- the legislation was enacted after Barack Obama became president.
A bailout by any other name
In retrospect, Congress has also been giving TARP a second look.
Due to take the hot seat before the bipartisan congressional Financial Crisis Inquiry Commission on Thursday morning is Federal Reserve Chairman Ben Bernanke who helped formulate TARP. Former Treasury Secretary Henry Paulson and current Treasury Secretary Timothy Geithner have already testified about their decisions to aid financial institutions, such as Merrill Lynch, Bear Stearns and American International Group (AIG) that were pronounced "too big to fail" during the economic pandemic that began in the United States and quickly spread around the globe.
Public dissatisfaction with bailing out financial institutions that had made risky investments intensified as reports surfaced of CEOs and top executives being paid large bonuses after the government rescue -- even as the nation was shedding hundreds of thousands of jobs every month.
The political difficulty is how to convince Americans that things could have been much worse had the federal government not stepped in, says Andrew Rehfeld, associate professor of political science at Washington University.
With the nation's unemployment rate hovering at just under 10 percent, foreclosures approaching another million in 2010 and a stalled-again housing market, the Obama administration is basically defending the fact that the economy didn't spin out of control, he said.
While TARP was passed on Bush's watch, the Obama administration gets credit for the auto industry bailout of GM and Chrysler and the American Recovery and Reinvestment Act passed in February 2009. The stimulus program was designed to pump $787 billion into the economy through a variety of methods, including tax incentives, infrastructure construction and stabilization funds to prevent layoffs in school districts and state and local governments.
Was the stimulus enough? Not enough? Economists and political scientists continue to debate the results -- with some suggesting that a second round is now necessary, Rehfeld said.
"Had the Obama administration done nothing or had they done much more, I think we would have had more decisive results," Rehfeld said. "They are in the position of defending a negative -- defending the fact that we did not spin out of control. We are still in a bad place, and it might get worse. But would unemployment be twice what it is today? Would the economy be worse?"
Rehfeld said that convincing Americans that the bailouts and stimulus were worthwhile is a political test of Obama's leadership, even as gloomy economic numbers continue to roll in.
"When you're getting your foot amputated, it's only a small measure of relief to be told, 'We saved your leg,' " Rehfeld said. "It's not spinning, it's leadership to be able to be very clear about where we were headed and what precisely the intervention did."
Rehfeld is perplexed by Obama's seeming unwillingness to remind Americans that he inherited the nation's financial mess.
"Obama is picking up the pieces, though he is doing it in the way that Bush had started. But it is stunning to me how you could inherit such a mess and wind up taking the blame for it,'' he said. "It would be as if Franklin Roosevelt were blamed for the Great Depression. A lot of the Great Depression happened under Roosevelt's watch, and it started earlier in the Hoover administration than this did in the Bush administration. But nobody thinks that FDR caused the Depression, though they may think that he didn't do enough to get out of it."
Part of that public relations campaign should include explaining to the American public that TARP primarily loaned money to financial institutions and that much of the money has been paid back, said Rehfeld.
Earlier this month, the Congressional Budget Office projected that the total cost of TARP over its lifetime would be about $66 billion.
While that is a large amount of money, Fazzari points out that it less than one-tenth of the sticker price of the program.
"This was not the government giving out money," Fazzari said. "They were loans, and a lot of those loans were paid back. People didn't understand that at the time."
What about me?
Robert Cropf, chairman of the department of public policy studies at St. Louis University, agrees that bailouts are an easy target this election year partly because of human nature: We tend to look upon these big financial packages in terms of how they affect us personally.
"Everyone thinks that it's a bailout when it involves someone else," Cropf said. "But when it involves you, it's a helping hand. Or, 'I deserve it.' It depends on the subject of the 'bailout.' If you're someone employed by GM it wasn't a bailout, it was the natural thing to do given GM's importance in the national economy. If you're somehow dependent on the finance industry for your livelihood, it was the natural thing to do and in fact the logical thing to do."
Cropf believes that, in reality, most Americans collect some form of a government subsidy. Whether it's Social Security or mortgage interest deductions, the nation has gone too far down that road to turn back.
"When people get riled up about it, they don't realize that they are just as guilty as everyone else,'' he said.
TARP focused first on Wall Street and the big banks, but later government action and the stimulus were directed toward Main Street. That list includes tax credits, rebates, extended unemployment benefits and assistance for struggling homeowners. A new plan recently announced by the Obama administration will offer up to $50,000 in temporary "bridge" loans to help unemployed homeowners pay their mortgages. While critics may argue that direct assistance for homeowners is long past due, the plan might not seem fair to some of the millions of Americans who have already lost their homes to foreclosure.
"Part of the problem is a sense of entitlement -- when someone gets something and someone (else) doesn't," Cropf said. "There has been a growing sense of that in American society over the last 40 or 50 years."
The true test of a successful stimulus or bailout is whether the spending increases aggregate demand, he said.
"From a strictly economic standpoint, it doesn't matter where the money goes as long as it goes into the economy -- as long as it boosts demand in the economy because that's what's going to get the economy back on its feet again," Cropf said. "But it goes back to this concept of virtue. You have to be virtuous to receive this money; you have to be someone who did everything the right way."
Looking back at the Great Depression, Cropf points out that the Work Projects Administration included some programs that weren't absolutely necessary but that helped employ out-of-work Americans.
"Murals are nice, but at that time did we really need another mural or someone writing books about the United States?" he said.
The problem is getting people to think about economic solutions in a rational way.
"You do have to use the kind of strategy that candidates are using and the rhetoric that the administration is using to sell these programs: 'These people deserve it, and they need our support.' But you have to target the programs to specific segments of the economy because the point is to get the money into the economy and people spending it," Cropf said. "The political cycle and the economic cycle don't coincide. If you want to do the right thing, you're thinking long term, not just in terms of two-year or four-year cycles. The timing for the political cycle might not make sense for the economic cycle and vice-versa."
But did the bailouts work?
Fazzari agrees that it will be a tough job for politicians -- particularly incumbents who voted for the programs -- to convince voters that the bailouts and stimulus programs worked.
"Did it do any good? I think it did. Two years ago we were falling off a cliff. The economy was following a path that looked very much like the early part of the Great Depression and that continued through the end of 2008 and into the first part of 2009," he said. "The panic situation we were in for a few months subsided and that was following the bailout programs of the Treasury and the Fed and the stimulus bill in early 2009."
Fazzari said that while voters can easily see that the president of a bank got a bonus, for example, it is not so easy to see that because of the bailout the bank kept functioning, businesses were funded and jobs were saved.
"My view is if we hadn't acted aggressively in the fall of 2008, the job losses would have been much, much worse. So people are working today because of those bailouts in ways that no one can ever tell,'' he said. "The problem was that it matters who gets bailed out, especially in terms of the political ramifications."
In retrospect, Fazzari said the bailouts could have been handled better. For example, investors who were made "whole" by government intervention should have taken their fair share of loss -- a financial haircut, so to speak.
But Fazzari said that the decisions were made against the backdrop of panic and the situation required fast action to ensure that the markets would open the next day. Bailing out banks directly was quicker than bailing out financially troubled homeowners.
Fazzari believes that politicians were also driven by the conventional wisdom of the day -- that the problem could be fixed if they got banking in order.
"Part of the political problem right now, whether it's Roy Blunt or the Democrats -- any incumbent who has to defend their record in this environment -- part of the problem is they viewed this as a temporary problem, and they put in temporary solutions. But it was much more persistent," he said.
"People have been talking about the need for a second stimulus, but it's a politically unpopular view right now," Fazzari said. "The Republicans want to argue exactly the opposite. The Democrats seem to be stuck in the mud, serving as cheerleaders for the recovery. There is no constituency in Washington for a second stimulus plan now. Without it, I expect stagnation to continue. People have asked me how long. I say I would be surprised if it's less than two years."
Short of another financial crisis, Fazzari believes that economic policy will remain paralyzed. While the good news is that the labor market is no longer shedding 700,000 jobs a month, the bad news is that it not creating the number of jobs that would signal a recovery.
Even as politicians point fingers at one another, Fazzari puts some of the blame on the shoulders of economists who have fundamentally disagreed on what steps should have been taken in the fall of 2008 -- and what, if any, steps should be taken now.
"Economists are not providing very much guidance, and I think what happens is that ideology fills the vacuum,'' he said. "The Obama administration came in with the idea of a big and temporary stimulus plan, and within a year, we're going to be rolling. And it didn't work. Now they're caught between 'We should do more' or 'We should wait' -- and the Republicans are saying, 'You should have done less to begin with.' "