Looking Back on Barack

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At the end of his time in office Barack Obama merits an enumeration of some of his many accomplishments.   The recollection should start as he started, on January 20, 2009: the pilot taking the cockpit just when the plane was in an uncontrolled dive.

The circumstances were the most adverse faced by any new president in many decades.  Two ill-conceived and ill-executed foreign wars were underway, which had done nothing to bring to justice the mastermind of September 11, 2001.  He inherited an economy that was in free-fall, whether measured by the seizing up of finance markets, the fall in GDP, or the hemorrhaging of employment.  (The rate of job loss was running ran at 800,000 per month.)  True, Franklin Roosevelt inherited the Great Depression and Abraham Lincoln took office just as the Civil War broke out.   But what other president has come in facing both an economic crisis and a national security crisis?

The rapid policy response to the economic crisis included — in addition to aggressive and innovative monetary easing by the Federal Reserve — the Obama fiscal stimulus (the American Recovery and Reinvestment Act, passed by the Democratic Congress in February 2009) and rescue programs for the financial system and the auto industry.  Republicans were near unanimous in opposing the stimulus. And almost everybody was critical of the rescue programs – either urging nationalization of the banks and auto firms, on the one hand, or urging letting them go out of existence on the other.  There was and is insufficient recognition of how the Obama Administration succeeded, against all odds, at making the middle path work:  jobs were saved, while shareholders and managers suffered consequences of their mistakes  and the government got its money back after the recovery.

Most importantly, the free-fall ended promptly.  The timing and clarity of the turnaround is much more visible than one would think by listening to debates on what was the right counterfactual to evaluate the effect of Administration policies.  Economic output in the last quarter of 2008 had suffered a shattering 8.2 % p.a. rate of decline and job loss had been running at more than 600,000 per month.  Output and employment began to level out almost immediately after the February stimulus program.  The bottom of the recession came in June 2009; output growth turned positive in the next quarter.  Job creation turned positive early in 2010 and employment growth subsequently went on to set records all the way through the end of Obama’s time in office, adding more than 15 million jobs.

By the last half of Obama’s second term, the unemployment had fallen by half, to below 5% (2015 and 2016), wages were rising (by 2.9% nominal over the 12 months to Dec. 2016); and real median family income was finally growing too (by a record 5.2% in the most recently reported year, with lower-income groups advancing even more).

It is certainly true that the recovery was frustratingly long and slow.  Reasons include the depth and financial nature of the 2007-08 crash and the early reversal of the fiscal stimulus after the Republicans took back the Congress in the 2010 election and blocked Obama’s further efforts.   2011-14 are the years when the economy really could have used infrastructure spending and (the right) tax cuts.  But it would seem that Republicans only support fiscal stimulus when they are the ones in the White House — including when the economy is no longer in recession.

Obama’s other two biggest accomplishments in those first two years before the Congress starting blocking everything he tried were the Dodd-Frank financial reform bill and the Affordable Care Act (Obamacare).  In both cases, the reforms would have been better without a succession of steps by the opposition party to weaken them, both at the stage of passing the legislation and subsequently.

But each of those important reforms nonetheless succeeded in moving the country more clearly in the right direction than most people realize.  Dodd-Frank in a variety of ways helped make less likely a repeat of the 2007-08 financial crisis. Among other things, it increased transparency for derivatives, raised capital requirements for banks, imposed additional regulations on “systemically important” institutions, and, per the suggestion of Senator Elizabeth Warren, established the Consumer Financial Protection Bureau (CFPB).  Obamacare has succeeded in giving health insurance to 20-million-plus Americans who lacked it (for example, due to pre-existing conditions) and the cost of health care contrary to most predictions and perceptions slowed noticeably.

In the area of foreign policy, the wars in Afghanistan and Iraq were  intractable.   But the President made the tricky decisions that resulted in the elimination of Osama bin Laden (a goal in which George W. Bush had lost interest, in his eagerness to invade Iraq).  In 2015, just as the press was saying Obama was a lame duck, he achieved a string of foreign policy successes: a much-needed nuclear agreement with Iran, normalization of relations with Cuba, agreement on the Trans-Pacific Partnership (TPP), and important progress to address global climate change via a breakthrough with China.

Needless to say, the man who assumes the Presidency this month has said he will reverse most of these initiatives, if not all.  In some cases, he will do exactly that. TPP is certainly dead, at least for the time being.  (And four years from now will probably be too late to revive it, as East Asian countries may by then have responded to America’s withdrawal from the region by joining China’s trade grouping instead.)

In other cases, real-world constraints will make it harder for Mr. Trump to translate crowd-pleasing sound-bites into reality.  Repealing Obamacare is apparently top of the list.  But the Republicans are likely to be stymied by the absence of an alternative that does not take health insurance away from those 20 million Americans nor raise the net cost.  Some important innovations, such as the switch to electronic patient record-keeping and more emphasis on preventative care, are bound to survive in any case.  Perhaps the eventual outcome will be relatively minor changes in the substance of the Affordable Care Act, together with a new name – the analog of building a big beautiful wall on a quarter-mile of the Mexican border as a sort of stage set suitable for photo opportunities.

Similarly, it is hard to see how pushing harder on China would produce desirable results.  To take the most ironic example of ill-informed policy positions, if the Chinese authorities were to acquiesce to Mr. Trump’s demands that it stop manipulating its exchange rate, its currency would depreciate and its competitiveness would improve.

Similarly, if the Administration tries to carry out its promise to tear up the nuclear agreement with Iran, it will quickly find that US sanctions are ineffective without the participation of our allies.  Iran could rapidly renew and accelerate its nuclear program.  That is what happened with North Korea when George W. Bush essentially tore up the “agreed framework” upon taking office in January 2001.

Do the voters hold presidents accountable?   Bush made other serious mistakes in economic and foreign policy as well in those early years, of course, with the predictable consequences for the economy, budget, and national security.  Yet his poll numbers soared in his first term.

Conversely President Obama’s popularity sagged during much of his eight years.  Yet he leaves office with substantially higher poll ratings than most presidents at this stage and – unusually – with much higher ratings than his successor, let alone his predecessor at the end.  So apparently the person who occupies the White House does eventually receive the credit he is due for the intelligence of his policies and the content of his character.  It just takes longer than it should.

[A shorter version of this column appeared at Project Syndicate.  Comments can be posted there.]

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Outlook for 2017

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Five journalist’s questions about the economic outlook in the New Year and my answers:

1. In the first year of Trump’s presidency, what do you predict for the US economy in 2017?

The US economy is currently at or near full employment, for the first time in 9 years.  So there is limited capacity for an acceleration of growth in the medium term.  Mr. Trump is fairly likely to follow through with his proposals for massive tax cuts and spending increases (which the economy needed 5 years ago, but were blocked by Republicans).  In the short-term, it may contribute a bit to faster growth.  But the economy is likely to run soon into capacity constraints, in which case the fiscal stimulus will show up more as inflation, interest rate rises, and bigger trade deficits.

  1. Will President Trump be able to keep his word on things he said during his presidential campaign such as infrastructure investment, tax cuts, high tariff, and protectionism?

He certainly won’t be able to keep his word to bring US manufacturing jobs back on net, to any substantial degree.  But he will easily get enough support in congress for tax cuts and, probably, infrastructure investment.   What will happen with respect to tariffs and other trade barriers is impossible to say.  Mr. Trump could do a lot of damage by reverting to protectionism, as the US did under Herbert Hoover in 1930.

  1. China’s annual economic growth is going down to 6% from 10%. What is your view on the Chinese economy? How will it influence global economy?

It was inevitable that China’s economy would slow down from the three decades of 10% growth — and indeed the slowdown began five years ago.  Of course the slowdown is a negative for the world economy, especially commodity-exporting countries.  But it looks like China is avoiding a hard landing, at least this year.

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Demonetization on Five Continents

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Several countries are undergoing “demonetization” or currency reforms in which the government recalls bills of particular denomination that are circulation and replaces them with new notes. Some of these initiatives are going better than others.

India is still reeling from the consequences of Prime Minister Modi’s announcement on November 8 that 500- and 1000-rupee denomination bills, which constitute 86 % of the cash in circulation, could no longer be used and that residents have until the end of December to turn them in. They have been waiting in long lines, only to find in many cases that the banks have not received enough of the new currency to make the exchange. Some businesses are unable to operate. India’s experiment is unique in that it combines mostly benign motives – a crackdown on illegal activities – with an abrupt implementation that has inflicted unnecessarily high costs on the economy.

Demonetizations fall into several widely different categories. The most dramatic and disruptive episodes are usually signposts on the highway to hyperinflation. Venezuela’s President Maduro on December 11 announced a recall of the 100-bolivar note, creating chaos by giving residents only 10 days to make the exchange into new higher-denomination-notes (500-bolivar notes and higher, up to 20,000 bolivars).

Venezuela will almost certainly be in hyperinflation in 2017. Economists generally define hyperinflation as a pattern of price rises that exceed 50% per month. The inflation rate may cross over the line into technical hyperinflation within the next few months. Hyperinflation had become much rarer in the 21st century, compared to the 20th century. Venezuela’s would be the first since Zimbabwe’s hyperinflation in 2008-09 — which exceeded 79,600,000,000 % per month, rendering the Zim dollar worthless long before it was officially demonetized.

The current Venezuelan episode continues in a long tradition of gross mismanagement of their currencies by some governments, especially in Latin America and the former Soviet bloc. They have demonetized as a means of confiscating wealth from the public, in effect, and transferring it to themselves. The fundamental problem is that the government spends way beyond its means, unable to finance the spending by taxation or borrowing, and so relies on debasing the currency. The “currency reform” may be announced in the name of a program to end high inflation. But true macroeconomic reform requires fundamental measures to end the excessive printing of money and its origin in excessive primary budget deficits. Without such a true reform, the exchange of new bills for old is just one more symptom of mismanagement (along with price controls and the rationing of goods).

A very different category of demonetization entails the orderly decommissioning and replacement of bills for technical reasons. The technical reasons can range from the lack of popularity of a particular note, to the desire to honor a national hero, to a re-design of features to block counterfeiting, to more consequential – but still orderly – reforms such as a European country’s switch-over to the euro as the national currency. An example was the announcement in April by US Treasury Secretary Jack Lew that the $5, $10 and $20 bills are to be replaced with new designs that include women and civil rights leaders.

What differentiates this second category is that citizens are given enough time to trade in their old currency for the new unit. The monetary authorities plan ahead, so that they have plenty of new bills available. Nobody needs to lose out or even to wait in long lines at the bank. Lithuania is the most recent country to have joined the euro, having given up their lita in 2015. The currency transition went smoothly, as it had when the Germans traded in their marks for euros in 2002, the French their francs, and so on with the rest of the 19 countries that have joined the eurozone.

The main motive for India‘s demonetization apparently puts it into a third category, which includes what the US did in 1969, when it announced the phasing out of $500 bills and higher denominations, and what the European Central Bank commendably decided to do in May of this year with its decision to phase out the 500-euro note. In each of these cases, most of the high-denomination notes are used in illegal activities, ranging from tax evasion to corruption to drug trafficking and even terrorism. So the government stops issuing the big bills to avoid facilitating these illegal activities. Such prominent observers as Ken Rogoff, Larry Summers and Peter Sands think the US should do the same with its $100 bill.

In these cases, the phase-out period is typically long — in some cases indefinitely long, until all the existing paper notes wear out on their own. If the leaders are brave, they could set a relatively short time period, of less than a year, after which the note in question is no longer valid, and could ask tough questions of anyone trying to cash in a large quantity of the high-denomination notes. The goal would be to go beyond merely phasing out the facilitation of illegal activities in the future and to strike a strong blow against those who acquired stockpiles by engaging in such activities in the past. The need for bravery arises because some citizens would object strongly, probably ranging from survivalists to grandparents who want to give a crisp new $100 bill to a grandchild for a special occasion.

Although the discouragement of illegal activities is a motive to be applauded, the implementation in the case of India has obviously fallen short. The reform did not need be so very sudden and so very secret. Especially because the notes were relatively small (worth approximately $7 and $15, respectively) and widely used by all Indians, not just in illegal activities, the authorities should have allowed enough time to print plenty of the new notes and even to allow businesses to accomplish some of the desired switch-over to non-cash means of payment (checking accounts and electronic funds transfer).

Even with the advance warning time, those who had accumulated large wealth stashes in the form of the bills would still have lost some value – in effect a tax – if they had been unable to demonstrate to a bank that they had valid reasons for having the bills. Yes, they would still have been able to take recourse to an unofficial market in the phased-out bills, but they would have had to sell the bills at a discount. Most importantly, allowing more time would have avoided the serious inconveniencing of ordinary people and disruption to the economy that India has experienced since November.

Given the problems that it has created for ordinary Indians, why did the Modi government feel the need to launch the reform so suddenly, without time to print enough new notes? One theory is that a goal was to disrupt rival parties that use cash heavily in their campaigns, ahead of important elections in early 2017 (in the state of Uttar Pradesh). If the theory is valid, it is hardly an uplifting justification for what is supposed to be a good-government reform.

Western leaders probably do not act with sufficient boldness and bravery when they choose to phase out big bills as gradually as they do. But Prime Minister Modi acted too boldly in ending the use of medium-sized bills so abruptly.

[A shorter version of this column appeared at Project Syndicate. Comments can be posted there or at the Econbrowser site.]

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