2010: What happened?

A lot of people are asking, How could the voters have swung so much in two years? And, why didn’t Obama give Americans a better sense of his long-term economic plan in 2009, back when he still had a political mandate? As an academic statistician and political scientist, I have no insight into the administration’s internal deliberations, but I have some thoughts based on my interpretation of political science research.

The baseline

As Doug Hibbs and others have pointed out, given the Democrats’ existing large majority in both houses of Congress and the continuing economic depression, we’d expect a big Republican swing in the vote. And this has been echoed for a long time in the polls–as early as September, 2009–over a year before the election–political scientists were forecasting that the Democrats were going to lose big in the midterms. (The polls have made it clear that most voters do not believe the Republican Party has the answer either. But, as I’ve emphasized before, given that the Democrats control the presidency and are still (at the time of this writing) likely to keep the Senate, it’s perfectly reasonable for swing voters to swing Republican in congressional voting.)

The Tea Party

What about those new Republican candidates? Radical or merely conservative? How much did they stir up the base and how much did they turn off moderate voters? Based on some of my research with Caltech political scientist Jonathan Katz, I estimate moderation to be worth about 2 percentage points in congressional elections. There’s a lot of variation here, but overall people are voting primarily the party and secondarily the candidate. Ideology is a distant third. Sure, it’s a good plan to run moderate candidates if you can, but the choice of ideology is really much more of a battle within the party than a concern in the general election. 2010 was not a good year to be a Democrat in any case.

But where did that bad economy come from?

The unemployment rate increased from 6.6% in October 2008 to 8.6% in March 2009: a huge jump before the new administration had a chance to do much at all. So the Democrats were starting in a deep hole.

Thus, one story of the election, as expressed, for example, by journalist Jonathan Chait, is that Obama and congressional Democrats shouldn’t be blamed for their 2010 election failure: after all, they did about as well as forecasted. To be fair, Chait is not a pure determinist; he’s just using the forecast as a baseline. Still, he’s missing a key piece of the picture, which is that economic performance is not fixed. According to Paul Krugman, for example, the economy would’ve been doing much worse right now had there been no stimulus plan and would be doing much better had a larger stimulus been enacted in 2009. Economists on the right have a different view, but even those who think the government can’t do much to repair the economy tend to feel that the government has the ability to make things worse.

To put it another way, nobody’s claiming that the correct economic policies (whatever they may have been) would cause the economy to be booming right now, but perhaps the difference between a mild depression, a severe depression, or complete free fall would have some impact on whether the Republicans achieved small gains, large gains, or a landslide in 2010.

Why didn’t the Democrats do more?

The next natural question is: Why, in early 2009, seeing the economy sink, did Obama and congressional Democrats not do more? Why didn’t they follow the advice of Krugman and others and (a) vigorously blame the outgoing administration for their problems and (b) act more decisively to get Americans spending again?

I offer a few thoughts, but bear in mind that I know nothing about the people involved in these deliberations, so these are all just speculations or, at best, rational reconstructions:

One answer is that Obama wanted to do more but was limited by the preferences of the 60th-most-liberal senator. I buy this argument a bit but not completely. For one thing, all the Democratic senators, even the conservative ones, have an interest in their party remaining in the majority. OK, maybe Joe Lieberman is ready to switch at any time, but most of them are locked in. So they don’t gain from a Republican landslide, More to the point, the 55 or so Democratic senators who certainly wanted their party to remain in power could’ve done more, if they’d really felt it was a good idea.

Now we’re getting closer. Several Democratic senators did not favor the big stimulus. Part of this can be attributed to ideology (or, to put it in a more positive way, conservative or free-market economic convictions) or maybe even to lobbyists etc. Beyond this, there was the feeling, somewhere around mid-2009, that government intervention wasn’t so popular–that, between TARP, the stimulus, and the auto bailout, voters were getting a bit wary of big government taking over the economy.

Now, from the standpoint of November, 2010, if you’re a Democratic senator and can go back in time to mid-2009, you might want to forget about looking like a moderate and go for a stronger, Krugman-approved plan to juice up the economy. Being a compromiser might have seemed like a good idea at the time, but in retrospect it appears that voters care about results, not about what happens to be popular at the time of the vote.

On the other hand, most of the Senate’s moderate-to-conservative Democrats were not up for reelection in 2010. Thus they had little personal reason to support policies with immediate effects on the economy and had more motivation to favor a go-slow approach.

On not wanting to repeat the mistakes of the past

OK, so why didn’t Obama do a better job of leveling with the American people? In his first months in office, why didn’t he anticipate the example of the incoming British government and warn people of economic blood, sweat, and tears? Why did his economic team release overly-optimistic graphs such as shown here? Wouldn’t it have been better to have set low expectations and then exceed them, rather than the reverse?

I don’t know, but here’s my theory. When Obama came into office, I imagine one of his major goals was to avoid repeating the experiences of Bill Clinton and Jimmy Carter in their first two years.

Clinton, you may recall, was elected with less then 50% of the vote, was never given the respect of a “mandate” by congressional Republicans, wasted political capital on peripheral issues such as gays in the military, spent much of his first two years on centrist, “responsible” politics (budgetary reform and NAFTA) which didn’t thrill his base, and then got rewarded with a smackdown on heath care and a Republican takeover of Congress. Clinton may have personally weathered the storm but he never had a chance to implement the liberal program.

Carter, of course, was the original Gloomy Gus, and his term saw the resurgence of the conservative movement in this country, with big tax revolts in 1978 and the Reagan landslide two years after that. It wasn’t all economics, of course: there were also the Russians, Iran, and Jerry Falwell pitching in.

Following Plan Reagan

From a political (but not a policy) perspective, my impression was that Obama’s model was not Bill Clinton or Jimmy Carter but Ronald Reagan. Like Obama in 2008, Reagan came into office in 1980 in a bad economy and inheriting a discredited foreign policy. The economy got steadily worse in the next two years, the opposition party gained seats in the midterm election, but Reagan weathered the storm and came out better than ever.

If the goal was to imitate Reagan, what might Obama have done?

– Stick with the optimism and leave the gloom-and-doom to the other party. Check.
– Stand fast in the face of a recession. Take the hit in the midterms with the goal of bouncing back in year 4. Check.
– Keep ideological purity. Maintain a contrast with the opposition party and pass whatever you can in Congress. Check.

The Democrats got hit harder in 2010 than the Republicans in 1982, but the Democrats had further to fall. Obama and his party in Congress can still hope to bounce back in two years.

Avoiding the curse of Bartels

Political scientist Larry Bartels wrote an influential paper, later incorporated into his book, Unequal Democracy, presenting evidence that for the past several decades, the economy generally has done better under Democratic than Republican presidents. Why then, Bartels asked, have Republicans done so well in presidential elections? Bartels gives several answers, including different patterns at the low and high end of the income spectrum, but a key part of his story is timing: Democratic presidents tend to boost the economy when the enter office and then are stuck watching it rebound against them in year 4 (think Jimmy Carter), whereas Republicans come into office with contract-the-economy policies which hurt at first but tend to yield positive trends in time for reelection (again, think Ronald Reagan).

Overall, according to Bartels, the economy does better under Democratic administrations, but at election time, Republicans are better situated. And there’s general agreement among political scientists that voters respond to recent economic conditions, not to the entire previous four years. Bartels and others argue that the systematic differences between the two parties connect naturally to their key constituencies, with new Democratic administrations being under pressure to heat up the economy and improve conditions for wage-earners and incoming Republicans wanting to keep inflation down.

Some people agree with Bartels’s analysis, some don’t. But, from the point of Obama’s strategy, all that matters is that he and his advisers were familiar with the argument that previous Democrats had failed by being too aggressive with economic expansion. Again, it’s the Carter/Reagan example. Under this story, Obama didn’t want to peak too early. So, sure, he wanted a stimulus–he didn’t want the economy to collapse, but he didn’t want to turn the stove on too high and spark an unsustainable bubble of a recovery. In saying this, I’m not attributing any malign motives (any more than I’m casting aspersions of conservatives’ skepticism of unsustainable government-financed recovery). Rather, I’m putting the economic arguments in a political context to give a possible answer to the question of why Obama and congressional Democrats didn’t do things differently in 2009.

24 thoughts on “2010: What happened?

  1. You and others seem to forget that regardless of whose fault it was, It was Obama's job to fix it. Don't you remember this chart? It looks like it hasn't been updated in a year, but here we are in October 2010 and the unemployment rate is 9.2%. This chart promised we'd be down to 7.5% by now.

    That chart is what Obama promised. Was it a lie? Was it just "theater" for the suckers out in flyover country? They spent a trillion dollars of my and my children and grandchildren's money. They certainly didn't deliver on that promise.

  2. John:

    Not only do I remember that chart, I linked to it in the blog above! As I wrote above, "Why did his economic team release overly-optimistic graphs such as shown here? Wouldn't it have been better to have set low expectations and then exceed them, rather than the reverse?"

  3. They spent a trillion dollars of my and my children and grandchildren's money. They certainly didn't deliver on that promise.

    that's simply wrong.
    This is useful:

    The stimulus bill was 787 billions. Of that, fully one third was in tax cuts
    (which are probably quite ineffective at stimulus, because people use them to pay back debt, but that's what "moderates" wanted).
    So we're down to half a trillion. Of those, quite a bit went to states and to education – which, most people would argue, is in your grandchildren's best interest.

    Andrew: About the graphs – that's actually more complicated than you imply, because, as Keynes pointed out, recessions are partly psychological – not in the "you're just imagining things" sense, but in the sense that people's expectations matter for their behavior, most importantly consumption and investment decisions. So the President needs to walk a fine line between cheerleading and managing expectations. You don't want the President and his advisors conjuring doomsday scenarios.

  4. This is a really interesting question. Why did they make such optimistic claims, and how would things be different if they hadn't? Would voters have been kinder if he'd said "we're looking at 13% unemployment,10% with stimulus", or are they more concerned with the actual state of the economy then how it compares to somebody's projections?

    I also have to wonder if over-promising wasn't done intentionally. At the time, there really was a feeling that we were looking out over the abyss. My impression of the government response has been a dedication to avoiding the economy grinding to a stop under deflation. QE1+2, stimulus, I think a lot of it has been intended to essentially say "if you try to pull your money out of the economy and sit on it, we're going to inflate your wealth away. So your best best is to keep your money moving" If he'd said "we're looking at 12%+ unemployment, would consumers have cut back more, would companies have thinned their ranks quicker?" Who knows?

    Good food for thought…

  5. Oops, yeah, you did link to that graph, I didn't read down far enough.

    Here's a wild idea for why they published overly optimistic projections: because they believed them at the time. And they turned out to be wrong.

  6. What makes people think they were optimistic? Maybe they were appropriately pessimistic but their prescriptions simply made things worse. Contra Sebastian, Romer's own published work before she assumed her position with Obama argues that tax cuts work better than "shovel-ready" projects whch were anything but. And while everryone thinks education is an excellent infrastructure ivestment, money thrown at the education sector might not produce very much… y'know… education, as opposed to payoffs to favored interest groups. While I agree with Andrew that economic performance is somewhat endogenous, I find unproven (and mildly rejected) the notion that anything that they did brought us back from the abyss, or even improved things.

  7. Miron (Department of Economics, Harvard) presents the case against stimulus spending here. As Obama recently acknowledged, contradicting his original comments, there are no "shovel ready" infrastructure projects. Any positive effects for the economy are not realized for years. If you want effects in the short term, then give tax breaks. Of course this too is problematical because under current conditions, people are using tax breaks to buy down their personal debt. Businesses are reluctant to spend because they don't see a positive net present value to investing. That leaves pure Keynesian pump priming. Under this theory government spending on consumption items will have a net positive effect because of the "multiplier." This theory has yet to be validated and counter examples exist: The Great Depression, Japan, and the U.S. in the 1970s, to name but a few examples. By 1980 the Keynesian paradigm had been largely discredited and abandoned in favor of monetary policy. For a review of the thinking at that time, see The Dissolution of the Keynesian Consensus in the special 1980 issue of The Public Interest here. It appears that the Keynesian approach has been re-animated largely out of desperation and to create a slush fund to reward favored groups. What lies behind all these difficulties is the failure of neo-classical economics. Policy makers are using the wrong model of the economy. They use a model that ignores public and private debt. It's the gigantic level of debt that has caused the present crisis according to Hyman Minsky's theory. You really can't understand what's happening today without something like a Minsky theory.

  8. Don't forget that in 2009 Obama's goal was to get everyone to just calm down about the markets. Doom and gloom probably wasn't a good idea from any standpoint, although it probably helps that overoptimism is consonant with both the goal of re-election and stabilizing financial markets.

  9. John:

    In your first comment you suggested that Obama's early optimistic forecasts were "a lie . . . just "theater" for the suckers out in flyover country?" In your next comment you suggested that "they [the Obama team] believed them at the time." I don't think both these claims can be correct.


    Yes, I can see the theory that optimistic predictions might cause (or be believed do cause) a positive feedback on the economy. Still, I wonder whether some of the happy talk was done for political reasons, with the goal of following the example of Reagan.

  10. The argument that goes like "X fixed the economy and Y benefited from it" can be used by Republicans too (in fact, it is). For example Bush Senior could have kept his "read my lips" promise and not raise taxes, but he did raise taxes because it was the "right thing to do", that cost him Republican votes, and then, because he didnt make things worse, Clinton after him reaped the benefits.

  11. "why didn't Obama give Americans a better sense of his long-term economic plan in 2009"

    How about in 2008? Of course he probably would have won then.

  12. I wonder how much was distraction over the wars, the one area he has full responsibility. Many of his appointments were delayed in Congress, but many others he never got around to making such as Fed Board members. I don't think they wanted it to work too fast, but that was nearly an impossibility given the nature of the crisis. No one was willing to apply any accountability to the Fed for the situation. Are they that ignorant or did they just find a crisis too good an opportunity to waste? From the campaigns, it was a choice between the clueless and the sociopaths.

  13. Andrew, obviously both can't be true, but certainly one or the other has to be: either the administration knew the chart was not an accurate prediction and went with it anyway, or they really believed it at the time. In light of what happened, neither possibility reflects well on them. The first shows them to be deceptive and the second shows them to be, at best, unreliable predictors of policy outcomes.

  14. Andrew, I would be interested in your take on this article which came out today:


    If true, it indicates that the number of actual "swing" or "independent" voters may be much less than what people self-declare themselves to be, and that the results this time were basically due to the fact that those that normally vote Republican came out to vote in large numbers, and those that vote Democrat did not.

  15. Democratic presidents tend to boost the economy when the enter office and then are stuck watching it rebound against them in year 4 (think Jimmy Carter), whereas Republicans come into office with contract-the-economy policies which hurt at first but tend to yield positive trends in time for reelection (again, think Ronald Reagan).

    This is a ridiculous argument on the face of it. There have been _two_ Democratic presidents since LBJ. The reason for the bad economy under Carter (and it was only bad in an inflationary sense, not an unemployment sense) was the fall of the Shah and the removal of Iranian oil from the world markets. This lead to a tripling of oil prices (hence high inflation). I suppose you can argue that Carter's appointment of Volcker to the Fed, and the raise in interest rates to conteract inflation, was a policy choice, but it was indirect (and the raise in interest rates didn't affect
    unemployment until into Reagan's term). Inflation plus unemployment was high ("the misery index"), but it was inflation that was most of it.

    As for Clinton, interest rates came down because of
    his tax increases (Clinton included a tax on carbon which would hit lower income consumers because otherwise,
    Greenspan wouldn't lower rates unless the poor and middle class were hit). This helped spark the (continuing–it started under HW) recovery, which exploded in Clinton's second term.

    The point is that there are only two examples of Democrats in the last several decades and one of them shows the opposite of what Bartels is arguing (the "peak too soon"). Here's another explanation over why Obama didn't take the stimulus fight to another level (a greater stimulus, and if not successful, complaints about its failure)–the people in the White House (particularly the economic advisors) all have nice jobs and didn't see the necessity of working against a worst-case scenario (which would have required a stimulus of 1.2 (Romer's figure) or 1.6 (Krugman's) trillion). After all, Sommers will go back to Harvard.
    Incidentally, why is he seen as a great economist? He quashed the regulation of derivatives in the late 90's (even after Long Term Capital Management), lost a half-billion for Harvard as he left by telling them to take a stupid hedge bet, and then failed to push for a stimulus that could do the job. Won't even mention his discourse on women not being able to do hard-core economics due to lack of math (the person who wanted to regulate derivates–forget her name, but it was a she–he forced out, along with Rubin, and Romer was of course correct about size of the stimulus). Seems to me the women are better than he.

  16. From the perspective of analysing political actors' positions, it doesn't matter after the fact if the stimulus worked, what matters is whether the political actors thought it would work, and how much uncertainty there was in their own predictions. Obama and his economic team might have been true-believing neo-Keynsians, but not all Democrats in Congress are, and many Republicans in Congress are not. A person who isn't a neo-Keynsian might still believe that it's better to lower the incomes of the currently employed, through taxes or borrowing, in order to get more people working at some income level, but that belief will limit the size of the stimulus and bailout that such a person would vote for.

  17. Bill:

    I took a look at the item you linked to. He makes a couple of reasonable points but overall I disagree with him.

  18. One of Obama's big problems in 2010 is that the media so flagrantly oversold him in 2007-2008 that no mortal human could possibly live up to the expectations the press generated. Ronald Reagan didn't have to deal with that problem.

  19. It wasn't Obama job to fix it. I'm not a fan or a hater of his. However the presidents job isn't to fix the economy.

  20. If the goal was to imitate Reagan, what might Obama have done?

    You left out:

    – Get almost assassinated, and, while it is happening, be cool and witty and optimistic.

    Yes, I snark. Because smart people forget how important that was to people's feeling about Reagan.

    The best thing that happened to Michael Jackson's career was dying.
    The best thing that happened to Ronald Reagan's was almost dying.

    Imagine what things would be like today if some crazy white supremacist had almost killed Obama.

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