Perspective

Let’s take a look at some of the parallel challenges President elect Obama faces as he takes office next week.  We don’t really have to go back as far as FDR and the Great Depression.  Most presidents of the past 60 plus years have taken the oath amid varying degrees of economic uncertainty.  Even though the present situation may eventually turn out to be more dire than what other “rookie” presidents faced, their crises were in fact very real at the time.   

Harry Truman had to guide the nation from a war-time to a peacetime economy shifting from very strict controls to a much more free market.  That transition didn’t go smoothly.  Presidents Ford and Carter also faced problems not of their own making but spurred by a 600% increase in the global price of oil from 1973 to 1980.  The father and son presidents Bush both took office at the end of expansions that eventually collapsed of their own weight in late-stage speculative excesses.  Both suffered the hangovers.  In addition, both had the misfortune of presiding over recessions when international crises further weakened the U.S. economy.  None of this is new to incoming Presidents. 

Ronald Reagan faced an economic crisis most similar in magnitude to today’s.  Unemployment was 7% in 1980 and climbing fast.  Inflation had been running at 12.5%.  Interest rates in the high teens crippled residential real estate and business investment and the stock market had been in a rut since 1966.  The cost of the cure was very high.  The Fed tightened the screws on credit and pushed the economy into the worst recession since the 1930’s.  Sound familiar?   

Despite stimulus from deep cuts in tax rates and  military buildup, manufacturing output still took a steep nosedive.  In the 1981/82 recession GDP declined almost 6% in back-to-back quarters.  Joblessness eventually hit 10.8% in late 1982.  Tax receipts fell sharply but not government spending.  This produced a modern record deficit of 6% of GDP.  In short, Reagan inherited a very sick economy that got much worse before recovering. But the recovery did come in the middle of his first term and voters credited Reagan with playing a key role in bringing it about and gratefully reelected him in a landslide in 1984. 

Obama will likely experience something very similar with this difficult economy, which will probably worsen before GDP growth resumes.  Today’s unemployment rate of about 7% will likely hit at least 9% and may even hit the double digit rates of 1982.  The contraction could bottom out by midyear, but the ensuing growth will likely be weak for at least another year or so.  As tax receipts plunge and government spending rises through the roof, Reagan’s record federal deficit will probably be eclipsed, exceeding 7% of GDP.  Much like Reagan, Obama has tax cuts in his bag of tricks and he will use them.  But most of his faith is in the stimulus of infrastructure spending on transportation, alternative energy and public school renovations.  These are projects he views not as New Deal style make-work, but as investments in our future. 

He fully understands that he alone will be judged on how well the economy is nursed back to health by the White House, Congress, the Fed and American business leaders.  Make no mistake, this will take some time but all recessions eventually do end. Also, since recessions never run their course without a variety of remedies being tried, no one can be sure which treatments work and which might actually prolong the slump. 

On Tuesday, Inauguration Day, our new president and all Americans can believe this: The challenges ahead are not unprecedented in recent U.S. history.  We are still the greatest country on this planet. This nation has met and matched equally daunting crises before, always finding a way to get back on track. There is no reason to believe we can’t do it once again. 

Have a nice weekend.

 

 

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