Obama 2012: A Term Of Fi$cal Pain

This Tuesday, we'll find out who wins the presidential election—Michigan Governor Hillary Rodham Clinton or Republican candidate Charlie Crist of Florida. An exhausted President Barack Obama will soon return home to Illinois. But he can do so in the knowledge that he tried his best, and leaves a solid foundation for the next president, even if most voters can't see it yet.

It's hard to imagine now, but when Obama first took office, the experts thought that the consumer-led recession that had deepened precipitously in the fourth quarter of 2008 would be short, with the economy starting to recover in the fall of 2009, at the latest. Economists thought back then that the now-famous Black, Black Monday—the Monday after Thanksgiving 2008 when it became clear that consumer spending for the holiday season would drop by double digits—was a good thing. They figured that it meant that the pain would be deep, but short, as banks would quickly start to lend again.

That's why the Democrats howled when Obama gave a pre-inauguration speech on the floor of the New York Stock Exchange in which he seemed to backtrack on many of his election promises.

First, Obama, alarmed at the market's continued drop, declared a moratorium on tax increases of any kind for his entire first term, most importantly keeping the 15% capital-gains rate in place. The Dems couldn't figure out why Obama was coddling the rich. But as we now know from Bob Woodward's book, "Cool Amid the Chaos," Obama had listened to his University of Chicago economic advisers. They had told him privately that raising taxes on capital gains would add one more reason for people to stay out of the market, when the nation desperately needed people to start investing again in the hopes of future gains.

The Dems howled even louder when Obama reneged on his promise to make massive government cash payments to tens of millions of American households who don't pay federal taxes (he had called this plan a "tax cut" before the election).

Instead, Obama used some of that money to enact a zero capital gains and dividends tax rate on households earning under $250,000. Households are eligible for the rate after checking off a box on their income taxes, in exchange for a $1,000 one-time cash payment, to opt into a government plan to start investing 3% of their income in well-diversified global stock and bond index funds. For households earning under $50,000, the government now matches $2 for every $1 household contribution to such funds.

Of course, it took two years to get these plans enacted. Despite the best efforts of Sen. Chuck Schumer and Rep. Charlie Rangel, who wanted to save the remnants of New York's main industry, Wall Street, Obama had to wait until after the 2010 Congressional election to cobble together a coalition of conservative Democrats and moderate Republicans to pass the plan.

It also took Obama two years to pass reasonable financial-industry regulations. At first, many Congressmen of both traditional parties simply wanted revenge—especially after $2 trillion in government capital injections into banks and other financial institutions during 2008 and 2009 couldn't get those institutions to start lending freely again. It turned out that the banks were right not to lend liberally, since credit-card defaults and auto-loan defaults have exceeded all previous records and expectations. The smart banks, by lending conservatively and thus conserving capital, saved themselves and the government's investment from bankruptcy. Obama was right to wait until tempers cooled—but waiting added more uncertainty to the markets and further retarded recovery.

In the end, any hope that Obama could boast of an economic recovery under his watch ended with the Great Inflation. The seeds of the inflation were planted even before Obama took office, and seem obvious in retrospect. Well into 2009, farms and other suppliers couldn't get trade credit to keep production going, just as easy money around the world would push up worldwide demand for goods and services in 18 months' time. While both demand and supply fell sharply, in the end, supply fell more than demand, meaning higher prices at a terrible time.

The inflation has carried its own cost: a second, more severe recession that carried into the primary season, as the Federal Reserve jacked up interest rates to try to preserve the dollar's position as the world's reserve currency. Obama was right not to run a futile re-election campaign, instead concentrating on doing his job.

Today, though, things do look like they're getting better. Inflation seems to be abating. Working-class and middle-class Americans are pumping hundreds of billions of dollars into the world's stock markets through the government's investment program, putting capital into the economy and putting people back to work. Stimulus-era road and mass-transit projects are bearing fruit, laying the infrastructure groundwork for a real private-sector recovery (even though Obama annoyed the unions by signing an emergency executive order exempting the projects from normal federal work rules and wages, saying he wanted to get the biggest bang for every taxpayer dollar).

It was too late for Obama, though. The truth may be small comfort, but it's this: while recovery from a 25-year financial bubble was always going to be slow and painful, the president, by refraining from raising taxes and from putting punitive new regulations on business, likely made it less slow and less painful.

The new president will benefit, and so will the nation.

This piece originally appeared in New York Post

This piece originally appeared in New York Post