I remember vividly the economic and financial mess President Barack Obama inherited when he was sworn in as the 44th U.S. president eight years ago. Growth and trade were imploding, millions of Americans were losing their jobs, and the stock market was in free fall. This frightful combination was also playing out in many other countries, fueling a sense of deep economic and financial insecurity that had not been felt for more than 70 years.
As his time in office comes to an end, Obama presides over an economy that has done more than help the world avert what would have been a very painful multiyear global depression, both for current and future generations. The U.S. has been a star outperformer in the advanced world, delivering record job creation, boasting an unemployment rate that is the envy of many other countries, and remaining the best facilitator of innovation and entrepreneurship. Meanwhile, all major U.S. stock indexes are trading close to record highs, having delivered enormous returns to investors during the president’s tenure.
Yet this list of considerable accomplishments, which once would have been deemed unlikely if not unthinkable given the turmoil the president inherited in 2008, is tempered by a feeling that more could have been achieved, especially when it comes to ensuring more inclusive growth, unleashing the animal spirits of businesses, delivering better wage growth, anchoring genuine financial stability, and spearheading better global policy coordination. Indeed, this feeling of lost opportunities offers five important insights for economic management going forward.
1. The U.S. economy no longer lives just in cyclical space. As the immediacy of the global financial crisis receded, it was tempting (and comforting) to assume that the economic damage was due to nothing more than a cyclical downturn, albeit a severe one. Therefore, too much of the policy effort was influenced by the notion of a classical “V-shaped” recovery. In the process, policy makers paid too little attention to the secular and structural headwinds impeding the return of high and inclusive growth. Precious time was wasted, not only in terms of economic steps, but also in terms of a political window to ensure sustained policy implementation. Indeed, to adapt former White House Chief of Staff Rahm Emanuel’s famous phrase, the administration inadvertently allowed a “good crisis to go to waste.” As a result, the growth challenge became more deeply embedded in the structure of the economy.
2. A credible medium-term economic vision is crucial for maintaining economic traction. A well-articulated and broadly communicated medium-term economic vision became a victim of the excessive focus on cyclical policy responses. Once the worse of the crisis was overcome, the economy lacked a sufficiently strong multiyear framework to serve as a common catalyst for policy formulation and business plans. Individual policy initiatives submitted to Congress, including well-crafted pro-jobs and pro-investment bills, became even more vulnerable to the vagaries of political polarization. And, especially after the 2010 elections, insufficient economic buy-in by some segments of the population meant there was even less pushback against a Congress that was failing to step up to its economic governance responsibilities.
3. Reliance on monetary policy, while tempting, is ultimately unsustainable. The lost opportunities associated with partial policy responses did not become clear to Washington quickly enough as -- understandably -- the Federal Reserve stepped in to fill the void as best as it could. In doing so, the central bank enabled short-term growth to be higher than it would have been otherwise, and financial volatility to be a lot less than what was warranted by fundamentals. But using tools that were inevitably ill-suited for the task at hand, it couldn’t fix the structural ailments that hamper stronger longer-term prosperity. In effect, the economy replaced an inherently flawed growth model with another one: that is, it transitioned from a paradigm based on private-sector debt, leverage and financial engineering to one relying on central bank financing and artificially repressed interest rates. And the longer the Fed was de facto forced to act as the “only game in town” in terms of policy, the greater the concerns about the collateral damage and unintended consequences of a heavily unbalanced policy response.
4. Structure is critical for ensuring that episodes of effective global policy coordination are not just rare and surprising. Domestic shortfalls were compounded by a notable decline in global policy coordination after the surprising success of the U.S. and U.K.-led Group of 20 Summit in April 2009 in London. Rather than building on inspirational cross-border policy unity regarding the shared risks and responsibilities facing the global economy, coordination dissipated and further watered down the fuel for what already was a sluggish engine for world growth. Part of this failure reflected a G-20 construct that lacks sufficient continuity and suffers from the absence of a proper secretariat -- issues that the U.S., as the world’s natural economic leader, could have helped resolve.
5. Look to shape new global realities change rather than fight old battles. The administration also was slow in recognizing global economic realignments, including the emergence of China as a more assertive power that is being engaged by a growing number of other countries pursuing their own self-interest. This was the case when, confronted with the Chinese initiative to create an “Asian Infrastructure Investment Bank,” the administration resisted. Rather than engage and seek to significantly shape the investment bank at its creation, the U.S. adopted a similar approach to that used at the end of the 1990s in response to the proposal for an Asian Monetary Fund: It sought to derail an institutional effort that could compete with the post-World War II regional and multilateral architecture that the U.S. had spearheaded and dominated. This time, however, the U.S. was not able to unite the vast majority of its allies given their interest in joining an initiative led by what is now the second-largest economy and the world’s largest creditor. The U.S. was left on the outside looking in.
As he leaves office, Obama’s enormous economic accomplishments are tempered with the recognition of foregone opportunities. Disappointment among certain segments of the population has fueled the politics of anger and social divisions that go well beyond what would be expected and warranted based on actual economic performance. With time, however, historians will give a lot more credit to the favorable aspects of Obama’s economic legacy. His legacy could be even greater if the insights of the shortfalls are internalized by the next administration and acted upon.
Mohamed A. El-Erian is a Bloomberg View columnist. He is the chief economic adviser at Allianz SE and chairman of the President’s Global Development Council, and he was chief executive and co-chief investment officer of Pimco.
This column was provided by Bloomberg News.