SOTU: Obama Must Make the Case for His Economic Agenda

What should Obama say about his economic policies in the State of the Union address?:

SOTU: Obama must make case for his economic agenda

I like the longer version better, but there is also a shorter version here.

Update: Don't like some of the tweaks from an editor onthis one -- here's the unedited version:

SOTU: Obama Must Make the Case for His Economic Agenda: Since this is an election year, the annual State of the Union address provides Obama with the opportunity to convince voters that his economic policies have helped to bring about the recovery that is currently underway, and to highlight his plans for the economy from this point forward.

What does Obama need to do to defend his economic policies?

First, he needs to convince voters that his economic policies have been directed first and foremost at the problems the recession has caused for working class households. The perception is that saving the bankers came first, some see the financial bailout as little more than a way to make the already rich even richer, and with Wall Street recovering much faster than Main Street that sentiment is understandable. Why weren't job creation, mortgage relief, and other policies to help those struggling due to the recession higher priorities for the administration?

I think Obama can answer the question about why a financial bailout was necessary. The situation would have been much worse for the working class if the financial system had been allowed to meltdown entirely, and the financial bailout prevented that from happening. A harder question is why it was necessary to bailout the very people who caused the problems in the first place. Why weren't the high rollers in the financial sector asked to pay a higher price? Why couldn't we, for example, have nationalized troubled banks temporarily, kicked out the financial executives, repackaged the assets, and then resold them back to the private sector? That's what we do, in essence, when traditional banks go bad so why not do it here too?

Here again there's an answer, the administration did not feel it had the legal authority to do the bailout any other way -- the troubled institutions were non-traditional "shadow" banks and they did not have the necessary legal powers -- and not doing it at all would have been a disaster. There is disagreement about what they had the authority to do, but I think the administration is sincere in making this argument. In any case, Obama should take this opportunity to point out that the Dodd-Frank legislation fixes the problem of not having the legal authority to do anything but throw money at troubled too big to fail institutions, and that some of the key provisions of the Dodd-Frank legislation required time to implement and are just now coming online. But the main point to emphasize is that the recovery we are finally starting to see took a long time to get here, in part due to the political obstacles the administration faced, but it would have been even worse had the administration been less aggressive in its attempts to save and reregulate the financial sector.

But if the point was to help the middle class rather than bankers, what evidence is there that this has happened? This brings up the second thing Obama needs to do, explain how his stimulus package helped working class households -- the general perception is that it didn't do much at all -- and explain his plans to get people back to work as soon as possible. What does he plan to do between now and November?

The case for the stimulus package is a tough one, and it's partly the administration's own fault. The administration's initial projection for the severity of the recession was far, far too rosy, and this caused them to predict levels of unemployment that were much lower than they would actually be able to attain. When the actual economy turned out to be much worse than predicted, actual levels of employment fell short of projections making it appear that the stimulus did little or nothing. For example, suppose the prediction is that the unemployment rate will be 8 percent with no stimulus, and 6 percent if you put a stimulus in place. Thus, you tell everyone exactly that, the economy is likely to go to 8 percent unemployment if we do nothing, and 6 percent with the stimulus package. However, if the actual no-stimulus outcome is 10 percent rather than 8 percent, then even if the stimulus brings unemployment down to 8 percent it will look like it did nothing. You predicted 8 percent without the stimulus, and 8 percent was the outcome.

Thus, even though there is lots of evidence from both academic and business economists that the stimulus policies worked (e.g. 1, 2, 3), the president is in a tough spot making the case. I think the answer is to say exactly what happened, the original projections were far too optimistic and so on, and emphasize that things would have been much worse without the stimulus package.

But more important politically is what the president plans to do next, in particular between now and November, and the president must emphasize a strong commitment to job creation. The chances that a Republican Congress will go along with the president's proposals are very low, and he should not be shy about pointing to the political barriers that stand in the way of his policy initiatives. But he must make it clear that he won't stop trying to do whatever he can on behalf of the working class -- that he'll keep pounding Congress on this issue at every opportunity. The actual performance of the economy around election time is what will matter most, if things are improving that will make a big difference in November. But it's very unlikely our problems will be completely over by the time the election rolls around, and whatever Obama can do to make it clear that he is doing his best to help working class households despite the obstruction he faces will aid his election chances.