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Was it the economy, Stupid?

Published:Sunday | November 7, 2010 | 12:00 AM

Dennis Morrison, Contributor

Politicians, conscious that their hold on power is at the mercy of voters, are always, in the aftermath of defeat, ready to offer the obligatory proclamation of the infallibility of the electorate, even in instances when voters are in a complete muddle. President Obama's mea culpa, after what he called the "shellacking" congressional Democrats took in last week's mid-term elections, is therefore not surprising. In taking responsibility for the results, he attributed the losses to the frustration of Americans that his administration had not made enough progress in repairing the economy.

The weight of a harsh economy in the decision of voters to punish Obama and the Democrats is unmistakable - the unemployment rate is now double that in the previous massive swing against Bill Clinton in 1994. Poverty levels have risen sharply as eight million jobs have disappeared, and middle-class families have lost much of the value of their savings through the collapse of the housing market. These are conditions that people in the world's richest country do not expect to confront, for which they expect immediate solutions, and because there are no quick fixes, will make for volatile politics.

Beyond the economic pain, and because of the psychological reaction to it and how that has been exploited politically, Americans are in a muddle. Some recent poll findings reveal the extent to which their fears and uncertainty about the future have distorted their sense of reality. For example, the majority of Americans believe that the US economy is still shrinking, but the fact is it has recovered most of the decline and is now at the 2008 level. They also believe that their taxes went up, and not down. Indeed, 90 per cent did not know that they received a tax cut under the Obama stimulus package - the largest middle-class tax cut ever.

Effective rhetoric

So effective has been the rhetoric of the social forces stacked against Obama that a majority believes he was the one who instituted the Wall Street bailouts and not the Bush administration. Long forgotten is that Obama, while still a senator, voted against the bailout of AIG, one of the early casualties of the financial crisis. Tea Party supporters [read right-wing Republicans] say Obama is a socialist, but this does not square with his rejection of strident calls when he took office, including from Republicans, that nationalisation of the largest banks was the only way to avoid what was then seen as an impending catastrophe.

Right-wing demagoguery has fuelled such anger and irrationality that not many Americans have heard the news that taxpayer dollars used to bail out the banks have almost been fully recovered. They have also not noticed that with public-sector payrolls being cut, government employment is actually shrinking. Instead, they are stuck with the conventional wisdom that government is taking over the economy.

On the contrary, Obama's navigation of the great recession has rehabilitated capitalism from what could have been a 1930s depression. In 'How Obama Saved Capitalism and Lost the Midterms' [New York Times, November 2, 2010] Timothy Egan argues that while Republicans lambasted government bailout of the banks, they then turned around and fought financial reform legislation. For this, Republican candidates were rewarded with generous campaign contributions from the said banks to wage war against the Democrats.

The American financial system has recovered well under Obama. When the Bush admini-stration left office in January 2009, the stock market was collapsing and had seen the worse decline under any US president in over 70 years. By last Friday, the Dow Jones Index had recovered to the immediate pre-recession level. Calculations show that by election day last Tuesday, US$100,000 invested in a basket of stocks on the New York Stock Exchange on the day of Obama's inauguration would have generated whopping returns of 48-77 per cent.

Auto industry recovering

Obama has been good too for the US automobile industry and especially the giant flagship General Motors (GM). Without government intervention, the company would have disappeared, and so would its network of parts suppliers which supports the entire industry. Now, GM is rebounding, as is Chrysler, and Ford's profitability has risen sharply. With GM about to return to the stock market, the US government is on its way out, prompting critics of the auto bailout to recognise the wisdom of the move.

As Obama reflects on the reasons for his party's crushing defeat, the worst results since Roosevelt's astounding reversal of fortunes in the 1938 mid-term elections, Democrats may also blame the legislation they pushed through in the last 20 months. But they should not forget that the social security legislation which provoked the voter hostility behind the 1938 defeat created the backbone of America's welfare system. Their defeat last week is similarly, in part, the political price for health-care reform, a necessary policy measure to tackle a chronic, structural weakness in the US economy, but from which the benefits are not instantaneous.

Good policy is not always good politics, not in the short term at least.

Dennis Morrison is an economist. Feedback may be sent to