Who Really Dug Us Out of the Great Recession?

In his final State of the Union address last night, President Obama enumerated the current strengths of the U.S. economy, implicitly defending his administration's economic record from Republican attacks and demanding credit his role in the recovery. Here are his key lines on the topic:

But how much credit does President Obama really deserve for digging us out of the Great Recession—and how much should go to others? Let's take a look.

President Obama and congressional Democrats?

Congress, with a new Democratic majority, passed the 2009 stimulus bill—more formally known as the American Recovery and Reinvestment Act—less than 30 days after taking office. The Act provided for roughly $800 billion in government spending (most of it) and tax cuts (less) to jumpstart the economy.

Though this was generally seen as a “stimulus” bill, really it was as much about creating a safety net as a stimulus. Infrastructure spending was certainly in there, but the single biggest category of increased spending (you can see this analysis by economists Alan Blinder and Mark Zandi) was for expanded unemployment insurance, to the tune of about $54 billion a year. Meanwhile, the tax cut part was smaller than you might think; of the cuts, $69 billion came from tweaking the alternative minimum tax, a pretty standard adjustment that would have been done anyway.

So the Act was driven by Democratic priorities, passed in a close-to-party-line vote, and overall achieved most of what was promised. In Blinder and Zandi’s analysis—Blinder is a Democrat, Zandi a Republican and former adviser to John McCain’s campaign—the fiscal stimulus reduced the unemployment rolls by as much as 3 million and kept the economy from contracting around 2%. Overall role: Substantial.

The Bush administration?

Wait a second, didn’t the previous administration preside over the whole banking mess that led to the Great Recession? Yes, that’s a fair assessment. But the Bush administration’s response was rapid and smart. With banks about to melt down, the Treasury Department began buying up risky mortgage bonds, taking them out of banks' hands and assuring investors around the world that whatever happened, U.S. banks would be able to pay their debts.

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Sadly, in the current environment, one good test of how much a program is motivated by actual economics, not politics, is how unpopular it is. And TARP (the Troubled Asset Relief Program) was pretty much as unpopular as a program could be. “Bank bailout,” may be two of the ugliest words in the English language. Nonetheless, it was effective and necessary enough for the Obama administration to continue along much the same course, for which then-Treasury Secretary Tim Geithner was endlessly pilloried. Ultimately TARP stabilized the banking system at what turned out to be little cost, and may even have earned the Federal government a small profit. Overall role: A lot more than it's gotten credit for.

The Federal Reserve?

If any entity deserves the biggest share of credit for avoiding another Great Depression, it’s the Fed. The Fed really turned to an extraordinary number of tools to keep money flowing in the economy, many of them made up on the fly. Any pundit who wanted to talk about the economy in the years 2009 to 2012 had to learn how to make the words “quantitative easing” roll off the tongue.

Most folks know that the Fed lowered the interest rates that banks pay to zero. But Fed policy actually had a lot of moving parts. After its lending rates couldn’t go any lower, the Fed embarked on a huge program of bond buying and exotic maneuvers (the Twist, anyone?) to lower interest rates throughout the economy, stimulating bank lending and corporate spending. And incidentally, the stock market. Japan had tried something similar in the early 2000s, but on a vastly smaller scale.

The criticism of quantitative easing was that it would lead to runaway inflation. It clearly hasn’t done that, and it just may have avoided a catastrophic deflationary spiral. The bonus for investors was a spectacular advance in the stock market. And to the surprise of many observers, the Fed so far has been able to start turning off the spigot without making the stock market tank. We might want to hold onto some of the Fed's medals until we're sure we can get off the zero-interest cloud safely, but still... Overall role: Huge!

Bonus Round: The European Central Bank?

Hey, wait another second, what are these guys doing here? Well, if the Federal Reserve gets so much credit for bringing the U.S. out of recession, give the ECB some credit for helping avert a second worldwide meltdown. If your job is not to follow the peregrinations of the world economy, the 2011 European debt crisis may well have slipped from your mind entirely. But it was very much front and center of the news then. Here’s one amazing data point: In late 2011, the University of Michigan’s widely followed index of U.S. consumer expectations slipped to it’s lowest point ever—lower even than it stood when we were in the middle of our own financial crisis. The fact that you just don’t think about this anymore indicates that European policy makers did their jobs surprisingly well. Overall role: Underappreciated.

The great thing about the recovery is that it's taken so long that just about anyone can take credit for it. In politics the economic past is malleable. Case in point: South Carolina governor Nikki Haley, who will deliver the Republican rebuttal to the State of the Union. Republicans recently announced that during her tenure, "South Carolina's jobless rate hit record lows." Actually, that's not even close. It was a lot lower for all of 1998, 1999, and 2000. But that's about three political lifetimes ago.