The economic policy of the Barack Obama administration, or in its colloquial portmanteau form "Obamanomics", was characterized by steep tax increases on higher income Americans designed to fund health care reform, reduce the federal budget deficit, and decrease income inequality.
President Obama's first term (2009–2013) included measures designed to address the Great Recession and subprime mortgage crisis, which began in 2007. These included a major stimulus package, banking regulation, and comprehensive healthcare reform. As the economy improved and job creation continued during his second term (2013–2017), the Bush tax cuts were allowed to expire for the highest income taxpayers and a spending sequester (cap) was implemented, to further reduce the deficit back to typical historical levels. The number of persons without health insurance was reduced by 20 million, reaching a record low level as a percent of the population.
By the end of his second term, the number of persons with jobs, real median household income, stock market, and real household net worth were all at record levels, while the unemployment rate was well below historical average.
Overview
President Obama was inaugurated in January 2009, in the depths of the Great Recession and a severe financial crisis that began in 2007. His administration continued the banking bailout and auto industry rescue begun by the previous administration and immediately enacted an $800 billion stimulus program, the American Recovery and Reinvestment Act of 2009 (ARRA), which included a blend of additional spending and tax cuts. By March 2010, the private sector began creating jobs consistently each month, a trend which continued through the end of his tenure, while public sector employment was slower to recover due to budget cuts.
President Obama followed with the 2010 Patient Protection and Affordable Care Act (ACA), commonly referred to as "Obamacare". By 2016, the law covered approximately 24 million people with health insurance via a combination of state healthcare exchanges and an extension of Medicaid. It lowered the rate of those without health insurance from approximately 16% in 2010 to 9% by 2015. Throughout his presidency, healthcare costs continued to moderate. For example, healthcare premiums for those covered by employers rose by 69% from 2000 to 2005, but only 27% from 2010 to 2015.
By 2017, nearly 70% of those on the ACA marketplace exchanges could purchase insurance for less than $75/month after subsidies. The ACA was evaluated multiple times by the Congressional Budget Office (CBO), which scored it as a moderate deficit reducer, as it included tax hikes primarily on high income taxpayers (roughly the top 5%) and reductions in future Medicare cost increases, offsetting subsidy costs. No Republicans in the House or Senate voted for the law.
To address the excesses in the banking sector that precipitated the crisis, Obama signed the 2010 Dodd–Frank Wall Street Reform and Consumer Protection Act. This law limited bank risk-taking and overhauled the outdated regulatory regime that was ineffective in monitoring the non-depository or shadow banking sector at the core of the crisis, which had outgrown the traditional depository banking sector. It also created the Consumer Financial Protection Bureau. However, it did not breakup the largest banks (which had grown even larger due to forced mergers during the crisis) or separate investment and depository banking, as the Glass-Steagal Act had done. Only a few Republicans in Congress voted for the law.
During his first two years, President Obama had a majority in the House and the Senate, which coincided with the 111th Congress, considered to have been one of the most productive Congresses in terms of legislation passed since the 89th Congress, during Lyndon Johnson's Great Society. However, in the November 2010 elections, the Republicans won the House majority and reduced the Democratic majority in the Senate. He faced either a split or Republican Congress thereafter, limiting his economic legislation to mainly budgetary matters.
The Great Recession had caused federal government revenues to fall to their lowest level relative to the size of the economy in 50 years. At the same time, safety net expenditures (including automatic stabilizers such as unemployment compensation and disability payments) and stimulus measures caused expenditures to rise considerably. This drove the budget deficit up, creating significant debt concerns. This resulted in a series of bruising debates with the Republican Congress.
President Obama signed the American Taxpayer Relief Act of 2012, which included the expiration of the Bush tax cuts for high income earners and implemented a sequester (cap) on spending for the military and other discretionary categories of spending. Compared against a baseline where the Bush tax cuts were allowed to expire on schedule in 2010 for all levels of income, it significantly increased future deficits. Compared against the prior years, it significantly reduced the deficit and limited future cost increases. This law and the recovering economy lowered the deficit back to the historical average relative to GDP by 2014.
With the economy recovering and major budget legislation behind him, President Obama began to shift to another priority, income and wealth inequality. From 1950 to 1979, the top 1% earned roughly a 10% share of the income. However, this had risen to 24% by 2007, due to a combination of globalization, automation, and policy changes that weakened worker's bargaining position relative to capital (owners). He referred to the widening income gap as the "defining challenge of our time" during 2013.Obama says income inequality is defining challenge for U.S. PBS NewsHour. December 4, 2013. Retrieved December 26, 2013. His tax increases on higher-income taxpayers raised their effective tax rates starting in 2013, helping address after-tax income inequality, while job creation remained robust.
Wealth inequality had also risen similarly, with the share of wealth owned by the top 1% rising from 24% in 1979 to 36% by 2007. While U.S. household net worth rose nearly 30% from its pre-crisis peak in 2007 to 2016, much of this gain went to the wealthiest Americans, as it had prior to his tenure. By 2015, the share of wealth owned by the top 1% reached 42%.
President Obama also attempted to address inequality before taxes (i.e., market income), with infrastructure investment to create middle-class jobs and a federally-mandated increase in the minimum wage. While the latter was defeated by the Republican Congress, many states did increase their minimum wages, due in part to his support. During late 2015, the House and Senate, in rare bipartisan form, passed the largest infrastructure package in a decade, the Fixing America's Surface Transportation Act.
The cumulative changes in several economic variables from the start of his tenure in January 2009 to late 2016 were: Stock markets +180%; Corporate profits +112%; Auto sales +85%; Home prices +24%; Real GDP +15%; Number of jobs +8%; and number of Americans without health insurance -39%. While the annual federal deficit was down 58%, the national debt was up 88%.
Responding to the Great Recession
President Obama's first inauguration was held during the depths of the Great Recession. The situation was dire; the economy had lost nearly 3.6 million jobs in 2008 and was shedding jobs at a nearly 800,000 per month rate when he took office. During September 2008, several major financial institutions either collapsed, were forced into mergers, or were bailed out by the government. The financial system was nearly frozen, as the equivalent of a bank run on the essentially unregulated, non-depository shadow banking system was in progress. Ben Bernanke later stated that 12 of the 13 largest U.S. financial institutions were at risk of failure during the crisis.
The Bush Administration had passed the $700 billion Troubled Asset Relief Program in October 2008 and provided enormous loan guarantees to help strengthen the banks as late as January 2009 during the transition period. Further, the U.S. Federal Reserve under Ben Bernanke was taking a series of innovative emergency steps to inject money into the financial system, acting in their role as the "lender of last resort". Obama and Bernanke agreed that further action was also needed by Congress to help boost the economy beyond Wall Street.
Stimulus
On February 17, 2009, Obama signed into law the American Recovery and Reinvestment Act of 2009, a $787 billion economic stimulus package aimed at helping the economy recover from the deepening worldwide recession. The act increased federal spending by $573 billion for health care, infrastructure, education and social benefits, with the remainder used for tax relief — including a $116 billion income tax cut that benefited 95% of working families. Democrats overwhelmingly supported this measure, while only a few Senate Republicans supported the law.
The CBO estimated ARRA would positively impact GDP and employment, with primary impact between 2009 and 2011. It projected an increase in the GDP of between 1.4 and 3.8% by late 2009, 1.1 and 3.3% by late 2010, and 0.4 and 1.3% by late 2011, as well as a decrease of between zero and 0.2% beyond 2014. The impact to employment would be an increase of 0.8 million to 2.3 million by last-2009, an increase of 1.2 million to 3.6 million by late 2010, an increase of 0.6 million to 1.9 million by late 2011, and declining increases in subsequent years as the U.S. labor market reaches nearly full employment, but never negative. The CBO estimated that enacting the bill would increase federal budget deficits by $185 billion over the remaining months of fiscal year 2009, $399 billion in 2010, and $134 billion in 2011, or $787 billion over the 2009–2019 period.
The Congressional Budget Office and a broad range of economists credit Obama's stimulus plan for economic growth. The CBO's final analysis in February 2015 found that ARRA provided substantial improvement to GDP growth and employment.
Although an April 2010 survey of members of the National Association for Business Economics (NABE) showed an increase in job creation (over a similar January survey) for the first time in two years, 73% of the 68 respondents believed that the stimulus bill had no impact on employment at their company after one year of ARRA's enactment. The economy of the United States has grown faster than the other original NATO members by a wider margin under President Obama than it has anytime since the end of World War II.Politics that Work, "U.S. GDP Growth Relative to Original NATO Members" , Politics that Work, March 9, 2015 The OECD credits the much faster growth in the United States to the stimulus in the United States, in contrast to the austerity measures taken in the European Union.Irene Chapple, "OECD: U.S. will recover faster, Europe faces unemployment crisis" , CNN, May 29, 2013
The Council of Economic Advisers produced a comprehensive report on the ARRA in 2014, which includes a variety of graphics illustrating the positive effect on both GDP and jobs. It also covers the allocation of spending and tax cuts contained in the legislation.
U.S. automobile industry support Obama intervened in the troubled automotive industry in March 2009, renewing loans for General Motors and Chrysler to continue operations while reorganizing. Over the following months, the White House set terms for both firms' bankruptcies, including the sale of Chrysler to Italian automaker Fiat and a reorganization of General Motors giving the U.S. government a temporary 60% equity stake in the company, with the Canadian government taking a 12% stake.Austan D. Goolsbee, and Alan B. Krueger. "A retrospective look at rescuing and restructuring General Motors and Chrysler." Journal of Economic Perspectives 29.2 (2015): 3-24. online