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Did Trump Really 'Inherit a Mess' From Obama?

Did Trump Really 'Inherit a Mess' From Obama?

Dr. Gordon Boronow is a professor at Nyack College.

President Trump commented at his press conference last week that he "inherited a mess". His comments sparked a loud opposing response from the mainstream media to the effect that President Trump inherited a healthy economy from President Obama. After all, the stock market is hitting new highs, unemployment is near full employment levels, there is stable, even if low, growth in the economy, and gasoline prices are low.

When it comes to taking over an economy in a mess, President Trump has a weak case compared to President Obama.

In January of 2009 at the start of the Obama Administration, the financial crisis was at full intensity, shaking up the economy and destroying jobs. The auto industry was on life support, awaiting the new administration to provide a bailout. President Obama and the Democratic super-majority Congress quickly acted to pass a spending bill which injected a massive Keynesian infusion of money into the struggling economy. The economy stopped contracting and slowly started recovery.

One can point to Fed policy (QE1, QE2, QE3) or to the suspension of an accounting rule (mark-to-market) in April 2009 as being important contributors to ending the crisis, but let's not quibble. The President and Congress acted to stop a bad situation and they succeeded. That will be a lasting part of the legacy of the Obama Administration.

Sadly, there is no other policy action in the next eight years of the Obama Administration that was helpful to the economy. I may be overly harsh, but in my view, the economy recovered despite the policies undertaken by the Obama Administration, not because of those policies.

It is evidence of the power of human ingenuity and the effectiveness of a market economy that despite the burdens on the economy of Obamacare, despite regulatory meddling in every corner of the economy, despite significantly higher marginal tax rates, despite it all, business managed to eke out a little growth (a paltry 2% per year) during the Obama Administration.

Even weak growth counts for something. So why is President Trump claiming he inherited a mess? What's he talking about?

There are any number of problems that President Trump may have had in mind when he declared the situation a "mess". Let's just consider two; debt and interest rates.

Both the high level of national debt, relative to the national income, and the abnormally low level of interest rates are a legacy of the Obama Administration. They both severely restrict the freedom of the new administration to carry out its policies.

The National Debt is currently $19.9 trillion, up from $10.4 trillion when President Obama took office. The Debt increased by $1 trillion in the last year alone, six full years after the end of the Great Recession. National income is growing slowly, rising from $14.4 trillion in 2008 to $18.6 trillion in 2016.

The nation is living beyond its means, building up a big balance on the national credit card. What is worse, the annual deficits will increase faster in the years ahead, largely due to rising costs from Social Security, Medicare, Medicaid and Obamacare. President Trump is trapped by the fiscal "mess" he inherited from President Obama, who failed to address these obvious problems.

President Trump would like to spend $1 trillion on infrastructure repair, which could add to the debt. President Trump would like to reform taxes, which could add to the debt at least in the short run. President Trump would like to rebuild the military capability of the United States, which would add to the Debt. But President Obama already ran up the credit card to an unhealthy high level.

To make matters worse, interest rates are on the rise. Interest rates (specifically the federal funds rate) were suppressed to virtually zero by the Fed during the period of the Obama Administration, from December 2008 to December 2015, when they were finally increased to about 0.35%. Interest rates are currently 0.5%, still well below the 2% rate one would expect in a healthy economy.

Those rosy cheeks on the current economy, evident in record prices on Wall Street and high home prices in the housing market, are not a sign of good health. Those rosy cheeks are a sign of a Fed-induced fever and euphoria in the market at the prospect of changes in economic policies coming out of Washington. Another financial crisis could happen if the economy stumbles while the Fed raises interest rates or if economic policies are not changed for the better.

When interest rates increase, the burden of paying interest on the National Debt gets heavier, crowding out other spending priorities from the federal budget. When interest rates increase, mortgages become more expensive, putting downward pressure on home prices. When interest rates increase, auto loans become more expensive, reducing new car sales. When interest rates increase, sky-high prices for stocks cannot be justified and the stock market might take a tumble, jeopardizing 401(k) plans across the country. All the good times enjoyed during the sugar-high of monetary stimulus become a hangover as the stimulus is removed.

President Obama enjoyed the good times; President Trump gets to deal with the pains of withdrawal.

And yet, President Trump confidently says "We'll take care of it, folks."

It won't be easy, especially in the poisoned politics of a shocked and angry opposition. President Trump may not have inherited a crisis, as President Obama did in 2009, but he did inherit "a mess". It is in the interests of all Americans to recognize the problem and work with the Administration to fix it.

Dr. Gordon Boronow is a professor at Nyack College.

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