Dean Baker
Caixin Online, October 23, 2012

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As we enter the last two weeks of the presidential race, the country looks to be facing its third-close finish this century. While President Barack Obama is still the favorite to be re-elected, Mitt Romney has a very real chance of winning. The weak economy is undoubtedly the major reason.

Incumbent presidents usually get re-elected. The three exceptions in the last 80 years were Lyndon Johnson, Jimmy Carter and George H.W. Bush. The first was pushed out of office because of hostility to the Vietnam War. At the time, we had 500,000 soldiers involved in the war. Given the relative size of the country, this was more than 10 times the scale of the war in Afghanistan today.

The other two presidents lost their campaign for re-election at a time when the country was still struggling to recover from a recession. In both cases, their opponents quite explicitly offered the hope for a brighter future. This is essentially the story that we are seeing today, with Romney running on the promise that his experience running a successful private equity company will allow him to set the economy on a better course.

It is not clear that many voters really have much hope that Romney has an agenda for turning around the economy. It's more likely the case that they don't believe that a second Obama term will be much better than the first term.

This view could be based on a realistic assessment of the likely political lineup for a second Obama Administration. The Republicans are virtually certain to maintain their control of the House of Representatives. If the Republicans don't actually get a majority in the Senate, they will certainly have enough seats to put up serious procedural obstacles to anything the Democrats might try to do.

For these reasons it would be reasonable for voters to conclude that Obama will not be able to push through any major economic initiatives in a second term. However, there is also the problem that Obama has not provided any information on the economic initiatives he would try to get through.

This has been a serious problem plaguing his presidency since its early days. He never tried to give a clear picture of the nature of the economic crisis. For this reason the public has always been badly confused about the cause of the downturn and the slow pace of the recovery.

To some extent this confusion has been generated deliberately by the Obama Administration. The Democrats' main criticism of President George W. Bush's economic performance had been that his tax cuts and his decision to fight two wars without paying for them had turned the budget surpluses Bush inherited from the Clinton administration into deficits. 

While the tax cuts and the cost of the wars did add to the deficit, they had nothing to do with the crisis that caused the economy to seize up in 2008. This crisis was the result of a collapsed housing bubble. The immediate damage was the financial crisis in the fall of that year that nearly led to a collapse of the financial system.

The longer-term problem was that there was no source of demand to replace the demand that was being driven by the housing bubble. The collapse of the bubble led to a loss of more than $600 billion in annual construction demand as the boom led to a huge oversupply of housing. The loss of $8 trillion in bubble-generated housing equity led to a falloff of close to $600 billion in annual construction demand. People who had been consuming based on the wealth they had in their home cut back their consumption when that wealth disappeared.

In this context, large budget deficits are not a problem. In fact, they are absolutely necessary to maintain demand in the economy. While an improved trade balance may eventually generate enough demand to get the economy back to full employment, in the near term there is no alternative source of demand that could plausible fill the gap created by the collapse of the housing bubble.

However, Obama never explained the situation clearly to the public. Many of his advisors wanted him to keep with the line that the economy's problems stemmed from Bush's decision to run up large deficits with his tax cuts and wars.

This strategy has backfired in a big way for Obama. As a result most of the public does not understand why this recession has been so much deeper and longstanding than prior recessions in post-war decades. The public also views the large deficits of the Obama years as a serious problem, rather than a force for sustaining demand in the economy. If Obama ends up losing the election there can be little doubt that his failure to be honest about the causes of the downturn was a major factor.