Joe Biden assumed the presidency confronting an economic crisis reminiscent of the one that faced him when he and Barack Obama took office 12 years earlier. But it is already apparent that the political atmosphere surrounding Biden is unrecognizable. He enjoys freedom of action and a presumptive legitimacy in tackling the crisis that had been denied the last Democratic presidency. Every actor around him — the Republican opposition, business, the mainstream media, and Democrats in Congress — are behaving differently. It’s as if he’s the president of a completely different country than the one that existed in 2009.
This is not because the present crisis is more severe. Just the opposite: The deepest and darkest moment of the contraction has passed, and the question before the economy now is how rapidly it can return to health. A dozen years ago, the economy was plunging so rapidly nobody could even measure the speed of the collapse, let alone discern a bottom.
Americans in 2009 had been conditioned to treat budget deficits as their greatest threat. This began when Ronald Reagan created the modern era of large deficits, which thrust Democrats into the role of fiscal stewards. In part this reflected economic conditions that were once very real. Inflation in the 1980s, while lower than the previous decade, remained high, and periodically threatened to spiral when the deficit peaked. Alan Greenspan informed incoming president Bill Clinton that his economy depended on persuading the bond market he had a serious plan to reduce the deficit, and he was not necessarily wrong — interest rates did seem to threaten to choke off the economy.
The focus on deficits spread beyond Washington and Wall Street, becoming a national obsession. Ross Perot created a national populist movement by making deficits a symbol of national decline. The fantasy of who could cut through partisan rancor and solve this singular crisis was often reflected in popular culture. A 1992 Saturday Night Live skit imagined the Founding Fathers returning to the future through a time machine, telling the country, “as we studied your problems, we kept coming back to one overriding concern: the crippling federal deficit.” The 1993 movie Dave centered on Kevin Kline as an ordinary person who becomes president through a deus ex machina, and brings in his common-sense accountant friend to comb through the budget and find the necessary savings. A 2000 Simpsons episode, later made famous for obvious reasons, depicted Lisa Simpson growing up to become president, only to declare, “We’ve inherited quite a budget crunch from President Trump.”
And so when Obama took office, the news media treated the deficit, not the greatest economic calamity since the Great Depression, as the primary crisis. “If combined with the gigantic stimulus package of tax cuts and new spending that Obama is preparing, which could amount to nearly $800 billion over two years, the shortfall this year could hit $1.6 trillion,” reported the New York Times on January 7, “But Obama and Democratic leaders in Congress said they were more determined than ever to pass a stimulus package.” Obama’s desire to increase the deficit in the face of already-large deficits was frequently treated as completely perverse.
Republicans embraced the idea that deficit spending could only worsen the economic crisis. When Obama invited House Republicans to meet with him, 82-year-old Roscoe Bartlett became a brief sensation by instructing Obama he “was there” during Franklin Roosevelt’s New Deal, and “government programs didn’t work then.” A deeply weird revisionist history of the New Deal by Amity Shlaes was held up by Republicans as proof positive that Bartlett’s youthful memories (he was 5 when Roosevelt took office) were correct.
Throughout most of Obama’s presidency, reporters judged his success by a simple metric: Could he join with Republicans to forge a deal to reduce the deficit? The ends (deficit reduction) and the means (bipartisan cooperation) were linked together so tightly that journalists considered it almost axiomatic that if he could cooperate with Republicans, the deal would be over deficits. When Bob Woodward chronicled the failure of a deal to emerge in 2013, he lamented, “They did not get that a genuine deal would send multiple messages to the world, establishing some economic certainty, laying the conditions for a burst of economic growth and providing evidence, sorely lacking for years, that Democrats and Republicans could work together for the common good.” The endless demands that Obama spend more time drinking with Mitch McConnell or golfing with John Boehner reflected the press corps’ inability to imagine any other avenue for domestic success.
In the intervening years, the assumptions that produced this atmosphere have all collapsed one by one.
The rise of Donald Trump is the largest single cause of the transformation. It was obvious to some of us all along that Republican claims to have a passionate concern for fiscal probity were insincere. Trump has made it impossible to ignore. The beliefs that sincerely animated reporters and officials in Washington during the Obama era — that the Tea Party was a reaction to debt levels, that Republican leaders were willing or able to deal with Obama — were turned into a running joke by a Republican president who won the nomination in part because he never fooled himself into believing any of these things. Trump’s ability to blow out the budget deficit and wantonly pick winners and losers without any shame or meaningful Republican blowback destroyed the whole premise.
Democrats in Congress also learned an important lesson from the Obama era. Many moderate Democrats shared a belief with the mainstream media that bipartisanship was both possible and necessary. Democrats in Congress squandered much of their time pursuing fruitless negotiations with Republicans, chasing a deal they were sure lay just around the corner. Only in retrospect did they realize that Republicans were stringing them along to allow opposition to build while they ran out the clock.
One of the biggest obstacles Obama faced in 2009 was the excessive confidence of his putative congressional allies that they could strike an agreement with Republicans. Biden’s congressional allies have fewer illusions about the incentives of their Republican counterparts.
Economic thinking itself has changed in important ways over the last decade. Economists previously feared that the federal government floating trillions of dollars in additional debt would cause interest rates to rise. (Indeed, this seems like a straightforward application of supply and demand.) Instead, interest rates have failed to budge, eliminating the austerity pressure that exerted such a powerful impact in the 1980s and 1990s.
A 2010 paper by Kenneth Rogoff and Carmen Reinhardt estimated that once a country’s debt hit a threshold of 90 percent of its gross domestic product, its growth rate sharply fell. This finding, backed by unimpeachable sources, inspired a huge amount of civic and business lobbying to reduce the long-term debt. But in 2013, a graduate student found that its principle conclusion was based on simple errors.
Economists have likewise changed their view of unemployment. The Federal Reserve has historically tried to balance between unemployment and inflation, keeping interest rates at a level that would maintain a growth rate neither too fast nor too slow. But the evidence has grown increasingly clear that its calibrations have been off. The level of unemployment central bankers thought would be low enough to set off inflation has not made prices budge.
The Trump era produced the strongest evidence of all. In 2018 and 2019, unemployment dropped below what had been previously assumed to be “full employment.” And yet, contrary to theory, inflation did not rise. Indeed, unemployment just kept falling, until the pandemic artificially halted the recovery.
Many economists on the right as well as the left are eager to resume the experiment and find out just how low unemployment can actually be brought. The fears of hyperinflation that circulated freely during Obama’s first term have been completely forgotten.
It is ironic that Trump created the conditions to allow Biden to succeed. First by exposing his party as disingenuous, then by disproving its economic nostrums, he set the stage for his successor to implement a smarter and better version of his experiment in running the economy hot.
The left has stewed for a dozen years over Obama’s inability to secure more fiscal stimulus. And while he might perhaps have gotten a bit more out of Congress with more clever design, ultimately the most important constraints came from outside 1600 Pennsylvania Avenue. Obama’s economic-recovery push came in an atmosphere of pure hysteria, in which media and business elites joined by many members of his own party believed the United States stood on the precipice of hyperinflation and a public-debt crisis, the resolution of which had willing partners across the aisle. All those myths now lay in tatters. After hard experience, the path to a fast recovery and an era of prosperity is now open for Biden.