Quora Session: U.S. Economic Policy and Obama’s Legacy

On October 26, 2016, I teamed up with with Quora to host a live session and answered questions from the Quora community about U.S. economic policy, President Obama’s economic legacy, and more.  Here are all the questions – and all of my answers.

WHAT IS PRESIDENT OBAMA’S ECONOMIC LEGACY?

President Obama has achieved a lot during his two terms.

His quick response to the financial crisis (along with help from the Fed) helped stem the crisis and turn the economy around.

Under his watch:

– The economy has added about 10 million jobs since he took office

– Jobless rate, which peaked at 10% in 2009 is down to 5% now

– Incomes are finally beginning to rise – after several years of decline and stagnation, in 2015, real median household income grew a solid 5.2%

– Budget deficit has fallen by ~$1tn

– US growth has significantly outpaced that of every other advanced nation

– Auto industry is back – the auto bailout saved over a million jobs – and the industry added a record 17.5 million jobs in 2015, up from 10.4 million in 2009

But the economy still has a lot of problems:

– Labor force participation is stuck at 1977 levels

– Incomes are finally inching up but remain below pre-recession levels

– Income inequality has improved but remains at historically high levels – with the top 1% taking in about 18% of the nation’s income

– Globalization and automation have left many people (esp those without college degrees) jobless and anxious – leading up to the Trump phenomenon

On balance though, the President will be judged to have done a tremendous service by dealing with the financial crisis, turning around the economy and putting the nation on the right track.


HOW CAN THE U.S AVOID ANOTHER AUTOMOTIVE CRISIS?

The auto industry crisis was a product of two things:

- Bad management

- Financial crisis

Today, due to President Obama’s auto bailout and reorganization – which I was proud to be a part of – corporate governance at General Motors and Chrysler is much improved. There is still more work to do – such as separating the roles of CEO and Chairman – but they are in a much better place than before.

The economy is also much stronger than in 2008, when liquidity had all but dried up and car sales were dropping steeply. The government has put many safeguards in place (such as a stronger regulatory system, greater capital requirements at financial systems etc.) that should prevent a similar crisis.


WHAT ARE SOME UNEXPECTED RESULTS/IMPACTS OF THE BREXIT VOTE?

The most unexpected result was how quickly the stock market recovered. The FTSE 250 fell 14% in the immediate aftermath of the vote but is up 20% since June 27. Companies and businesses did not flee Britain as was widely feared. And the proverbial sky didn’t fall. Why is that? The most obvious explanation is the steep decline in the British pound, which has plunged 18% since the referendum. Investors seem to have concluded that the falling pound would strengthen exporters and prevent a crisis. The other reason is that the British government plans to continue easy monetary and fiscal policies to prop up the economy and boost confidence. Either way, Britain seems to have avoided the worst of economists’ projections.

This doesn’t mean Britain’s challenges are over. Brexit has yet to be implemented so it’s full impact remains to be seen. Economists have been tempering their growth forecasts – Bloomberg consensus growth forecasts for 2017 are down from 2.1% to 0.8% since the Brexit vote. Falling pound also has two sides: exports are cheaper but imports are suddenly more expensive. And finally, expansionary fiscal policy is not without its costs – especially with UK’s debt to GDP already at 84%. Britain may have avoided the worst but it’s certainly not out of the woods yet.

 

WHICH PRESIDENTIAL CANDIDATE WOULD BE WORSE FOR THE AMERICAN ECONOMY?

This one is a no-brainer. Various independent economists and policy think tanks have estimated Trump’s economic plans would be disastrous for US jobs and our debt/deficits.

According to the nonpartisan Committee for a Responsible Federal Budget, Trump’s tax policies would cost $5.8tn and add $5.3tn to the deficit over the next 10 years. In contrast Clinton’s tax policies would increase tax revenues by $1.5tn and barely change the debt/deficit picture.

Moody’s Analytics estimates that under Trump’s plan, unemployment would rise to nearly 7%, and about three million jobs would be lost. On the other hand, Clinton’s policies would add more than 10 million jobs (about 3 million more than currently expected).

Trump’s policies would also worsen inequality. His tax cuts would give the richest 1% a 10-16% income boost while the bottom 80% would get less than 2%. Meanwhile, Hillary’s plan would leave taxes unchanged for the majority of Americans and raise them only for the wealthiest 10%.

In dollar terms, Trump’s plan would give an average tax cut of $163k per year to the wealthiest 1%, whereas Hillary’s plan would raise their taxes by an average of $126k per year:

But note tax plans are not the only thing that make the prospect of a Trump presidency worrisome.

He has also taken trade-bashing to another level, threatening to impose 35% tariffs on imports from Mexico and 45% on those from China. A recent study by the nonpartisan Peterson Institute for International Economics estimated that, rather than bringing jobs back to the US, the tariffs would result in trade wars that could cost our economy five million jobs and possibly lead to a recession.

His plan to deport more than 11 million illegal immigrants – which the conservative American Action Forum calculated would cost $400 billion to $600 billion, reduce GDP by $1.6 trillion and take 20 years – is repulsive on both economic and moral grounds.

All this (and more!) has made Trump perhaps the first Republican presidential candidate in recent history who’s ascendancy is feared by stocks markets and businessmen alike. A report from Macroeconomic Advisers, a St. Louis forecasting firm, estimated that a Trump victory would cause stocks to lose 7%, while a Clinton victory would lead to a 4% increase. Not surprisingly, no Fortune 100 CEO has donated to his campaign or endorsed him (in 2012, a third supported Romney).


WHAT IS THE STATE OF THE ECONOMY TODAY VERSUS EIGHT YEARS AGO?

No question the state of the economy is far better today than eight years ago.

When President Obama took office in 2009, the economy was bleeding 800,000 jobs a month. In the fourth quarter of 2008, GDP had contracted at a Depression-level 8% annual rate. Thanks to his quick actions – specifically the passing of the $800bn stimulus package – the economy started on the path to recovery in 2009.

In addition to the stimulus program, the Fed’s quantitative easing and easy monetary policy also lowered financing costs and helped stimulate the economy.

A 2010 report by economists Mark Zandi and Alan Blinder estimated that without all the government policy responses, the recession would have been three times deeper and lasted twice as long; we would have lost twice as many jobs and unemployment would have peaked at 16% instead of 10%; and the deficit would have reached 20% of GDP. Basically, we would have been far worse off.

Fast forward to now and the economy has added 15 million jobs since Feb 2010 (10 million since Obama took office) and the unemployment rate has dropped from a peak of 10% in Oct 2009 to 5% today. The economy itself is not booming but is growing at a slow but steady 1.5 – 2% annual rate.

Looking back sixteen years ago is a bit more complicated. Everyone thought we were in a golden era in the late 1990’s and early 2000 but then the dot-com boom burst, 9/11 happened, and we entered into protracted Iraq/Afghanistan wars. The economy and stock market did come back in 2003 but we went on to create too many asset bubbles which of course brought us to the Great Recession of 2008-09.


WHAT ARE THE MAIN CHALLENGES FACING THE INVESTMENT BANKING INDUSTRY TODAY?

Competition, government regulation and slow economies. With respect to the first, when I started in investment banking 34 years ago, it was a very specialized profession. Fast forward to today and you see a business that has become commoditized — anyone can (and does) become a banker.)

Since 2009, of course, the business has become (correctly) far more regulated, making it harder for investment banks to earn the kinds of profits they did previously.

Finally, with the economy still slow, demand for investment banking services has been been sluggish.


WHAT SHOULD A PERSON DO WITH $10,000?

It really depends on your age and financial circumstances. If you are young and won’t need the money until retirement, invest in a passive equity index fund (like the Vanguard S&P 500 fund.) If you are older and/or want to be sure you are not taking any risk, keep it in your checking account until interest rates rise and then put it into a money market mutual fund.


WHAT WERE SOME OF THE MOST DIFFICULT CHALLENGES IN YOUR CAREER?

By far the biggest challenge of my career was taking on the role of lead advisor in the rescue of the American automobile industry in 2009. As most Americans will recall, this was a crisis of unimaginably large proportions – one of America’s biggest business sectors stood on the brink of collapse, threatening perhaps a million jobs as well as many related sectors, such as suppliers and service companies. I was faced with having to address a problem that would usually consume months of work by dozens of people in a few weeks with fewer than 15 colleagues (albeit, very able ones.)

I was so daunted by the magnitude of the problem that I almost didn’t take it on, but ultimately concluded that it was my opportunity to serve my country (and also that things were so bad that I was unlikely to make them worse.) I resolved to simply put one foot in front of the other and take on each issue or question as best I could. I was also somewhat comforted by the belief that the auto industry was so central to our country that one way or another, we would find a way to save it.

While I knew nothing about the auto industry and hadn’t set foot in a manufacturing plant in years, I had spent nearly 30 years on Wall Street and had learned how to analyze companies, evaluate management teams and undertake financial restructuring. Among many other things, I learned that those skills were in fact transferable to a new industry.


WHAT ARE THE MOST INTERESTING THINGS ABOUT YOUR JOB TODAY?

The most interesting part of my “day job” is the range of issues and industries I have the opportunity to learn about. Our business involves, in a sense, investing in every asset class in every part of the world. At one moment, I might be discussing an oil and gas investment in Texas; at another, the venture capital environment in China. While we are focused on investing, that activity inevitably also involves understanding public policy, politics and science.

As a former reporter, I find the process of reading and asking questions in order to get up to speed on new areas particularly fulfilling. Not all my work occurs in NYC, I do have to make a number of trips around the world in the course of this and while I don’t particularly enjoy traveling, I end up seeing many interesting things and meeting many interesting people.

I am fortunate to have an equally exciting “night job,” writing for The New York Times, appearing weekly on Morning Joe and serving a variety of public policy and other non-profits. These roles make feel that I am giving back to my country and having some small – likely, immeasurably small – impact on the important economic issues of our time. I also feel that these two roles intersect, in that what I learn in my “night job” informs and helps my investing and vice versa.


WHEN SHOULD A PERSON START SAVING FOR RETIREMENT?

Ideally, you should start saving for retirement as soon as you possibly can. Even if you only put aside a few dollars a week, it’s better than nothing. When you are young, invest in a passive equity index fund (like the Vanguard S&P fund). While the stock market goes up and down, over a long period of time, it is the best way to earn more; compounding can be a powerful tool (as Warren Buffett often likes to point out.)


IS A 0.5% APY CD WORTH SAVING AN INITIAL $5,000 DEPOSIT AND COMMITTING TO THAT BANK FOR FIVE YEARS?

Probably not. You should want a higher return on money that is committed for five years. If you are not in a position to make a longer-term commitment to the stock market, you should just keep it in your checking account until interest rates rise.


IF YOU EARN 100K+ ANNUALLY, AND HAVE A FAMILY OF FOUR, HOW MUCH SHOULD YOU BE SAVING TO BECOME RICH?

It depends on your definition of “rich”! You should save as much as you possibly can — your retirement will be far more enjoyable if you have a sizable nest egg.