(Bloomberg Opinion) -- Polls suggest Joe Biden is now the strong favorite to win the presidential election. If his lead holds through Nov. 3, he will be on track to inherit an economic crisis on par with the one he faced as vice president 12 years ago. That means he will also come up against the same trap that ensnared the Obama administration — the danger of focusing intently on the immediate crisis but neglecting the recovery.
President Barack Obama’s success — working hand-in-hand with Federal Reserve Chairman Ben Bernanke — in stemming the damage of the Global Financial Crisis has led many commentators to overestimate his record in handling the Great Recession that followed. Led by Treasury Secretary Timothy Geithner, the Obama administration devised several policies to rescue the financial sector. Had it not done so, the Great Recession probably would have been as deep as the Great Depression.
In the aftermath, however, the administration did little to promote economic growth. The American Recovery and Reinvestment Act, its major stimulus effort, was haphazard in design and small in size, compared with the enormity of the crisis. Under TARP (the Troubled Asset Relief Program, passed under President George W. Bush but carried out by Obama), Congress wrote a blank check of $700 Billion to save the banking system, but the Obama administration asked for only a $787 billion hodgepodge of spending and tax cuts to rebuild the economy. Many of those were targeted at state and local governments, but so narrowly defined that their recipients found it hard to find projects that qualified.
Worse, even though the U.S. economy had entered the long-dreaded liquidity trap — a condition in which, even at zero, short-term interest rates couldn’t stimulate enough investment — the administration did little to encourage private capital spending.
Geithner and Obama quickly turned their attention to increasing taxes and regulations — through sweeping health care reform and an aborted attempt at cap and trade. It’s clear why they wanted to do these things: They had a narrow window of sky-high approval ratings and a filibuster-proof Congress; they didn’t want to waste their opportunity. They wanted to fulfill important political objectives.
Nevertheless, these policies had negative economic effects. They increased the cost and uncertainty associated with new investment and made it that much harder for the Federal Reserve to stimulate private business.
Then, in 2011, Obama prematurely turned his attention to deficit reduction. This may have been something he genuinely and deeply wanted to do, or he may have been motivated by the Tea Party movement. I suspect it was both. If so, he grossly overestimated the Tea Party’s effect on Republican lawmakers’ fundamental priorities.
The administration entered into gut-wrenching brinkmanship with the Republican Congress. Again and again, as the clock repeatedly ticked down on the debt ceiling, Obama insisted on trading spending cuts for tax increases. When that strategy proved insufficiently stress-inducing to force meaningful headway on the deficit, a third artificial crisis was conjured in the form of the sequester.
These efforts depressed economic demand directly by increasing taxes and cutting spending, and indirectly by raising policy uncertainty to then unprecedented heights. Consequently, the recovery was slower and more uneven than it needed to be.
If he becomes president next year, Biden will need to tack in the exact opposite direction. Grand schemes to remake the economy will need to be put on hold. Any further efforts at stimulus will need to focus on increasing long-term investment. Most important, with the U.S. able to borrow for 30 years at a negative real interest rate, Biden should recognize that the deficit can wait.
There will be no reason to raise taxes on Americans as they struggle to put their lives back together after the coronavirus crisis subsides. Even efforts to address long-term increases in spending, which must be made eventually, will inevitably lead to further slowdowns, spikes in uncertainty and declines in investment.
A decade ago, the Obama administration neglected the economic recovery in favor of long-standing priorities. This was a mistake that slowed the recovery and diminished the economic fortunes of a generation. The economy cannot afford to have President Biden to make that same mistake.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Karl W. Smith, a former assistant professor of economics at the University of North Carolina and founder of the blog Modeled Behavior, is vice president for federal policy at the Tax Foundation.
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