San José State University
Department of Economics
Thayer Watkins
Silicon Valley
& Tornado Alley

What Share of the Great Recession
of 2009 Was Due to Obama?

Barack Obama never tires of blaming his failures on having inherited a recession. The fact is that the recession in production as measured by the Gross Domestic Product of the U.S. in constant prices did not begin until the time he was elected. The immediate cause of the recession was the collapse of investment purchases of plant and equipment. The businesses considering making investment purchases to increase their productive capacity viewed the situation they faced and decided to cancel or postpone some of those investment purchases. Such investments are sensitive to such things as interest rates and tax rates and how they may change in the future. They are sensitive to uncertainties about what is going to happen in the near future. For details of the investment decision process see Investment Decisions. For material establishing that the major immediate cause of the recession of 2009 and all previous recession is the collapse of investment purchases, particularly those investments in plant and equipment, see Immediate Cause of Recessions.

The financial collapse and bailouts in September of 2008 created uncertainty, but the election of a president threatening to make revolutionary financial and social changes also contributed to the uncertainty facing business. It is important to note that if the financial sector collapsed so businesses could not borrow the funds they needed for investment that would be different from affecting investment solely through the uncertainty the situation created in the minds of those making the investment decisions. The financial institutions were saved so they could lend funds to businesses for their investment purchases. Investment purchases collapsed not because they could not borrow money; they collapsed because businesses did not want to borrow money for investment in plant and equipment. So some of the collapse of business investment purchases was due to the uncertainty created by financial crisis and some was due to the uncertainties concerning the new president. Is it possible to estimate the shares due to each?

The Pattern of the Declines in Demand
Associated with the Recession

The graph below shows what happened to the four components of demand for U.S. production over the period from the first quarter of 2006 to the second quarter of 2011. The graph clearly shows that it was the decline in investment purchases that was the cause of the recession. Purchases by Federal, state and local governments were initially rising then dropped due to the reduced revenues available.

Consumer purchases later rose above their level in the first quarter of 2006 as did exports but investment purchases rose but never again reached their level in the first quarter of 2006. There was a plateau of investment purchases from the second quarter of 2010 to the third quarter of 2011. This was a period in which the concern about the financial sector had abated. The major thing left discouraging business investment was Barack Obama and his policies actual, proposed and threatened.

The Changes in Demand from Just Before
and at the Depth of the Recession

The quarter just before the Recession was the second quarter of 2008 and the depth of the recession was the second quarter of 2009. Over that period the real GDP ($2005) fell $669.2 billion. Private investment purchases over that period fell by $626.8 billion, but that figure includes foreign purchases as well as domestic. If imports are allocated proportionately over all components of demand then private domestic investment purchases fell by $514.5 billion. Over that same period then consumer domestic purchases fell by only $91.8 billion. Government domestic purchases rose by $96.7 billion. On that same basis exports fell by $185.1 billion. It is problematical to state shares if one item changes in a different direction from the other three, but the ratio of the decline in private domestic investment purchases to the net decline is 74 per cent. Clearly the lion's share of the recession was due to the collapse of business investment purchases.

Obama's Share of the Recession

In the second quarter of 2011 the estimated level of private investment purchases of domestic output was $1527.4 billion whereas in the second quarter of 2008 it was $1739.1 billion. This is a gap of $211.8 billion. This is the impact of the Obama Administration on business investment. This is approximately what it was between the 2008 and 2009 second quarters when the total decline was $514.5 billion. Thus about 41 percent of that decline was due to the uncertainty created for investors by Obama.

The collapse of business investment purchases constituted about 74 percent of the decline in demand between the second quarters of 2008 and 2009. Thus the overall share of the recession due to Obama and his policies was about 30 percent.

The inability of Obama to see and admit that he and his policies were part of the problem kept him from seeing what needed to be done to cure the malaise the U.S. economy is still experiencing.

It is often said that the level of investment purchases is volatile. But volatile just means changeable whereas the sensitivity of investment purchases is more in the nature of the vulnerability of an inflated balloon to a pin prick.

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