Prepared for Delivery
CHICAGO - Good
morning. Thank you, Mayor Emanuel. I want to thank John Canning and Donna
Zarcone for hosting this event. It is a pleasure to be here at the Economic
Club of Chicago to discuss some of the fundamental economic choices we face as
The President arrived in Washington
at a particularly dark moment in American history. The U.S. economy was
contracting at an annual rate of 9 percent. Growth around the world was
The actions taken by Secretary
Paulson, Chairman Bernanke, and the FDIC in the fall of 2008 had broken the
back of the financial panic, but the financial system was frozen and the
economy was still deteriorating at an alarming pace.
The President did not sit around
hoping the fire would burn itself out. He did not commission a bunch of
studies. He did not play politics with the crisis. He chose to act, and he
The President’s strategy to repair
the financial system, combined with the Recovery Act, the restructuring of the
U.S. auto industry, the coordinated global rescue he led in the G-20, and the
actions of the Federal Reserve, was very effective in restoring economic growth.
Within three months of his taking
office, the pace of decline in growth began to slow. By the summer of 2009, the
American economy was growing again.
Let me make that clear. In about
six months, the economy went from contracting at an annual rate of 9 percent to
expanding at an annual rate of nearly 2 percent, a swing of almost 11
In a remarkably short period of
time, we were able to not just avert a second Great Depression, but also to
begin the long and fragile process of repairing the damage and laying a
stronger, more durable foundation for economic growth.
How has the economy performed since
that early start?
Since the summer of 2009, the
economy has expanded at an average annual rate of 2.5 percent, adding 3.9
million private sector jobs over the last two years.
Growth has been led by private
demand, including strong gains in investment and exports. The balance sheet of
the business sector is exceptionally strong, and the economy as a whole is more
productive than before the crisis.
These are promising developments,
but we still face some very tough challenges.
Unemployment is very high, the
housing market remains weak, and growth is not as fast as we would like. These
are tragic legacies of the financial crisis.
And we live in a dangerous and
uncertain world, one reason gas prices are higher today.
What does the recent pattern of
growth tell us about the economy?
Most viewed the moderate pace of
the recovery and the slowdown in 2010 and 2011 as justification for pessimism.
But if you look at the causes of the slowdown, there is reason to be
much more optimistic about the strength of the economy and the private sector.
Most importantly, growth was
dampened in the early stage of recovery by headwinds that follow all financial
Recoveries that follow financial
crises are slower, as Carmen Reinhart and Ken Rogoff have famously written.
They are slower because the causes of financial crises—typically a large rise
in borrowing by households and the financial sector and too much investment in
housing and real estate—act to hold down growth as they are unwound.
As people bring down their debt
burdens and raise their saving rate, they spend less. As banks are forced to
reduce risk and restore more prudent credit standards, they lend
less. These forces work against the impact of lower interest rates,
dampening the otherwise potentially powerful effects of monetary policy.
There is a paradox in this, in that
the changes necessary to unwind the causes of the crisis and lay a more lasting
foundation for future growth necessarily slow the pace of expansion.
Our economy is still in the process
of deleveraging, dealing with significant household debt, excess investments in
real estate and other forms of debt.
But we are making a lot of progress
in working through those adjustments. Household debt is down 17 percentage
points relative to income since before the crisis. Financial sector
leverage is down substantially and credit is expanding. Housing and commercial
real estate construction is starting to pick up after five years of
Overall, we have done a better job
than many economies in making these adjustments—as Martin Wolf has written in The
Financial Times, “The U.S. economy is the most advanced in deleveraging.”
Apart from these difficulties, we
have faced a series of other challenges to growth.
There were three large external
shocks in 2010 and 2011—the situation in Europe, the effects of the earthquake
and tsunami in Japan, and higher oil prices. These shocks were large
enough to take about a percentage point off GDP growth in the first half of
Their effects are now receding,
although Europe and oil still present risks. But the U.S. economy proved
quite resilient in the face of those pressures, and growth strengthened quickly
as those shocks receded. Despite the resilience of the economy, high gas prices
do remain a challenge for average Americans.
On top of this, President Obama
inherited very large fiscal deficits, swollen to levels well beyond any
experienced since World War II. That erosion in our fiscal strength left the
nation with less room to maneuver and increased the political opposition to
fiscal actions beyond the Recovery Act.
And while the Recovery Act provided
absolutely crucial support for the economy, state and local fiscal contraction
offset a significant part of its effects. But that drag is receding as revenues
have started to rise with economic growth.
Finally, the debt limit debate last
summer caused huge damage to confidence. But that was a blow caused by
political threats of default by the President’s opponents—not something
produced by weakness in the economy or by economic policy.
Much of the political debate and
the critiques of business lobbyists misread the underlying dynamics of the
economy today. Many have claimed that the basic foundations of American
business are in crisis, critically undermined by taxes and regulation.
And yet, business profits are
higher than before the crisis and have recovered much more quickly than overall
growth and employment. Business investment in equipment and software is
up by 33 percent over the past 2 ½ years. Exports have grown 24 percent in real
terms over the same period. And manufacturing is coming back, with factory
payrolls up by more than 400,000 since the start of 2010.
The business environment in the
United States is in numerous ways better than that of many of our major
competitors, as measured by international comparisons of regulatory burden, the
tax burden on workers, the quality of legal protections of property rights, the
ease of starting a business, the availability of capital, and the broader
flexibility of the economy.
The challenges facing the American
economy today are not primarily about the vibrancy or efficiency of the
business community. They are about the barriers to economic opportunity and
economic security for many Americans and the political constraints that now
stand in the way of better economic outcomes.
These challenges can only be
addressed by government action to help speed the recovery and repair the
remaining damage from the crisis and reforms and investments to lay the
foundation for stronger future growth.
This means taking action to support
growth in the short-term—such as helping Americans refinance their mortgages
and investing in infrastructure projects—so that we don’t jeopardize the gains
our economy has made over the last three years.
And it means making the investments
and reforms necessary for a stronger economy in the future. Investments in
things like education, to help Americans compete in the global economy.
Investments in innovation, so that our economy can offer the best jobs
possible. Investments in infrastructure, to reduce costs and increase
productivity. Policies to expand exports. And reforms to improve incentives for
investing in the United States—including reform of our business tax system.
A growth strategy for the American
economy requires more than promises to cut taxes and spending.
We have to be willing to do
things, not just cut things.
To expand exports, we have to
support programs like the Export-Import Bank, which provides financing at no
cost to the government for American businesses trying to compete in foreign
To make us more competitive, we
have to be willing to make larger long-term investments in infrastructure, not
just limp forward with temporary extensions.
Any credible growth agenda has to
recognize that there are parts of the economy, like the financial system, that
need reform and regulation. Businesses need to be able to rely on a more stable
source of capital, with a financial system that allocates resources to their
most productive uses, not misallocating them to an unsustainable real estate
Cutting government investments in
education and infrastructure and basic science is not a growth strategy.
Cutting deeply into the safety net for low-income Americans is not
financially necessary and cannot plausibly help strengthen economic growth.
Repealing Wall Street Reform will not make the economy grow faster—it would
just make us more vulnerable to another crisis.
This strategy is a recipe to make
us a declining power—a less exceptional nation. It is a dark and pessimistic
vision of America.
The President has a different
strategy for economic growth. He believes that while our long-term fiscal
problems are formidable, we can address them over time with a balanced package
of reforms that preserve room for investments that will help us grow.
There is no economic or financial
case for using the fear of future deficits to cut as deeply into core functions
of the government, to weaken the safety net or fundamentally alter Medicare
benefits as do the Republican proposals.
Our fiscal commitments are
unsustainable over the long run, but we cannot put our long-run fiscal
challenges above all others, and we have to confront them carefully and wisely,
with a balanced mix of spending cuts and modest revenue increases such as the
President has proposed.
We are gradually getting stronger,
but we still have very tough challenges ahead.
Yet, as tough as they are, these
are manageable challenges for the United States. And I would prefer our
challenges to those of any economy anywhere in the world.
We can afford the investments that
are important for future growth. We can adjust to the changes that will be
compelled by the need to bring our long-term deficits down.
As we face the great political and
economic choices ahead, remember how terrible the crisis was.
Remember that Americans are still living with the damage that is the legacy of
that crisis. When you listen to the debate about taxes and Medicare and
Medicaid, or when you hear politicians tell you that they will protect even the
most fortunate Americans from higher taxes, remember that even before this
crisis, about 20 percent of children in the United States were living in
poverty and about 40 percent of children were born to parents covered by
Remember that the fortunes of
children born in America today, the quality of public schools they attend, the
quality of health care they receive, the chance they have to go to college,
still depend significantly on the wealth of their parents and the color of
But also remember that we are a
country of great strength and resilience. We have successfully navigated the
most dangerous phase of the worst economic crisis in generations. We need to
bring the same creativity and force and sense of national purpose to the
challenges ahead. And that will require better choices from our
political system. No economy can be stronger over time than the ability of its
political leaders to come together to make tough decisions.