- Jan 12, 2005
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I think it's laughable that right-wingers on this thread are so confident in their appraisal that Obama's economic policies have "failed," using as "proof" that now - in October of 2011 - the economic numbers are about what they were when Obama entered office in January of 2009. Surely, they argue, a "good" economic policy (a right-wing economic policy, of course, which we can infer would have been doing exactly nothing - no stimulus at all) would have turned all of the economic indicators positive by now.
But almost no economists - not even right-wing economists - agree with this appraisal. An article in today's Washington post provides a lot more background on the 2008 financial meltdown, and provides a lot more historical context on financial crises in general. The article is very, very long, so I'll excerpt the juicier pieces. The Cliff's notes are as follows:
1. The financial crisis of 2008 was much, much worse than almost anyone thought at the time - with the true scope of the crisis not known until this year.
2. Not knowing the true extent of the crisis led to policies that - although the largest in history - were not nearly large enough to combat the damage.
3. Obama's policies were beneficial - and things would have been much worse without them. But they were not sufficient to match the full magnitude of the crisis. A much greater stimulus was needed.
4. History demonstrates that it typically takes a decade or more to recover from a financial crisis of the magnitude of 2008's. But a bad economy years after the initial crisis makes it easy for the political opposition to claim that the economic policies of those in power were a failure.
5. It's politically impossible for democracies to adequately respond to financial crises, so the policies that are actually put in place are never sufficient.
http://www.washingtonpost.com/blogs...een-different/2011/08/25/gIQAiJo0VL_blog.html
But almost no economists - not even right-wing economists - agree with this appraisal. An article in today's Washington post provides a lot more background on the 2008 financial meltdown, and provides a lot more historical context on financial crises in general. The article is very, very long, so I'll excerpt the juicier pieces. The Cliff's notes are as follows:
1. The financial crisis of 2008 was much, much worse than almost anyone thought at the time - with the true scope of the crisis not known until this year.
2. Not knowing the true extent of the crisis led to policies that - although the largest in history - were not nearly large enough to combat the damage.
3. Obama's policies were beneficial - and things would have been much worse without them. But they were not sufficient to match the full magnitude of the crisis. A much greater stimulus was needed.
4. History demonstrates that it typically takes a decade or more to recover from a financial crisis of the magnitude of 2008's. But a bad economy years after the initial crisis makes it easy for the political opposition to claim that the economic policies of those in power were a failure.
5. It's politically impossible for democracies to adequately respond to financial crises, so the policies that are actually put in place are never sufficient.
http://www.washingtonpost.com/blogs...een-different/2011/08/25/gIQAiJo0VL_blog.html
But [Christina] Romer [economist and an expert on the Great Depression, appointed to head the Council of Economic Advisers for Obama] wasnt trying to be alarmist. Her numbers were based, at least in part, on everybody elses numbers: There were models from forecasting firms such as Macroeconomic Advisers and Moodys Analytics. There were preliminary data pouring in from the Bureau of Labor Statistics, the Bureau of Economic Analysis and the Federal Reserve. Romers predictions were more pessimistic than the consensus, but not by much.
By that point [mid-December of 2008], the shape of the crisis was clear: The housing bubble had burst, and it was taking the banks that held the loans, and the households that did the borrowing, down with it. [Christina] Romer estimated that the damage would be about $2 trillion over the next two years and recommended a $1.2 trillion stimulus plan. The political team balked at that price tag, but with the support of Larry Summers, the former Treasury secretary who would soon lead the National Economic Council, she persuaded the administration to support an $800 billion plan.
[In order to persuade Congress to adopt the plan] Romer and [Jarad] Bernstein [a labor economist] gathered data from the Federal Reserve, from Mark Zandi at Moodys, from anywhere they could think of. The incoming administration loved their report and wanted to release it publicly. Romer took it home over Christmas to double-check, rewrite and pick over. At 6 a.m. Jan. 10, just days before Obama would be sworn in as president, his transition team lifted the embargo on The Job Impact of the American Recovery and Reinvestment Act. It was a smash hit.
It will be a joy to argue policy with an administration that provides comprehensible, honest reports, enthused columnist Paul Krugman in the New York Times.
There was only one problem: It was wrong.
The issue is the graph [below]. It shows two blue lines sloping gently upward and then drifting back down. The darker line With stimulus plan forecasts unemployment peaking at 8 percent in 2009 and falling back below 7 percent in late 2010.
Three years later, with the economy still in tatters, that line has formed the core of the case against the Obama administrations economic policies. That line lets Republicans talk about the failed stimulus. That line has discredited the White Houses economic policy.
But the other line Without stimulus plan is more instructive. It shows unemployment peaking at 9 percent in 2010 and falling below 7 percent by the end of this year. Thats the line the administration used to scare Congress into passing the single largest economic recovery package in American history. That line is the nightmare scenario.
And yet this is the cold, hard fact of the past three years: The reality has been worse than the administrations nightmare scenario. Even with the stimulus, unemployment shot past 10 percent in 2009.
To understand how the administration got it so wrong, we need to look at the data it was looking at.
The Bureau of Economic Analysis, the agency charged with measuring the size and growth of the U.S. economy, initially projected that the economy shrank at an annual rate of 3.8 percent in the last quarter of 2008. Months later, the bureau almost doubled that estimate, saying the number was 6.2 percent. Then it was revised to 6.3 percent. But it wasnt until this year that the actual number was revealed: 8.9 percent. That makes it one of the worst quarters in American history. Bernstein and Romer knew in 2008 that the economy had sustained a tough blow; they didnt know that it had been run over by a truck.
There were certainly economists who argued that the recession was going to be worse than the forecasts. Nobel laureates Krugman and Joe Stiglitz were among the most vocal, but they were by no means alone. In December 2008, Bernstein, who had been named Bidens chief economist, told the Times, Well be lucky if the unemployment rate is below double digits by the end of next year.
This time is different
But the Cassandras who look, in retrospect, the most prophetic are Carmen Reinhart and Ken Rogoff. In 2008, the two economists were about to publish This Time Is Different, their fantastically well-timed study of nine centuries of financial crises. In their view, the administration wasnt being just a bit optimistic. It was being wildly, tragically optimistic.
That was the dark joke of the books title. Everyone always thinks this time will be different: The bubble wont burst because this time, tulips wont lose their value, or housing is a unique asset, or sophisticated derivatives really do eliminate risk. Once it bursts, they think their economy will quickly clamber out of the ditch because their workers are smarter and tougher, and their policymakers are wiser and more experienced. But it almost never does.
In March 2009, Reinhart and Rogoff took to Newsweek to critique the chirpy forecasts coming from policymakers around the globe. The historical record, they said, showed that the recessions that follow in the wake of big financial crises tend to last far longer than normal downturns, and to cause considerably more damage. If the United States follows the norm of recent crises, as it has until now, output may take four years to return to its pre-crisis level. Unemployment will continue to rise for three more years, reaching 11 to 12 percent in 2011.
It seems unlikely that unemployment will return to 11 percent this year, but if the global economy tips back into recession, anything is possible. Either way, Rogoff and Reinhart were a lot closer to the mark than most forecasters.
I dont think its too much of an exaggeration to say that everything follows from missing the call on Reinhart-Rogoff, and I include myself in that category, says Peter Orszag, who led the Office of Management and Budget before departing the administration to work at Citigroup. I didnt realize we were in a Reinhart-Rogoff situation until 2010.
This time, it turned out, wasnt different. But could it have been?
The slogcession
The basic thesis of This Time Is Different is that financial crises are not like normal recessions. Typically, a recession results from high interest rates or fluctuations in the business cycle, and it corrects itself relatively quickly: Either the Federal Reserve lowers rates, or consumers get back to spending, or both.
But financial crises tend to include a substantial amount of private debt. When the market turns, this overhang of debt acts as a boot on the throat of the recovery. People dont take advantage of low interest rates to buy a new house because their first order of business is paying down credit cards and keeping up on the mortgage.
In subsequent research with her husband, Vincent Reinhart, Carmen Reinhart looked at the recoveries following 15 post-World War II financial crises. The results were ugly. Forget the catch-up growth of 4 or 5 percent that so many anticipated. Average growth rates were a full percentage point lower in the decade after the crisis than in the one before.
Perhaps as a result, in 10 of the 15 crises studied, unemployment simply never and the Reinharts dont mean never in the years we studied, they mean never ever returned to its pre-crisis lows. In 90 percent of the cases in which housing-price data were available, prices were lower 10 years after the crash than they were the year before it.
Finding fault with the stimulus
Some partisans offer a simple explanation for the depth and severity of the recession: Its the stimuluss fault. If we had done nothing, they say, unemployment would never have reached 10 percent.
That notion doesnt find much support even among Republican economists. Doug Holtz-Eakin is president of the right-leaning American Action Forum and served as Sen. John McCains top economic adviser during the 2008 presidential campaign. Hes no fan of the stimulus, but he has no patience with the idea that it made matters worse.
The argument that the stimulus had zero impact and we shouldnt have done it is intellectually dishonest or wrong, he says. If you throw a trillion dollars at the economy, it has an impact. I would have preferred to do it differently, but they needed to do something.
A fairer assessment of the stimulus is that it did much more than its detractors admit, but much less than its advocates promised.
The thing that people who want to argue that the stimulus failed have to deal with, Bernstein says, is that if you look at the trajectory of job losses, you will find that right on the heels of the Recovery Act, the rate of job losses began to diminish and then the jobs numbers turned positive. The Recovery Act worked. The problem is we didnt keep our foot on the accelerator.
Critics and defenders on the left make the same point: The stimulus was too small. The administration underestimated the size of the recession, so it follows that any policy to combat it would be too small. On top of that, it had to get that policy through Congress. So it went with $800 billion what Romer thought the economy could get away with rather than $1.2 trillion what she thought it needed. Then the Senate watered the policy down to about $700 billion. Compare that with the $2.5 trillion hole we now know we needed to fill.
But it is hard to credit the argument that the stimulus could have been much larger at the outset. This was already the biggest stimulus in U.S. history, and congressional leaders had been quite clear with the White House: Dont send over anything that passes the trillion-*dollar mark. To try and double the bills size based on a suspicion that the recession was much worse than the early data indicated would have been a hard sell, to say the least.
The stimulus was a bet that we could get out of this recession through the one path everyone can agree on: growth. The bet was pretty much all-in, and it failed. Reinhart and Rogoff are not particularly surprised. Its hard to get through a debt-driven crisis without doing anything about, well, debt.
In our crisis, the debt in question is housing debt. Home prices have fallen almost 33 percent since the beginning of the crisis. All together, the nations housing stock is worth $8 trillion less than it was in 2006. And were not done. Morgan Stanley estimates there are more than 2.2 million homes sitting vacant, and 7.5 million more facing foreclosure. It is housing debt that has weakened the banks, and mortgage debt that is keeping consumers from spending.
In late 2008, when the economy was cratering, Holtz-Eakin convinced McCain that the way out of a housing crisis was to tackle housing debt directly. What we proposed at the time was to buy up the troubled mortgages, pay them off and let people refinance at the lower rates, he recalls. That would have filled up the negative equity and healed bank balance sheets.
To this day, Holtz-Eakin thinks the proposal made sense. There was one problem. No one liked that plan, he says. In fact, they hated it. The politics on housing are hideous.
[T]he administration rejects the more radical solutions that are occasionally floated [to greatly reduce housing debt]. The problem, it says, is that the choices are mostly between timid and unworkable.
One problem was that mortgage finance giants Fannie Mae and Freddie Mac were ultimately controlled by the independent Federal Housing Finance Agency. Created by Congress in 2008, the agency was initially led by a Bush administration appointee, James B. Lockhart III, and when he stepped down, by another Bush administration appointee, Edward DeMarco. The Obama administrations November 2010 effort to nominate its own director was foiled by Senate Republicans.
The political immune system
So could this time have been different? Theres little doubt that it could have been better. From the outset, the policies were too small for the recession the administration and economists thought we faced. They were much too small for the recession we actually faced. More and better stimulus, more aggressive interventions in the housing market, more aggressive policy from the Fed, and more attention to preventing layoffs and hiring the unemployed could have led to millions more jobs. At least in theory.
Of course, ideas always sound better than policies. Policies must be implemented, and they have unintended consequences and unforeseen flaws. In the best of circumstances, the policymaking process is imperfect. But January 2009 had the worst of circumstances a once-in-a-lifetime economic emergency during a presidential transition.
Reinhart, for one, thinks the Bush and Obama administrations dont get sufficient credit for all they did.
The initial policy of monetary and fiscal stimulus really made a huge difference, she says. I would tattoo that on my forehead. The output decline we had was peanuts compared to the output decline we would otherwise have had in a crisis like this. That isnt fully appreciated.
What were in looks more like Japan in the 90s than the United States in the 30s. Reinhart doesnt think thats an accident; she thinks its a product of the initial successes. The same policies that serve you well in limiting the output collapse do not serve you well in speeding the time it takes to get out, she says.
By saving the banking system, you end up with banks that are quietly holding on to toxic assets in the hope that one day theyll be worth something. By limiting the output gap, you keep the economy from getting so bad that truly radical solutions, such as wiping out hundreds of billions of dollars of housing debt, become thinkable. You limp along.
The question, of course, is why do governments limp out of recessions when the weight of history tells them to run?
Now knowing how much worse the storm was, people look back and say, you guys undershot, sighs Treasury Secretary Timothy F. Geithner. But we didnt think we were undershooting at the time. We thought that the dominant strategy had to be massive, overwhelming force. There were political limits to what we could do, but we thought we were operating to expand the scope of those limits. I used to say to people, Which mistake is harder to correct: doing too much, or doing too little?
Yet the Obama administration did too little. Its team of interventionist Keynesians immersed in the lessons of the Depression and Japan did too little. Everyone does too little, even when they think theyre erring on the side of doing too much. Thats one reason this time is almost never different.
Perversely, the very size of the package is part of its problem. With something extraordinary that is nevertheless not enough, the economy deteriorates, and the government sees its solutions discredited and its political standing weakened by the worsening economic storm. That keeps it from doing more.
Meanwhile, the oppositions capacity to do more is arguably even more limited, as it has turned against whatever policies were tried in the first place. Add in the almost inevitable run-up in government debt, which imposes constraints in the eyes of the voters and, in some cases, in the eyes of the markets, and an economy that started by not doing enough is never able to get in front of the crisis.
These sorts of economic crises are, in other words, inherently politically destabilizing, and that makes a sufficient response, at least in a democracy, nearly impossible.
Theres some evidence for this internationally. Larry Bartels, a political scientist at Vanderbilt University, examined 31 elections that took place after the 2008 financial crisis and found that voters consistently punished incumbent governments for bad economic conditions, with little apparent regard for the ideology of the government or global economic conditions at the time of the election. Just look to Europe, where the path to ending the debt crisis and saving the euro zone the group of nations that use the currency is clear to most economists but impossible for any European politician.
In general, the policies that are vastly better than whatever you are doing are not politically achievable, and the policies that are politically achievable are not vastly better. There were many paths that could have been taken in January 2009, and any one would have made this time a bit different. But not different enough. Not as different as we wish.
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