The hot read of the weekend is a piece from New York Times economics writer David Leonhardt titled Obamanomics: A Counterhistory.
The gist: The Obama team came into office thinking a lot about how recoveries in the aftermath of financial crises were liable to be much worse and drawn out than normal recoveries, and yet it didn’t attack the problem with the requisite gusto.
Sure, there was the $800 billion stimulus. And the Fed took unprecedented measures to bolster the economy. But it wasn’t enough, and there was no thinking ahead that the economy might need even more beyond the initial push. This is despite the fact that some of Obama’s advisors clearly had anticipated the possibility that things might be much worse than realised.
Leonhardt notes that in the early days, Obama and his aides were reading the work of economists Carmen Reinhart and Kenneth Rogoff, who were about to publish their famous book: “This Time Is Different,” which spelled out the gory history of post-crisis recoveries.
In my interviews with Obama advisers during that time, they emphasised that they knew the history and were determined to avoid repeating it. Yet of course they did repeat it. After successfully preventing another depression, in 2009, they have spent much of the last three years underestimating the economy’s weakness. That weakness, in turn, has become Mr. Obama’s biggest vulnerability, helping cost Democrats control of the House in 2010 and endangering his accomplishments elsewhere.
So what should team Obama have done differently? Leonhardt proposes an alternate structure for the stimulus that would have not only been more effective, but it would have been in keeping with the premise that things might not recover very quickly.
Suggesting that Mr. Obama and his aides should have bucked the consensus forecast and decided that a long slump was the most likely outcome smacks of 20/20 hindsight. Yet that wasn’t their only option. They also could have decided that there was a substantial risk of a weak recovery and looked for ways to take out insurance.
The administration also could have added provisions to the stimulus bill that depended on the economy’s condition. So long as job growth remained below a certain benchmark, federal aid to states and unemployment benefits could have continued flowing. Crucially, these provisions would not have added much to the bill’s price tag. Because the Congressional Budget Office’s forecast was also too optimistic, the official budget scoring would have assumed that the provisions would have been unlikely to take effect. They would have been insurance.
Another mistake (and this is still a head-scratcher) is that the administration left two FOMC seats vacant for a while, and so for a long time there was a period when Bernanke’s dovish tendencies were not shared by many Fed members, a situation that’s only changed recently, thus enabling Bernanke to get near consensus on his controversial QE-Open Ended scheme.
Bottom line: The administration read up on the history of post-crisis recoveries, but didn’t really think that the economy would need more than the initial push.
The whole problem can probably be summed up in the infamous chart made by economic advisor Christina Romer, showing what she projected the unemployment rate would do if the stimulus were enacted vs. what it would have done if it had never been enacted. As you can see, it was way too optimistic, given that unemployment is still over 8 per cent.
This misjudgment is what may cost Obama the election in just over a month.
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