OBAMA: A Slow Recovery Or A Failed Agenda?

That’s the question posed in the title of yesterday’s op-ed by Ed Lazear, and it’s an excellent question. Looking at the statistics, 13 quarters after the President’s inauguration, non-defence GDP is only 4% higher (in log terms) than when he came into office.


Figure 1: Log per capita real GDP ex. Federal defence spending, normalized to 0 at inauguration quarter. Source: BEA, 2012Q2 advance release, FRED series POPTHM and author’s calculations.

This record is undeniably less than stellar.

It might be surprising to some to discover that Figure 1 depicts the outcome in the 2001Q1-2004Q2 period, i.e., under President G.W. Bush, for whom Professor Lazear served as CEA chair. And while 4% is not good, it turns out that by 2009Q1, when the second G.W. Bush term ended, this variable was only 3.2% above its level in 2001Q1.

So how does the current Administration’s record compare? Figure 2 presents a comparison of Obama (red line) and G.W. Bush (blue line).


Figure 2: Log per capita real GDP ex. Federal defence spending, normalized to 0 at G.W. Bush inaugural quarter (blue) and Obama inaugural quarter (red). Source: BEA, 2012Q2 advance release, FRED series POPTHM and author’s calculations.

In other words, the economy (ex.-defence) is 4.2% above levels in 2009Q1, compared to 4% for G.W. Bush, 13 quarters after his inauguration. One could argue that one should look at GDP; in that case the corresponding numbers are 3.9% versus 4.7%. Since the difference is (in a mechanical sense) attributable completely to defence spending, then one could argue better output performance could have been achieved with more government spending (quite a radical idea, but one I have yet to hear from Professor Lazear, even though it has been mentioned by other prominent Republicans, including his former boss.)

None of the foregoing should be construed to be an argument that the recovery is as strong as it could be. In point of fact, we know that had policymakers implemented a larger stimulus package in early 2009, additional infrastructure investment, as well as more aggressive job creation measures (e.g., tax incentives for new job creation), we would likely have had more rapid growth.

In previous op-eds, Professor Lazear has argued that the recovery should have been more vigorous, given the depth of the downturn. If we condition on depth of downturn, then we should also condition on other factors, such as whether the recession was balance-sheet induced, for instance. In any case, it seems that Professor Lazear has failed to (once again) fully consider the data (following up on his May 2008 “We are not in a recession” call, and “The worst recovery ever” [1]).

Parting question: Why do Republicans believe government spending cannot create jobs, except when the government spending is defence related? Economic theory does not justify this world view.

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