The 2012 election will revolve around the economy, and somehow Obama will have to make the case that he should be re-elected with GDP growing below historical trend, and unemployment above 8 per cent.
James Pethokoukis of the American Enterprise Institute has been doing a lot of work comparing the Obama recovery to the Reagan recovery, pointing out how much more robust the latter was.
In a new post, he takes aim at the suggestion that comparing the two recoveries is somehow unfair because Obama had to deal with the aftermath of the housing bust, whereas Reagan didn’t.
The reality: Housing is usually a key contributor to GDP growth during the early stages of a recovery. As a 2011 St. Louis Fed analysis points out, “Somewhat surprisingly, the housing component of GDP (more formally known as residential investment) tends to be a solid contributor to GDP growth during a recovery. Historically, residential investment has contributed only about 5 per cent of GDP—a small share considering the consumption component is close to 70 per cent. Nevertheless … it can contribute substantially to the GDP growth rate for short periods of time.”
According to Commerce Department data, residential investment added 1.33 percentage points to GDP in 1983, 0.64 in 1984. By contrast, residential investment subtracted 0.11 percentage point in 2010 and 0.03 in 2011. (See chart below.)
But here’s the thing: Subtract the housing rebound from the Reagan Recovery and GDP still grows twice as fast as during the Obama Recovery. For example, the economy grew 7.2 per cent in the second full year of the Reagan Recovery. Without residential investment, it would have grown 6.6 per cent vs. 1.7 per cent growth in 2011, Obama’ s second full year of recovery. Score one for the Gipper … and for supply-side/Schumpeterian economics over demand-side/Keynesian economics.
The problem is that Pethokoukis is knocking over a straw man here. He’s defining housing bust purely in terms of housing construction, while ignoring the real elephant in the room: The collapse in home prices, and the knock-on effects it has had on the economy. Almost nobody, when they’re talking about the housing crisis, is talking about it purely in terms of residential investment (though that is one sub-area).
Lest anyone be confused about what happened, here’s a look at the national House Price Index going back to 1975. As you can see, home prices didn’t even notice the two early ’80s recessions. They collapsed massively, however, starting late in the Bush administration.
To put it bluntly, this is A Big Deal, and a dynamic not captured at all merely looking at the residential construction’s share of GDP.
The unprecedented (in post-War America) housing bust also corresponds with another thing that made this recession unique: the credit bust.
Here’s a look at Consumer Credit going back to 1945. Never had the U.S. seen a meaningful decline in this measure until this current malaise.
The point here, again, is that to imagine that the key difference between the Obama recovery and the Reagan recovery is the falloff in housing construction is ridiculously narrow.
It’s also worth pointing out research which shows a direct connection between household debt and deleveraging and unemployment. A study by Professors Amir Sufi and Atif Mian, which we wrote about here, uses Mastercard spending data to look specifically at what happened to unemployment in areas characterised by high home prices and high household debt before the crisis. Suffice to say, those areas got hit harder.
We also had one other thing: A financial crisis. Hopefully we don’t need to put up any charts or anything to remind everyone that much of the financial system seized up in late 2008, and that we lost multiple major banks, and so on. There are at least some economists who argue that post-financial crisis economies experience unusually slow growth for years and years.
So at least right off the bat, we can easily identify some huge differences between the conditions that Obama inherited and what Reagan inherited.
But we’re just getting started …
The first, obvious, point is that soon after Reagan entered office THE U.S. WENT INTO A RECESSION!
For some reason, which we can’t figure out, Pethokoukis thinks Reagan gets to start at 1983.
Ronald Reagan inherited a Long Recession. The economy declined 0.3 per cent in 1980, grew at a subpar 2.5 per cent in 1981, and then plunged 1.9 per cent in 1982. The lengthy downturn was really the culmination of more than a decade of bad economic policy. But the Reagan Recovery was stunning. GDP rose 4.5 per cent in 1983 and 7.2 per cent in 1984. It was Morning in America, and Reagan won reelection by a landslide.
If you really want an apples-to-apples comparison, it’s hard to fathom why Reagan doesn’t have to answer for a recession happening so soon on his watch, and why he only gets measured on those two years. What’s more, as you can see in the chart above, the 1984-1988 period was pretty average, so we’re really just talking about two years of really impressive morning-in-America growth.
Another thing about Reagan was that he was a deficit-lover.
Reagan presided over the largest (still) one-year annual jump in the size of the national debt. (And PS: that just happened to be right after the recession, when the economy started growing like crazy as Pethokoukis notes)
If you want to look just at annual growth of government spending, Reagan clearly had more sustained growth than Obama has had. Note that Reagan never once had a period of shrinking government spending.
Let’s forget government spending though. We’ve already established how much Reagan loved it.
What about private investment? After all, that’s the sine qua non of a strong economy, as supply siders like to argue.
Here’s a look at annualized change of private spending.
Since the Recession ended, Obama has maintained growth in private investment. Reagan? He had several negative periods in there, and overall a lot more volatility on this measure. And as Pethokoukis even noted above, Obama has had to contend with weak residential investment, yet private investment is still maintaining nice growth.
We could of course go on, and point to several other factors in Obama’s favour, such as the fact that tax rates had already been lowered quite a bit heading into his presidency, taking away one easy form of stimulus, or the fact that a major trading partner, Europe, has been in crisis virtually the whole time of Obama’s Presidency, or the fact that Obama faced a Congress who threatened to cause the U.S. to default, or the fact that interest rates were ultra-low already, again taking away one form of stimulus from Obama.
But you get the gist: The conditions behind the Great Recession were far worse than anything Reagan inherited, and Obama has pulled off a recovery with less of a sustained growth in Federal Government spending.
It doesn’t look good for The Gipper.