The Washington Post summarizes President Obama’s acceptance speech:
The president offered an appealing, even a stirring, vision of a shared citizenship and commitment to democracy. “We don’t think government can solve all our problems,” he said. “But we don’t think government is the source of all our problems — any more than are welfare recipients, or corporations, or unions, or immigrants, or gays, or any other group we’re told to blame for our troubles.”
But the attractiveness of that vision made all the more frustrating Mr. Obama’s refusal to fill in any substance, his once again promising hard truths that he did not deliver. “They want your vote, but they don’t want you to know their plan,” he said of the Republicans. If Mr. Obama has a plan, Americans who listened Thursday don’t know how he would achieve it.
That brings to mind a concern I’ve had about the Obama Administration’s approach to the economy practically from the outset: the lack of a coherent approach to solving the problems at hand. As I see things there are three different theories competing for attention on the source of our problems: the Keynesian view that our problems are caused by a shortfall in demand, the idea first put forward by Richard Koo but occasionally advanced by the Obama Administration that it’s a “balance sheet recession” brought on by excessive household debt, or that the problems of the American economy are primarily structural.
In 2009 then-director of the White House National Economic Council for the Obama Administration Lawrence Summers said:
To address the deep and severe crisis he inherited, President Obama started from two main premises. First, the most immediate priority was to rescue the economy by restoring confidence and breaking the vicious cycle of economic contraction and financial failure. Second, the recovery from this crisis would be built not on the flimsy foundation of asset bubbles but on the firm foundation of productive investment and long-term growth.
The President was clear from the beginning that these two tasks needed to be dovetailed—that confidence in our ability to rescue the economy depended on a sense of our commitment to reform and a vision for rebuilding.
The economic problems confronting the United States as President Obama took office were of a unique character. This was not the standard post-World War II recession in which rising inflation had led to monetary contraction which led to economic contraction. Nor was it a crisis of the kind frequently experienced in emerging markets in which the country had experienced a sudden loss of external confidence. Indeed, the dollar strengthened over the second half of 2008.
Rather, the crisis was qualitatively similar to the crisis in Japan after its asset bubble collapse, the early stages of the Great Depression, or other major domestic financial crises in which asset bubbles burst, credit flow contracted and de-leveraging reduced spending.
We were very much aware that there were few, if any, examples of success in rapidly restoring economic growth and stability after broad-based financial crises. We concluded that this was a reflection of insufficiently aggressive action taken too slowly and decided that our policy response would be neither too little nor too late. The Administration decided to pursue a policy approach of seeking to reverse the vicious cycle connecting income declines and financial instability by directly supporting incomes and restoring stability to the financial system.
The rebuilt American economy must be more export-oriented and less consumption-oriented, more environmentally oriented and less fossil-energy-oriented, more bio- and software-engineering-oriented and less financial-engineering-oriented, more middle-class-oriented and less oriented to income growth that disproportionately favors a very small share of the population.
That statement combines all three of the theories and, indeed, suggests a fourth: that the problems of the American economy are caused by maldistribution of income.
If the intent of the ARRA, the “stimulus package”, was Keynesian pump-priming, it was not a coherent approach for two important reasons. The theory calls for counter-cyclical spending increases to make up for inadequate demand and pro-cyclical spending cuts. According to the NBER the longest post-war economic contraction prior to that of the Great Recession was 16 months (that of the Great Recession was 18 months). With the recession having begun in December 2007 it could reasonably have been expected to end by the middle of 2009.
Without utterly unrealistic assumptions about the Keynesian multiplier that would be realized by a stimulus, the amount that would have needed to have been spent was around $400 billion. Both the ARRA’s size and timing were inadequate.
It’s not that there were no available ways of spending the required amount of money in the time necessary. There were any number of ways of accomplishing that, all based on tax cuts. For example, suspending FICA both for workers and employers for six months would have resulted in leaving more money in the economy in 2009 than was actually spent in 2009 under the ARRA.
Why wasn’t such a plan adopted? Because Republicans wouldn’t have supported it? Because Democrats wouldn’t have supported it?
There have been a few half-hearted attempts at speeding up the reduction in household debt, HAMP, the Home Affordable Modification Program begun in 2009, is the most significant. By most accounts it hasn’t succeeded in its goals. According to a report from the McKinsey Global Institute household debt has declined by about a half trillion dollars since 2007 and two-thirds of that has been in the form of foreclosures and defaults. That’s significantly different from paying off the debt in its economic effects due to the difference in the wealth effect.
Assuming that the recession was a balance sheet recession due to excessive household debt how much farther would that debt need to decline before the economy could return to robust health? According to the St. Louis Federal Reserve household debt is now roughly where it was in 2007. For it to return to what it was in, say, 1999 it would need to decline ten times as much as it has so far. Over the last six months household debt has hardly declined at all, only about $20 billion. That’s another way of saying “Never”.
An additional problem with concluding that the reason for the phlegmatic recovery is that recoveries from financial crises are slow is that, at least according to a recent paper from the Cleveland Fed, that does not appear to have been true historically in the United States.
I wish I had the time, inclination, and resources to produce an empirical measure of the administration’s actual beliefs based on how often President Obama mentions something when speaking. I have no way of verifying it but my impression is that the president believes that the primary reasons for high unemployment are structural. For example, back in June 2011 on the Today Show the president said:
&133;a couple of things happened. look, we went through the worse crisis since the great depression. we are now in a process where the economy is growing again and we created 2 million jobs over the last 15 months. but it’s not as fast as it needs to be to make up for all the jobs that were lost. the other thing that happened, though, and this goes to the point you were just making, is there are some structural issues with our economy where a lot of businesses have learned to become much more efficient with a lot fewer workers. you see it when you go to a bank and you use an atm, you don’t go to a bank teller , or you go to the airport and you’re using a kiosk instead of checking in at the gate. so all these things have creakrecreated changes in the economy and this counsel is identifying where the jobs of the future are going to be, how do we make sure there’s a match between what people are getting trained for and the jobs that exist, how do we make sure that capital is flowing into those places with the greatest opportunity. we are on the right track. the key is figuring out how do we accelerate it.
That’s clearly a structural argument. Emphasizing the impact of offshore outsourcing:
We should start with our tax code. Right now, companies get tax breaks for moving jobs and profits overseas. Meanwhile, companies that choose to stay in America get hit with one of the highest tax rates in the world. It makes no sense, and everyone knows it.
So let’s change it. First, if you’re a business that wants to outsource jobs, you shouldn’t get a tax deduction for doing it.
That money should be used to cover moving expenses for companies like Master Lock that decide to bring jobs home.
Second, no American company should be able to avoid paying its fair share of taxes by moving jobs and profits overseas.
From now on, every multinational company should have to pay a basic minimum tax. And every penny should go towards lowering taxes for companies that choose to stay here and hire here in America.
Third, if you’re an American manufacturer, you should get a bigger tax cut. If you’re a high-tech manufacturer, we should double the tax deduction you get for making your products here. And if you want to relocate in a community that was hit hard when a factory left town, you should get help financing a new plant, equipment, or training for new workers.
I also hear from many business leaders who want to hire in the United States but can’t find workers with the right skills. Growing industries in science and technology have twice as many openings as we have workers who can do the job. Think about that: openings at a time when millions of Americans are looking for work.
It’s inexcusable. And we know how to fix it.
Jackie Bray is a single mom from North Carolina who was laid off from her job as a mechanic. Then Siemens opened a gas turbine factory in Charlotte and formed a partnership with Central Piedmont Community College. The company helped the college design courses in laser and robotics training. It paid Jackie’s tuition, then hired her to help operate their plant.
I want every American looking for work to have the same opportunity as Jackie did. Join me in a national commitment to train 2 million Americans with skills that will lead directly to a job.
as President Obama did in his 2012 State of the Union address, are structural arguments, too. These themes were repeated in his recent acceptance speech during the Democratic National Convention. I found little or no mention of the argument that our economic woes are caused either by a shortfall in demand or too much household debt in that speech.
The problem with this theory of our economic problems is that it doesn’t comport with what has actually happened and it doesn’t comport with the Obama Administration’s consistent laying of the blame for those problems on the previous administration. Technological progress didn’t suddenly start eliminating jobs in 2001, culminating in 2007, and offshoring did not reach some sort of tipping point then. Indeed, there’s been as much offshoring of jobs during President Obama’s first term as there was during President Bush’s first term. President Clinton lobbied hard to grant China Most Favored Nation trading status and for China’s admission to the WTO, both of which gave impetus to the problems about which President Obama is complaining. There’s plenty of blame to spread around and the factors go back at least 20 years.
It might be argued that the scattershot approach to economic policy is an appropriate strategy for dealing with uncertainty or with complex conditions. I don’t think that excuse holds water when none of the solutions being proposed are adequate to address any of the explanations that have been proffered. Additionally, the approach assumes an infinite amount of time, money, and political will in which to execute it. I don’t believe that we have any of those.
A coherent approach to our problems would consist in enunciating a theory of those problems that comports at least in part with what’s actually occurring, proposing solutions that would address those problems effectively, advocating those solutions tirelessly until they’re implemented, and following those solutions until they’re successful or proven inadequate. Our problems are already at hand. We need a coherent approach to solving them.
For the last five years we’ve had incoherence. Enough. I’m not letting Mitt Romney off the hook in these remarks. Unless you believe that our problems are that the highest marginal tax rate is too high which does not comport with the facts since we’ve had higher marginal tax rates for most of the last century and faster growth for most of the last century or that some unspecified regulations are restraining a gigantic surge of economic activity that’s straining at the bit to be released, something I think is unlikely, his proposals are as incoherent as those of the man he seeks to replace.