Do you believe that President Obama “saved the economy”? Quoting long-time econblogger Brad DeLong, Robert Samuelson in his Washington Post column, replies:
Not so fast, objects economist J. Bradford DeLong of the University of California at Berkeley. “Fifty years from now, historians will . . . write that President Franklin Roosevelt, Congress and the Federal Reserve provided a collective policy response that was, if not optimal, at least respectable. . . . By contrast, they will [argue] that the responses of President Barack Obama, Congress and the Federal Reserve did not come up to the standard [set by] the mid-1930s policy-makers.â€
Could DeLong be correct? The answer matters, because if he’s right, the economy — despite its present strength — faces a future of long-term sluggishness.
Writing in the Milken Institute Review, an economics journal, DeLong accepts the conventional wisdom that the rapid response to the Great Recession by both the Federal Reserve and Congress — the Fed lowered short-term interest rates to near zero, and Congress passed a huge stimulus package of spending increases and tax cuts — prevented a second Great Depression. But his praise stops there.
We are now 11 years removed from the beginning of the crisis in 2007, and income per worker has risen only 7.5 percent, DeLong notes. By contrast, income per worker rose 10.5 percent in the 11 years following the 1929 stock-market crash.
What explains the gap, he argues, is a psychological hangover from the Great Recession. Consumers and businesses are more cautious, and the despondency is likely to persist. He writes:
“We are haunted by our Great Recession in a sense that our predecessors were not haunted by the Great Depression. . . . No unbiased observer projects anything other than slow growth, much slower than the years during and after World War II. Nobody is forecasting that the haunting will cease — that the shadow left from the Great Recession will lift.â€
I don’t think that’s quite accurate. What I think is closer to the truth are:
- The GWB Administration and the Federal Reserve had already taken the steps necessary to prevent a Great Depression 2 by the end of 2008.
- While it is possible that the ARRA and the various phases of quantitative easing put in place by the Federal Reserve prevented a second dip, IMO it is more likely that they only served to improve the fortunes of certain favored constituencies and had a negligible effect on the greater economy.
- After the ARRA the Obama Administration turned its attention beyond the economy and never really returned to it.
- Imposing the largest tax increase on the working poor in American history as happened at the end of 2012 was unwise.
As I have said for over a year, I disagreed with the Trump Administration’s decrease in the personal income tax for the simple reason that I don’t think that slow economic growth in the U. S. has been caused by a shortfall in personal consumption but by inadequate domestic business investment over the period of the last 18 years. However, if there is one thing that should be unarguable at this point, it has been demonstrated that it is possible for the U. S. economy to grow at a rate faster than 2%, something repeatedly denied previously.
What I think what actually happened was a sort of one-two punch. The Obama Administration could not promote faster growth because of the limitations of its own ideological framework and because of the opposing policies of the Fed. What we should be doing is decentralizing, cutting business taxes, cutting payroll taxes, and streamlining federal regulations. What is likely to happen is increased business taxes (under the rubric of “paying their fair share”), increasing payroll taxes (in the name of “saving Social Security”), promoting consumer spending (mostly on goods produced in China and health care), and increasing the deadweight loss of government generally.
Well, within reasonable tolerances that’s the way I see it.
Dot point 1 – yes, and they should have just stopped.
Dot point 2 – it disrupted capital markets pricing, enriched high risk asset investors by creating a bubble, and hosed savers. If there is a reason for public hangings, the Fed is a prime candidate.
Dot point 3 – Obama cared about social change. The economy be damned.
Dot point 4 – yes
The 2% kid couldn’t get out of his own way. Regulation. Taxes. You didn’t build that. So he reinvented economic potential and boneheads bought it.
The big issue was discussed a couple weeks ago. The Fed is -as always – careening like a drunken sailor into sudden tightening. Inflation is their stated concern. Bull. They don’t have a clue what velocity or trade issues will do to inflation. The Fed never gets its timing right, as well documented by a certain M Friedman. They should just pause and watch. But they won’t. About those public hangings……
We have only had 2 quarters of GDP growth over 3%. We had that happen twice, with bigger numbers, during the Obama years.
https://www.statista.com/statistics/188185/percent-chance-from-preceding-period-in-real-gdp-in-the-us/
Yet you keep saying ” it has been demonstrated that it is possible for the U. S. economy to grow at a rate faster than 2%, something repeatedly denied previously.”
Could you explain why two quarters of good growth under Trump necessarily means we will continue that? Shouldn’t we wait yo celebrate over 3% growth until it happens?
Steve
Oops, hit submit too soon. We had two good quarters, with the aid of increased deficit spending. That was enough to get us right at 3%, but what can we do without deficit spending increases? Let us see constant growth over 3%, then I can be a believer.
Steve
Deficit spending ONLY produces growth in the near term when there is potential product. In the absence of potential product it will merely produce inflation or timeshifting.
My gripes against the Obama Administration’s economic policy are:
1. The ARRA probably DECREASED potential product if anything through deadweight loss.
2. After the ARRA they were more or less disinterested in producing economic growth.
3. President Obama was not a good cheerleader for the economy. (Good cheerleaders: Reagan, Clinton)
My gripe against the Trump Administration’s economic policy is essentially that they’re relying too heavily on consumer spending. Once consumer spending has reach the highest proportion of the total economy in history, I don’t think that’s a good bet. We need more domestic business investment and I reject the argument that businesses aren’t investing more domestically because of insufficient demand. I don’t know why they aren’t investing more but my suspicion is that managers are trying to reduce downside risk.
Surely you don’t want to argue that the economy did not perk up. There are numerous statistics. You also leave out that there had been a torrent of liquidity and low, almost zero, interest rates for years. For that all we got was 2%. What would it have been with normalized rates? There has been quite a lot of criticism over stock buybacks, especially the diversion from corporate investment. I attribute it more to a less rosy view of demand, and secondarily to rates. Others differ. In any event, what could one possibly expect, even as a secondary effect, with low cost debt?
Now, the Fed reverses course too fast, like so many times before. Look at the time financing dependent sectors now beginning to labor. This is the biggest threat to the economy, the sudden reversal of bad policy. Housing, which is huge, and vehicles are both starting to show bad signs. How long until appliances? Furniture.
Now can we talk about the drain on finances from health care and education, no strangers to the effects of government policy?
“Surely you don’t want to argue that the economy did not perk up. There are numerous statistics.”
Such as? Dave keeps using GDP, but we had a year with Obama with GDP over 3%, just not a calendar year or fiscal year. Add in an extra $100 billion a year in deficit spending, and how do you not get at least some numbers that are better? So, while I would agree that things seem to “feel” better, and there are some good numbers, I dont think we have solved the (artificial) 3% growth problem. Show me sustained growth over 3% without adding deficit spending and then I will be convinced that we are seeing something different.
Steve
Because it just doesn’t work that way. Unless there is potential product deficit spending either increases inflation or timeshifts growth. Read the General Theory or accept the word of those who have.
And I only use GDP as a measure because I have no better way of measuring economic growth and the Obama Administration used it in justifying their view that we had entered a permanent condition of slow growth.