“Slow Recovery or 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-defense GDP is only 4% higher (in log terms) than when he came into office.

lazearasks1.gif

Figure 1: Log per capita real GDP ex. Federal defense 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).
lazearasks2.gif

Figure 2: Log per capita real GDP ex. Federal defense 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.-defense) 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 defense 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 defense related? Economic theory does not justify this world view.

Update, 8/1/2012 1pm Pacific:

Reader Ricardo aka DickF alleges I am trying to mislead by using GDP data and employment data in my comparisons, rather than consistently using employment data (he actually said unemployment, but I’ll let that slide). He further asserts that I am using weasel-words in trying to evade plotting the corresponding unemployment graphs (he is I believe confused, and actually means employment). Here, then, are the key employment graphs, corresponding to the GDP graph above.
dickfpix1.gif

Figure 3: Log nonfarm payroll employment, normalized to inaugural month for GW Bush (blue), and to inaugural month for Obama (red). Source: BLS via FRED, and author’s calculations.

dickfpix2.gif

Figure 4: Log private nonfarm payroll employment, normalized to inaugural month for GW Bush (blue), and to inaugural month for Obama (red). Source: BLS via FRED, and author’s calculations.

Personally, I fail to see a change in the story depicted here, vis a vis that in Figure 2.

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59 thoughts on ““Slow Recovery or Failed Agenda?”

  1. Lord

    Bush shouldn’t have been re elected and Obama probably shouldn’t be either but the alternative can be even worse, or worse, perhaps no difference at all.

  2. Robert

    “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.”
    Keynesian economics a complete bust, and Menzie peddles this as an excuse for the failed policies of Obama. IF only government spending were larger; IF only the deficit (future taxes) were larger; If only we had spent more than $35 billion on green energy we ‘would LIKELY have’ created more than 1,600 permanent green energy jobs…IF only, IF, IF, IF…. In point of fact, we know NO such thing.
    Keynesian economics has become the ‘humans have caused global warming’ alarmist of the social sciences.

  3. Nick

    “Keynesian economics has become the ‘humans have caused global warming’ alarmist of the social sciences. ”
    …in the sense that it’s extremely likely to be correct but our political elites keep ignoring basic science/economics because they’re socipathic, idiotic, or both.

  4. spencer

    Interestingly, real GDP excluding government — one possible measure of private real GDP — is up
    9.6% from the trough. This is exactly the same as it was in the same 12 quarters under Bush. So excluding government, Obama is doing as well as Bush did with what Larry Kudlow called the “Golidilocks Economy”.

  5. Lord

    Though while both may be bad at getting us out of one, the former was astounding at getting us into one, and the current alternative is completely intent on repeating, compounding, and extending the same, so maybe there are differences.

  6. Anonymous

    Robert,

    A) Congress is inefficient at handling an active fiscal policy. The “failed policies of Obama” excuse only goes so far – http://www.gallup.com/poll/155720/Congress-Approval-Remains-Historically-Low.aspx

    B) You fail to recognize the counter-cyclical framework for keynesian economics during times of both prosper and downturn – principles which we’ll likely never see in our time due to government’s inability to follow them (i.e. belief against running trade defecits, etc.)

    C) Think about it in terms of cutting social programs aimed at the largely underserved population. Surely people would be without benefits which they use to spend and contribute (albeit at small individual levels, the wide reach makes these significant to our economy). Therefor, unemployment would reach higher levels, certain business activity would decrease, and government defecits would arguably stagnate. The idea is to make government more efficient, not cheaper.

  7. Ricardo

    Menzie,
    Is there purpose in selecting GDP to compare Bush and Obama, but selecting unemployment to compare Gov. Walker with previous years? This wouldn’t be to support some kind of agenda, would it?

  8. Steven Kopits

    I think the election will be between Obama and Romney, not Obama and Bush. There were many of us fiscal conservatives not so enamored of the Bush administration.
    Certainly, Romney has demonstrated an ability to manage turnarounds, whether corporate or of the Olympics. The guy has some managerial skill and a good understanding of business–neither of which is an Obama hallmark.
    If you think oil is holding us back–and I do–then we need a highly aggressive energy policy. We will have that under Romney, because the House Republicans will see to it. So that’s a plus, and it might prove decisive in the economic outlook.
    As for the rest–getting some control over spending and taxes, in particular–I don’t know. Does Romney have the courage and skill that Obama lacks to create order in the budget? I’d like to think so, but I can’t say I’m sure.

  9. Ricardo

    Pertinent comments from my friend Ed. Just for the record Ed’s comments apply to both the Bush administration and the Obama administration.
    This is why the GDP is so insidious in how it distorts economic thought. You have to break the tranquilized obviousness of using the GDP in your thought. It is not a measure of growth; only the investment part (if it were thoughtfully and properly documented) speaks to real growth.
    The reason that the West is broke and China is gathering our coins is because 55% of the Chinese GDP is investment…and the average for the rest of the developed world is around 15%. The truth about this…is that it is proper investment in assets that maintain or increase future income that provides the basis for both government spending and consumption. Without the investment and the return on the investment there is no funding for the other two GDP metrics which are spending metrics. Where investment declines and consumption and government spending increase the income from investment will begin to decline and the gap between the income from the investment and the spending will have to be made up with debt. If the debt is used, not in investment, but simply to prop up consumption and government spending, then the cost of the debt will continue to increase and the return on investment will continue to decline until ….welcome to the Western Developed World….
    Returning to WWII….during the war the spending by Government and private investment was directed toward plant and equipment that could produce capital goods…used in war. Plants were modernized, expanded and tremendous investment went into quality and production…at the same time consumption was attenuated to serve the war investment. When the war ended the industrial plant remained and it was converted to other non-war production where the rest of the world lacked the productive capacity and infrastructure. In 1950 the GDP in the U.S. was 55% Investment and that drove the wealth and growth of the 1950’s and 60’s. It is our current 50 year trend of failing to reinvest in the U.S. that produces our budget deficits today.

  10. Ricardo

    Opps! I need to make it clear because it might be misunderstood. My friend Ed is not Ed Lazear. He is a different Ed. It didn’t strike me when I posted that there could be confusion, but thinking about it, the confusion would be obvious.

  11. Ricardo

    Increasing taxes on the top bracket—$200,000 single; $250,000 married—hits small businesses, sole proprietorships and family farms that file as individuals or “pass through entities.”
    Congress is talking about raising taxes on 940,000 small businesses which comprise 75 percent of all small businesses in the country.
    This disastrous destruction of jobs from the President’s tax increase plan does not get enough exposure.
    From Hugh Johnson.

  12. Robert

    Nick,
    Of course it’s right …..IF you MANN the data well enough, IF all your ‘scientific papers’ are (snicker snicker) peer reviewed by your global-alarmists buddies, IF you refuse to make your codes and data available to others (because in the ‘science’ that is global warming attempts by others to replicate results cannot be allowed), and IF you control the major scientific journals in order to exclude any/all papers that challenge APG warming.
    Yep, a REAL science……..

  13. Menzie Chinn

    Ricardo: I do not recall ever plotting unemployment data for Wisconsin. I only mention Wisconsin UE when asked about it, in the comment section. Please provide specific citations/URLs for those posts I am alleged to have used such data to bolster a point.

  14. spencer

    GEE Steve– domestic oil output is up under Obama,
    something Bush could not seem to achieve.
    So tell me, how will going back to the republican policies that failed under Bush make us better off.

  15. Robert

    Spencer,
    Is oil production on FEDERAL land up under Obama relative to Bush? Could you give us that comparison?
    Oil production is up on PRIVATE land, but then Barry has little/no control there. But not to worry–all the signals we’re getting from him (and his EPA) leads one to believe they fully intend on handling this ‘problem’ during his 2nd term IF we are foolish enough to reelect him.
    Love it that Obama and the Dems want to double/triple conventional energy prices….because nothing helps the poor and middle class like high energy prices…….as you elitists Dems ride around in your $47,0000 taxpayer-subsidized Chevy Volt feeling good about how much you care about the middle class.

  16. AS

    If per capita GDP under Obama is “equivalent” to per capita GDP under Bush, why have we gone from 18 million folks on food stamps in 1999 to 46 million as of May 2012?

  17. Menzie Chinn

    AS: The calculation that has been undertaken (log differentials of per capita GDP ex.-defense) relative to a given data is a metric for progress since a given point. It does not say anything about the distribution of output.

  18. Steven Kopits

    Spencer –
    I was referring specifically to Alaska and increased shale oil drilling on Federal lands.
    In addition, I was speaking of bringing CNG in as a true alternative fuel, and accelerating self-driving technology as a means of making the economics of electric cars work.
    I’ve both commented and written on these topics before:
    http://aspousa.org/2010/02/the-market-potential-of-cng-as-a-transportation-fuel/
    http://www.foreignpolicy.com/articles/2012/06/08/self_driving_car?page=0,0

  19. don

    Sorry Menzie, but posts that track the economy during Presidential terms look to me like political hackery of the middling to awful kind. I know Krugman also uses them from time to time, despite his excellent remarks on the lack of merit in the practice, but I would rather see you devote your excellent platform to more productive instruction.

  20. Jonathan

    The House plan for oil is a direct assault on the rights of states. It federalizes drilling rights even when a state, like Maine, objects. If this plan, which they voted yes on, says anything, it’s that the GOP speaks out of both sides of it’s mouth. Do you believe in the rights of states or only when that’s convenient?

  21. Rick Stryker

    Menzie,
    This is a highly misleading argument. The fact that the growth rates for the first 13 quarters under Bush and Obama are similar illustrates the problem Lazear is pointing out–that the Obama recovery has been much too slow.
    Here are some clarifying facts:
    1) Bush was inaugurated in January 2001 and the recession went from March 2001 to November 2001. So, you are counting the recession of 2001 and its aftermath in Bush’s first 13 quarter record
    2) This hardly matters though given how mild the recession of 2001 was. Between October 2000 and July 2001 real GDP fell only 0.05%.
    (changes of logs of 2005 real levels).
    3) Thus, real GDP stopped growing for about 3 quarters and then resumed growth during the early 2001 period.
    4) In contrast, between October 2007 and April 2009, real GDP fell a whopping 4.8%. Thus, much higher growth rates would be necessary to get back to trend.
    5) Obama was inaugurated in Jan 2009 so much of the negative growth was already behind him when calculating his 13 quarter record.
    Given that Bush’s recession was so mild, the economy did not have to grow very fast to catch up. However, given how much ground the
    economy lost before Obama took over, it really needed to grow much, much faster than under Bush. But it didn’t. Lazear is asking whether Obama’s policies have been responsible.
    It would be reasonable to argue that neither Bush nor Obama is responsible for growth over the first 13 quarters, since their policies have not
    had time to take effect. But over 2009 and 2010 Obama had both the house and Senate and thus was able to get the policies he wanted: stimulus, health care, Dodd Frank, regulation, etc. We should have expected to see better times in 2011 and 2012.
    And what actually happened during 2011 and 2012? Real growth and employment slowed even further with a recent 1.5% growth rate and employment that is not growing fast enough to keep up with population growth.
    By making this misleading growth rate argument, you are diverting attention from Lazear’s question: Why have Obama’s policies been so ineffective in accelerating the growth rate to where it needs to be?
    If you cannot answer that question, then it’s hard to escape Lazear’s conclusion: We have a failed Presidency on our hands.

  22. Lord

    Romney knows business of a sort, tearing them down rather than building them, but it doesn’t appear he knows any economics. About all one hears out of him is the repetition and endorsement of the Bush policies and telling whatever audience he is in front of what they want to hear. Certainly he will walk away from all the deficit talk and following Reagan’s example go full Keynesian but of the least effective sort, tax cuts. He is running as the not Obama, but sounds like Bush III.

  23. Ricardo

    Steven Kopits,
    Spencer is also playing another game of taking credit where credit is not due. While in the Senate Sen. Obama was one of the leaders against oil drilling. The Democrats blocked policies that would have significantly prevented much the problems we are facing now during the Bush administration. This is nowhere more obvious than in the area of oil production.
    In fact all of Obama’s claimed accomplishments were initiated by the Bush administration and most of the Bush administration errors were supported by Obama.
    It is typical politics.

  24. a

    “Why have Obama’s policies been so ineffective in accelerating the growth rate to where it needs to be?”
    Because we are in a balance-sheet depression, and the policies that need to be implemented to redress a balance-sheet depression – such as higher taxes on wealth and withdrawing government guarantees on savings and other assets (e.g. the Fed’s stock market put) – have not been implemented.

  25. Ricardo

    Menzie wrote:
    Ricardo: I do not recall ever plotting unemployment data for Wisconsin. I only mention Wisconsin UE when asked about it, in the comment section.
    Menzie,
    This is so absurd I almost just let it go but let me point out the obvious. First, as I have said before you are a master at creating strawmen.
    Try this post.
    July 20, 2012
    Wisconsin Employment Release for June: Payroll, Private, Civilian Employment Decline.
    Now your graphs in this post could be about the number of fish in Hudson Bay but you clearly state, Here is a graph of the private payroll employment series for Wisconsin… I am sure you will weasel-word something like this was a BLS graph but most here clearly understand that your quote above is disingenuous.
    And that is not to mention that it was in your primary post not a response to being “asked about it.”
    I probably should have left it alone but in truth you should have left my comment alone. Your response only made you look worse.

  26. Steve LaBonne

    I continue to marvel at the ability of right-wingers like Stryekr to cling to their dimwitted alternate reality. Meanwhile even the Wall Street Journal ahs figure out what’s actually going on:
    http://blogs.wsj.com/economics/2012/07/31/government-cutbacks-separate-this-expansion-from-others/
    And if you want to see what happens when you double down on failed right-wing economics, just look at the UK right now.
    Wingers have been wrong at every stage along the way. One would think you’d have the decency to shut up. What has really failed is YOU.

  27. November2012stimulus

    To Rick Stryker’s comments I would also add that Bush came in after a market crash where stocks lost about 50% of their value (bye bye capital gains) and was hit with the 9/11 terrorist attacks. Things turned around very sharply in 2003 when the supply-side tax cuts were accelerated.

  28. Menzie Chinn

    Ricardo: You wrote:

    Is there purpose in selecting GDP to compare Bush and Obama, but selecting unemployment to compare Gov. Walker with previous years? (emphasis added–mdc

    I took seriously your specific reference to unemployment. I am not responsible for your inability to distinguish between unemployment and employment.

    As for comparisons using GDP, state GDP is not reported by BEA on a quarterly basis; if you had acquaintance with the real world or real world data, you would know that.

  29. Ray Lapan-Love

    G-Dub could do more to lead the economy between his breakfast… and his crossword puzzle time, than most presidents could do in a month of dedicated days. It is just that the economy is not as important as some of his other pursuits, or he would probably offer his advice now. But he is busy:
    the ONION
    DALLAS—Speaking from his home in Dallas, former president George W. Bush told reporters Tuesday that when he’s not busy giving lectures or writing his memoirs, he spends most of his spare time working on the manned mission to Mars he proposed in January 2004.
    Enlarge ImageBush goes over some of the statistics on surviving in a prolonged low-light environment.
    “This is genuinely important to me,” said Bush, looking over sketches of potential rocket systems he had drawn up while waiting for his oil to be changed at a service station earlier this week. “I wasn’t kidding when I announced a plan to get us to Mars, by God, and I intend to finish what I started. That’s why I try to carve out a little time before lunch and after dinner to work on this important interplanetary initiative.”
    “It’s a big project,” Bush added. “Lots of little details to work out.”
    While in 2004 many critics suggested Bush’s call for a mission to Mars was little more than political theater, the 43rd president has called those claims “ridiculous.” Bush said he has spent many hours scouring the web for information about space travel and Mars, in addition to checking out “a bunch” of books on the subject from the local library and regularly e-mailing contacts he still has at NASA to ask their advice on his plan.
    He also frequently watches the PBS program Nova.
    “It’s the first thing I think of when I wake up after having some breakfast and doing the crossword,” Bush said. “Ask anyone: Whenever I have a spare minute, I’m always thinking about how to put astronauts on the surface of Mars.”
    The former president believes the journey from Earth to Mars will be feasible, although fraught with peril.
    “And Laura knows not to bother me on Saturday afternoons when I don’t have a speaking engagement or a golf match to go to,” Bush added. “That’s my Mars time.”

  30. tj

    2 different recessions, 2 different outcomes. Stryker makes many good points.
    To be fair, the Obama Recovery is linked to a huge credit market shock. Credit market shocks are known to produce slow recoveries. At the same time, the Bush recession was shallow, and shallow recessions are known to produce shallow recoveries.
    Apples and Oranges.
    In general, Obama’s policies are aimed at redistribution, centralizing power and increasing the size of the federal government. Thus, his stimulus designs do not place a singular focus on producing private sector income and employment growth.
    The Bush “ownership society” was built on public and private sector borrowing along with poor policy making in Congress (Fan, Fred, CDS’s, etc). It set up conditions for the credit market failure that Obama’s policies have failed to resolve. Too big to fail is now institutionalized, regulators are again asking private lenders to relax mortgage lending and re-fi standards.

  31. Ray Lapan-Love

    Here is the rest of the article:
    Working from the makeshift basement office he refers to as “Mission Control 2,” Bush said he has grappled with some of the major issues surrounding a manned mission to Mars. For months he’s been jotting down notes about how zero gravity would affect the bone density and muscle mass of the crew, and he spends about five minutes during his morning jog each day coming up with ideas for safely storing a year’s worth of onboard oxygen.
    Sometimes, Bush said, potential solutions come not when he’s reading about the Red Planet’s inhospitable surface conditions on Wikipedia or brainstorming shuttle names through free-association exercises, but when he’s not thinking about the historic 34- million-mile voyage at all.
    “Just last week, I was out in the garden tending to the tomatoes when it hit me: The astronauts should grow their own food to eat on their spaceship,” Bush said. “I’m not saying I have all the specifics down just yet, but how the astronauts going to Mars will eat is at least one thing the next president won’t have to worry about.”
    Bush recently started a blog devoted entirely to his thoughts about setting up a permanent colony on Mars. To achieve this, he writes on MarsUSA.blogspot.com, the astronauts will need to bring materials for building a sustainable base on the planet, and be able to convert water in the Martian soil into hydrogen and oxygen for the trip home.
    “That’s just common sense,” Bush said. “All the science-fiction writers know that.”
    Bush admitted that he didn’t have as much time as he would like to devote to the mission, but assured reporters he would never give up on something so important. While the challenges may seem insurmountable, he said, the greatest hope for man to achieve the incredible goal of landing on the surface of Mars lies in exploiting as-yet undiscovered technologies to overcome the incredibly daunting physical distances involved.
    “I’m pretty busy right now, but when I get a spare 30 minutes, I’m going to start working on that,” Bush said while flipping through a copy of Scientific American. “I’ll have my friend Jerry from down the road come over and crunch some of the numbers for me. He’s good with computers.”
    ———————————-
    I of course can not speak for G-dub, but I suspect that if the Obama team would simply give him a call, G-dub would fix things (in his spare time).

  32. JBH

    Real GDP has risen only 6.7% this recovery. The last time a recovery was this slow (if ever) was in the 1800s or perhaps in colonial times. Growth has been dismal in good part due to following an ideological agenda rather than a pro-growth agenda. One step in quantifying this is policy uncertainty. Economic policy uncertainty rose to a new high this recovery relative to its prerecession baseline (“Measuring Economic Policy Uncertainty,” Baker, Bloom, Davis). With uncertainty 70% above normal, businesses are holding back on investing in new projects and holding off on hiring. Insertion of this uncertainty variable in reduced form models finds real growth 0.6% to 0.9% below where it would otherwise be if the policies of this administration were more salutary to business in terms of taxation, regulatory burden, etc. The euro crisis is about the only exogenous source of uncertainty captured by the index, the bulk is homegrown. Never before have we witnessed sustained uncertainty like this during a recovery.

    The weakness is because of not focusing like a laser on growth. It started with Romer and Bernstein misjudging the severity of the crisis, and picked up energy along the way by threat of cap-and-trade and passage of the Health Care Act and rampant growth of the regulatory state. To be fair, the balance sheet effects of the bust have significantly inhibited households in their ability to spend. But many countervailing factors would have worked hand in glove with a pro-entrepreneur, pro-job agenda had one been adopted. The recovery was slingshot from a deep hole, which momentum alone was cause for a strong recovery the first couple years via inventory rebuilding. Also, the recovery has been bolstered enormously by the Fed taking interest rates to historic lows and by 3 trillion dollars (!) of structural deficit spending during 2009-11; the largest ever monetary and largest peacetime fiscal stimulus in history. Alas, the debt-to-GDP ratio soon spiked into the Reinhart-Rogoff region where potential growth going forward gets shaved by a percentage point. This coming debilitation needs be factored in for a fuller understanding. This economy will not print sustained growth rates much above 2% without major policy changes. The public has no idea.

  33. Menzie Chinn

    JBH: I think you should re-read the Baker et al. paper, to recall exactly where the uncertainty comes from — it’s macro uncertainty for the most part, as discussed in this post, rather than just regulatory burden (as you might recall, since you commented on this post).

  34. Menzie Chinn

    Rick Stryker: Thank you for the tutorial in recent macroeconomic time series. Well, it’s only misleading to someone who writes about the likelihood of 500,000 jobs created per month per Romney: “No, both 500K and 4% are reasonable expectations since they both happened many times historically.” (Rick Stryker on May 5th) Anybody who writes that I think can be easily mislead. But please write something like that again. I need a good laugh. Again, and again.

  35. Ray Lapan-Love

    JBH,
    If you can keep Japans’ debt to GDP ratio in mind, while viewing the index here:
    http://menalive.com/wp-content/uploads/2012/05/Health-and-Social-Problems-Are-Worse-in-More-Unequal-Countries.jpg
    Maybe then, you can relax about ‘debt’ and ‘growth’ and thereby realize that our problems, while “dire”, are far more complicated than your assessment suggests. But then of course you seem to actually believe that we have “peacetime” conditions while our military spending is half of all military spending on this planet.

  36. Rick Stryker

    Steve LaBonne,
    OK–You are claiming that the reason that Obama’s policies have not failed is because the current weakness is caused by declines in government spending, particularly at the state and local level. And it’s right wingers who are behind that I suppose.
    It’s true that government spending has been declining over the last year and a half or so. But that argument fails on a number of fronts.
    First, let’s look at simple arithmetic. Government spending is about 18% of GDP while consumer spending is about 70%. So even if government spending is declining, that can’t be the whole story on why we’ve had weak growth. Indeed, if you look at real consumer spending for example, it’s been averaging about 2% annual growth since 2011.
    Second, your guys were fully in charge over 2009 and 2010, not right wingers. If you think that declining government spending is the problem, then why didn’t your guys show some leadership and attempt to get a larger stimulus package? Why waste political capital on health care when the economy needs to be fixed? Why spend a large portion of the stimulus package on temporary tax cuts that experience shows will be saved? Why not try to build a bipartisan consensus on economic policy. Successful presidents such as Reagan and Clinton built that consensus. Failed presidents don’t.
    Finally, what’s going on in the UK is hardly conservative policy, give the massive tax increases that were enacted. I don’t know of any serious conservative politician in the US that would think that’s a good idea here.

  37. perplexed

    Menzie, it seems that nobody’s taken you up on that last question about whether or not government spending creates jobs.
    Apparently, the Republicans are actually Keynesians, worried about jobs and the demand destruction impact of reduced government spending. This is, after all, the history of Republican economics, though without that problematic ‘balance the budget and save for a rainy day’ thing…
    If the argument is that cutting govt spending destroys jobs and hurts the economy, then QED the flip side MUST be true that increasing spending would add jobs and help the economy. So the Republicans are, in effect, arguing that Keynes was right!
    I am as perplexed as you as to why this would be true only of defense workers, and not, for example, CDC researchers, NASA or NOAA scientists. I’m sure one of the Conservatives who follow this blog can explain it for me. What is the contribution to GDP of a soldier or airman compared to the productivity of a Social Security auditor or IRS agent?

  38. Rick Stryker

    Menzie,
    I was not mislead but I was worried that some of your readers may have been.
    And you are misleading them again by taking my quote out of context in an attempt to suggest that I think that 500K jobs per month was common and that therefore my arguments on this topic can be dismissed.
    But that’s not what I said. I was reacting to an earlier misleading post in which you took Romney to task for his claim that we should be seeing 500K jobs per month job growth. You tried to show that Romney had unrealistic expectations by counting the number of times historically that we saw 500K jobs. That’s a small number of course but deeply misleading as I pointed out. The labor force has been growing over time so a proper way to compare is to express the 500K monthly change as a fraction of the current level of the labor force and then ask how many times that fraction happened on a monthly basis historically. It turns out that it happened quite a lot.
    As I recall, I also said that although not historically unprecedented I thought that Romney was setting an ambitious goal. So I acknowledged that these are big numbers but certainly not impossible given the historical record.
    Since you’ve responded to my plea to actually answer Lazear’s question with an ad hominem attack, I must conclude you don’t have an answer. So, I’ll stick with Lazear’s answer: we have a failed Presidency on our hands.

  39. Menzie Chinn

    Rick Stryker: When quoting somebody verbatim constitutes an ad hominem attack, we are indeed in sad times.

    But really, you know that most macroeconomists agree the stimulus package enacted in 2009, and opposed by almost all Republicans on Capitol Hill, boosted output. And indeed, we had a fast recovery in 2009-2010. But with the loss of control of the House in 2010, no new stimulus measures aside from the payroll tax rate reduction were enacted, is it any surprise that growth in the past two years has been remarkably slow, in the wake of a balance sheet recession?

    So, to answer your question: growth has been lackluster in large part because (i) we did not have a sufficiently large, spending oriented, stimulus in 2009, (ii) Republican opposition to many measures they formerly supported, such as extension of payroll tax cuts, (iii) refusal to implement measures that CBO views as particularly stimulative, including infrastructure investment, transfers to the states, and employment tax incentives, and (iv) contractionary fiscal policies in many states, due in part to (iii).

  40. Rick Stryker

    Menzie,
    I wasn’t complaining that you quoted me inaccurately. I was complaining that you quoted me out of context in an attempt to discredit me.
    But anyway, thanks very much for answering my question. I’m sure you won’t be surprised to hear that I disagree with your analysis.
    I don’t know what poll would show that most macroeconomists think the stimulus package boosted the economy but it wouldn’t matter if there were such a poll. As Richard Feynman reminded us, the hallmark of science is that the guy with the facts trumps majority opinion. And I don’t think the facts are consistent with the belief that the stimulus package had any effect.
    I don’t say that because I believe the multiplier is less than 1. I do believe it’s less than one in normal times but I’m willing to have an open mind in a zero interest rate environment. We don’t really have any empirical evidence on this–just theoretical. But I’ll grant for the sake of argument that the multiplier is bigger than one.
    What should a well-designed stimulus package look like in a zero interest rate environment? It should be designed to increase government purchases quickly and significantly. On the consumer side, it should provide incentives for consumers to increase spending. If such a package had been designed carefully, it might have engendered bi-partisan support.
    Instead of that, we got a horribly botched policy. Infrastructure projects were chosen with long lead times, so that spending happens too far into the future. The mistaken Bush stimulus policy of temporary tax cuts was repeated with similar results–consumers saved most of it or paid down debt. And the transfer payments to the states were designed in a way that would allow states to take federal money and cut their own spending.
    The inevitable consequence was that federal spending went up a little bit but that was counterbalanced by state and local spending falling, so that on balance government spending didn’t change much. And consumers did not increase spending much either. Because the policy was rushed through with a very poor design, it had almost no effect on government and consumer spending and therefore could not have had much of an effect on the economy. You asserted that we had a fast recovery in 2009 and 2010, but that’s just wrong. Third quarter growth in 2009 was 4% but growth after that and over 2010 was in the 2.5% range, hardly a strong recovery.
    On top of those blunders, the administration ignored the advice of their wiser advisers who recommended not burning political capital by attempting to proceed with health care, especially given the public opposition. But they went ahead anyway, thus destroying the chance to come back for more stimulus if needed. More stimulus is a non-starter with both Republicans and Democrats.
    The bungled stimulus package was the first pillar of the failed policies. But there were others. Despite ferocious public opposition to the health care bill, with MA voters actually sending a Republican to the Senate in attempt to kill it, the administration was so determined to push it over the line that they passed the Senate version that they all acknowledged was flawed. That created tremendous uncertainty and questions about leadership.
    The same bumbling methods were followed in passing the Dodd-Frank legislation. It was pushed through with great speed and without adequate study or reflection, and, not surprisingly, ended up ill-conceived in so many ways that people can’t figure out how to implement it. That creates great uncertainty in the financial industry.
    So, we enter into 2011 with 2 very poorly designed policies that create great uncertainty. We also have increased the deficit $800 billion and have almost nothing to show for it. Former President Clinton knows that now is not the time to raise anyone’s taxes. But the current President is engaged in a game of chicken with Republicans on the looming fiscal cliff, sowing even more uncertainty. Now add in the worsening problems in Europe with spending cuts and tax increases enacted in key countries during a weak environment and it should be no surprise that growth over 2011 and 2012 has slowed further.
    What we need now is confidence. We need businesses, particularly small businesses, to form, to invest, and to grow. We need consumers to feel confident enough to start spending again. We need predictable policies. But the policies we’ve had have accomplished none of that.
    Lazear is absolutely right: it’s a failed agenda not a slow recovery that’s the problem. Fortunately that problem can and will be rectified in November.

  41. Menzie Chinn

    Rick Stryker: I agree, we need confidence, in particular less uncertainty about macro policy. That’s the entire point of the Baker, Bloom and Davis paper. So, let’s stop threatening to close down the government over the debt ceiling. I think that would be a good first step, but somehow I’m guessing that’s nowhere on your agenda.

    In response to your question about what most macro people think — well here’s one case. Suspicious of business economists; here’s a survey by the left-wing (!) Chicago B-School.

  42. JBH

    Menzie Regarding the Chicago survey, there was no precedent in history for the virulent phase of the financial crisis that erupted in September 2008. TARP was necessary, Fed action was necessary, and big fiscal stimulus was necessary – everything and the kitchen sink was necessary to save the global financial system from outright collapse. The financial markets were well-nigh certain that when the next president took office, his administration and Congress would enact fiscal stimulus on the order of magnitude of the ARRA. This expectation by sophisticated financial participants was blind to whomever that would be, McCain or Obama, Republican or Democrat. Battles turn out different when you fail to throw crack troops into the breach at the critical moment. No surprise then that 60% of a panel of “experts” would agree the benefits of ARRA were greater than its costs, versus 40% who are uncertain or disagree. That historic sequence of actions including ARRA was triage of the highest order that at the time should have trumped politics or ideology, but sadly in many cases did not. This particular argument does not hold, however, for any stimulus enacted after the storm had passed (April 2009 and beyond). Such stimulus must be justified on other grounds.

  43. Ricardo

    Menzie,
    Thanks for the graphs.
    Yes, 2006 is a watershed year. When the Democrats took over the House and the Senate the unemployment rate was 4.4% in December 2008 and 4.6% in January 2009. When the people turned the House back over to the Republicans the unemployment rate was 9.4% in December of 2010 and 9.1% in 2011. Today it is 8.2%.
    We are headed in the right direction. All we need to do is return to a Republican Senate and Republican President to see unemployment back below 5%.

  44. Anonymous

    So they both performed nearly equally bad, but one of these Presidents ran incredibly bigger deficits to get this level of bad performance.

  45. Rick Stryker

    Menzie,
    Thanks for the pointers to the surveys, particularly the UChicago one. I hadn’t seen that before and found it very interesting.
    By the way, I would not favor threatening to shut down the government over the debt ceiling. There’s too much uncertainty and we don’t need to add anymore.
    Besides, I don’t think Republicans need to engage in those tactics. They should just be patient. After January 20, 2013, they will have a much greater ability to get the policies they want enacted.

  46. 2slugbaits

    JBH The financial markets were well-nigh certain that when the next president took office, his administration and Congress would enact fiscal stimulus on the order of magnitude of the ARRA. This expectation by sophisticated financial participants was blind to whomever that would be, McCain or Obama, Republican or Democrat
    If it was so obvious and there was such general agreement that something like ARRA was the right thing to do, then why did virtually 100% of the GOP in Congress vote against it? Are you saying that the GOP would have voted for ARRA if it had been introduced by President McCain? And see Rick Stryker’s comment above yours, where Rick Stryker refers to ARRA as a “bungled stimulus package” and the “first pillar of failed policies.” It seems that there was less agreement about the need for and efficacy of something like ARRA.
    Rick Stryker Infrastructure projects were chosen with long lead times, so that spending happens too far into the future
    Sorry, but this is wrong. ARRA should have included more infrastructure spending that would have stretched out several years, but it didn’t. And it didn’t because too many people like you and CoRev mistakenly believed that the stimulus package must be frontloaded only. As many economists knew at the time, balance sheet recessions last for years and could have absorbed long term infranstructure projects. Economists also knew that stimulus has to increase for a few years, so the stimulus for the third year may need to be larger than the stimulus for the first and second years simply because the economy will be larger if the first and second year stimulus packages are successful. This is something that I thought only CoRev did not understand, although it seems he has some company. Krugman lays out a pretty good case for backloading stimulus.
    consumers saved most of it or paid down debt.
    That is how a stimulus package should work if you’re looking at a balance sheet recession. Unlike your garden variety recession, with a balance sheet recession you do not particularly want consumers to take on more spending. What you want instead is for the government to do the spending and allow consumers to pay down debt.
    But the current President is engaged in a game of chicken with Republicans on the looming fiscal cliff, sowing even more uncertainty.
    This is alternate reality stuff. Just who was it that said the economy was “a hostage worth taking”? Sen. McConnell not only admitted that he and the GOP were engaging in hostage taking, but McConnell was quite proud of himself. If Obama is re-elected, then he will have to call the GOP’s bluff in January because if he doesn’t then a minority party will be allowed to blackmail the government. That is not tolerable. The Tea Pot nutjobs are relishing a showdown. Obama surely would rather not go down this road, but he may not have much choice.
    What we need now is confidence.
    So are you saying that businesses would hire and expand if businesses confidently knew that demand for their products would be flat? This confidence fairy stuff is pretend economics. What we need now is aggregate demand. Generate aggregate demand and confidence will follow. Britain is proving that it doesn’t work the other way around.

  47. Rick Stryker

    2slugbaits,
    Once again, your analysis is off base. You assert that the tax cuts in the stimulus were designed to allow consumers to pay down
    debt in a balance sheet recession. And you also claim that government spending on infrastructure was designed to stretch out over many
    years. That’s not how stimulus works but rather than try to convince you myself I’ll just let the original authors of the
    stimulus plan speak.
    Romer and Bernstein explain the thinking behind the stimulus plan and provide job estimates in their January 2009 paper available here:
    http://www.ampo.org/assets/library/184_obama.pdf
    Let me provide some quotes:
    “Broad tax cuts have jobs effects, but they stem only from indirect effects: tax cuts only
    have effects when people go out and spend the money.”
    In other words, people need to spend the tax cuts to increase aggregate demand, exactly my point too. Now to the next quote:
    “It is important to note that the jobs effects of temporary broad-based tax cuts would probably be
    considerably smaller. Large proportions of temporary tax cuts are saved, blunting their stimulatory
    impact on output and employment. The prototypical recovery package only provides for the first
    two years of the Making Work Pay tax cut. Our analysis assumes that households treat the tax cut as
    permanent in determining their short-run spending.”
    Yes, exactly my point too. Romer and Bernstein are well-aware of the problem that temporary tax cuts tend to be saved. They acknowledge
    that they had to assume that they are permanent in order to generate their large predicted job increases. And why do they have tax cuts at
    all in the package?
    “Tax cuts, especially temporary ones, and fiscal relief to the states are likely to create
    fewer jobs than direct increases in government purchases. However, because there is a
    limit on how much government investment can be carried out efficiently in a short time
    frame, and because tax cuts and state relief can be implemented quickly, they are crucial
    elements of any package aimed at easing economic distress quickly.”
    Indeed, as Romer and Bernstein realize, it’s hard to get government projects that move the spending into the near term when it is needed.
    So, even though tax cuts are not as efficient job creators, they feel they need them because the money gets into the economy more quickly.
    The tax cuts are there because government spending can’t be front loaded enough.
    All you had to do is read their paper and look at all the caveats to realize that the stimulus wasn’t going to work. They can assume that
    tax cuts are permanent for their estimates but in the real world they are temporary and will not have much effect on spending. And if
    you look at the details of the stimulus spending, which is laden with political favors and compromises, you should have realized that very
    little was actually going to increase spending. As I pointed out, and as you can verify by looking at the macro data, neither consumer
    spending nor government spending changed much.
    Romer an Bernstein have been blamed for making a disastrously wrong prediction on job growth in this paper
    but that seems unfair to me. They laid out their assumptions
    and caveated appropriately. I think they were well aware of the uncertainty in their forecast.
    The problem was that this package was poorly designed from a political point of view. We had a chance for a natural experiment: what is
    the multiplier in a zero interest rate world? We still don’t know since Keynesian stimulus was not really tried.

  48. 2slugbaits

    Rick Stryker First, if you’ve followed what I’ve said over the years regarding ARRA, then it should be clear that I have plenty of problems with it. Basically it was half the size that it needed to be. The Administration made a serious political miscalculation in thinking that they it would get a second bite at the apple if Son-of-ARRA was needed later on. So in that sense I agree with you that ARRA was “poorly designed from a political point of view.” Team Obama should have gone with Romer’s original estimate in the first draft of the paper rather than the Rahm Emmanuel/Larry Summers edited version that was ultimately released to the press.
    Regarding the paper, yes, I am quite familiar with it. You have to distinguish between the headline narrative stuff in the paper that was meant for political consumption and the actual analysis part of the paper. As Krugman and others have pointed out, the two parts of the paper are not always consistent. For example, the actual analysis inside the paper clearly reflects the initial assumptions from the November 2008 draft versions that assumed a stimulus of ~$1.5T while the headline narrative refers to $775B.
    It’s interesting that you did not mention anything about the projected multipliers in the appendix. Note that ALL of the tax cut multipliers are less than 1.00. And the early quarter tax cut multiplier is less than 0.50!!! So I don’t think Romer & Bernstein were really making a strong economic argument for tax cuts. The point of the tax cuts was primarily political…they were supposed to be a bone to conservatives. If you look at the actual numbers (and not the narrative intended for news media consumption), it’s clear that Romer & Bernstein did not see much stimulative effect in the tax cuts. They were being disingenuous. The tax cuts were useful for helping taxpayers pay down debt and repairing balance sheets, but largely useless as stimulus. That’s why the initial multipliers were so low…Romer & Bernstein assumed that most of the early tax cuts would be saved rather than consumed. In other words, they assumed people would repair balance sheets.
    Romer an Bernstein have been blamed for making a disastrously wrong prediction on job growth in this paper but that seems unfair to me
    Romer & Bernstein should not have included that stupid unemployment chart. Their internal analysis did not support what was displayed on the chart, so I can only assume that it was inserted late in the day by the political operatives. The obvious telltale sign is that the chart shows a reduction in the unemployment rate that is immediate and contemporaneous with a projected recovery beginning in June 2009. No economist believes unemployment immediately tracks changes in GDP without a lag. So clearly the chart was not created by Romer & Bernstein. It was some idiot political hack with previous experience as a used car salesman.
    There were two big problems with ARRA. First, Obama naively believed that the GOP leadership was genuinely more interested in setting the economy right than they were in working towards his defeat. He should have taken Sen. McConnell at his word when McConnell said his number one priority was to make Obama a one-term President. Second, no one anticipated that the Minnesota GOP would hold up the lawful seating of Sen. Al Franken, thereby preventing the Democrats from getting the 60th vote.

  49. Peter Schaeffer

    Cherry Picking. The actual data shows that Obama’s record is so poor he actually makes Bush look good. Hard to believe but true.

    From Q12001 to Q22004 per-capita GDP rose 4.78% under Bush. From Q12009 to Q22012 per-capita GDP rose 4.12% under Obama. The actual GDP growth numbers are even more revealing. 8.045% for Bush versus 6.67% for Obama.

    Excluding defense spending is contrivance. Bush spent money on defense (9-11 was in 2001). Obama has spent money on welfare. Each was a choice that a President made in response to recent events. To exclude the one and include the other may be good for scoring political points but is not good economics.

    The use of per-capita GDP is also misleading. In a depressed economy population does not drive economic growth (over the long-term it arguably does). Population growth was faster in the post-2000 period versus the Obama administration. 3.11% for Bush versus 2.44% for Obama.

    This kind of an argument might be appropriate for a DNC press release but does not belong in the realm of economics.

  50. Peter Schaeffer

    It turns out… That excluding all Federal outlays doesn’t change the results stated above. Bush’s record was (and remains) dismal. However, Obama manages to make Bush look good anyways.

    Real GDP net of all current Federal expenditures grew by 6.62% from Q12001 to Q22004 under Bush. For Obama growth was 5.28%.

    There are some quite real reasons for poor growth under Obama. The 2008 crash was considerable worse than the bursting of the Tech bubble. It’s completely legitimate to argue that Obama’s poor performance is a consequence. Denying Obama’s poor performance is not.

    Of course, FDR inherited far worse fundamentals compared to Obama and achieved stellar growth over the course of his first term. Policies matter.

  51. Menzie Chinn

    Peter Schaeffer: All that defense spending was due to 9-11? Ah, I see. We needed to spend nearly a trillion dollars in Iraq because Iraq attacked us on 9-11. With such command of the facts, I am impressed by your arguments!

  52. Peter Schaeffer

    Cherry Picking. The actual data shows that Obama’s record is so poor he actually makes Bush look good. Hard to believe but true.

    From Q12001 to Q22004 per-capita GDP rose 4.78% under Bush. From Q12009 to Q22012 per-capita GDP rose 4.12% under Obama. The actual GDP growth numbers are even more revealing. 8.045% for Bush versus 6.67% for Obama.

    Excluding defense spending is contrivance. Bush spent money on defense (9-11 was in 2001). Obama has spent money on welfare. Each was a choice that a President made in response to recent events. To exclude the one and include the other may be good for scoring political points but is not good economics.

    The use of per-capita GDP is also misleading. In a depressed economy population does not drive economic growth (over the long-term it arguably does). Population growth was faster in the post-2000 period versus the Obama administration. 3.11% for Bush versus 2.44% for Obama.

    This kind of an argument might be appropriate for a DNC press release but does not belong in the realm of economics.

    It turns out… That excluding all Federal outlays doesn’t change the results stated above. Bush’s record was (and remains) dismal. However, Obama manages to make Bush look good anyways.

    Real GDP net of all current Federal expenditures grew by 6.62% from Q12001 to Q22004 under Bush. For Obama growth was 5.28%.

    There are some quite real reasons for poor growth under Obama. The 2008 crash was considerable worse than the bursting of the Tech bubble. It’s completely legitimate to argue that Obama’s poor performance is a consequence. Denying Obama’s poor performance is not.

    Of course, FDR inherited far worse fundamentals compared to Obama and achieved stellar growth over the course of his first time. Policies matter.

  53. Peter Schaeffer

    The question at hand is the actual growth records of Bush versus Obama. As all of my statistics make clear, Bush’s record only looks good if you compare it to Obama’s. There is no obvious justification (other then political point scoring) for excluding some classes of Federal expenditures and including others… Nor is the use of per-capita GDP growth versus actual constant dollar growth.

    Such tactics belong in a press release, not in a discussion of economics.

    I never asserted that Iraq attacked the U.S. on 9-11. I stated that “Bush spent money on defense (9-11 was in 2001)”, a true statement. Any reading of the history of the period shows that the decision to invade Iraq (and Afghanistan) was an outgrowth of 9-11. A trivial quote from Wikipedia (http://en.wikipedia.org/wiki/Rationale_for_the_Iraq_War) makes this point.

    “Despite key Bush advisers’ stated interest in invading Iraq, little formal movement towards an invasion occurred until the September 11, 2001 attacks.”

    The final Iraq war resolution enjoyed vast support in Congress. A majority of Democrats and Republicans backed the war in the Senate (77-23). In the House, essentially all Republicans and 39% of the Democrats supported the war.

    With hindsight many folks now regret supporting the war. At time support was widespread. To use an obvious analogy, the ARRA was widely touted as a valid response to the Great Recession. It doesn’t show up in too many lists of notable achievements of late.

    The parallel with the ARRA is actually stronger than it first appears. The total cost of the ARRA is now given at $787 billion. Accord to FAS, the total cost of the Iraq war was $806 billion. See http://www.fas.org/sgp/crs/natsec/RL33110.pdf for a detailed analysis.

  54. Menzie Chinn

    Peter Schaeffer: You surely seemed to imply the necessity of all that defense spending by noting explicitly 9-11 was in 2001. Only a dolt wouldn’t know that so It’s not unreasonable to infer that you thought that event justified all those defense expenditures. The popularity of the Iraq war is beside the point.

  55. Peter Schaeffer

    The question at hand is the actual growth records of Bush versus Obama.

    Each president responded to the circumstances of the nation and the world in a manner he (and Congress) thought appropriate. Bush expanded defense spending as did Obama (to a considerably lesser extent). Obama spent more elsewhere (also with the support of Congress).

    My opinion (or that of anyone else) as to the necessity of post 9-11 defense spending is no more relevant than my opinion of the ARRA. What is germane is the actual performance of the U.S. economy from Q12001 to Q22004 versus Q12009 to Q22012.

    Bush’s economic track was and remains dismal except compared to Obama.

    For the record, I thought at the time that Bush’s Neocon Democracy agenda was ill-considered. As far back as the 1970s Arabic speaking friends who had lived in the Middle East told me that Iraq was intensely violent and not exactly fertile ground for a liberal society. I believed them.

  56. Peter Schaeffer

    One final comments. In conventional usage, “justification for” and “consequence of” have different meanings. In my view, the latter is a correct characterization of defense spending after 9-11.

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