Tuesday, September 11, 2012

The "recovery" should have been stronger

In his speech at the Democratic National Convention, Bill Clinton - in that hectoring, finger wagging way of his ("listen to me") - told us that no President could have "fixed" the economy in one term.

Why, not even he could have done it.

History suggests he's wrong. We have a relatively recent example of a strong recovery from a very deep recession in one Presidential term. There may well have been at least one President who could have "fixed" this in four years.

Ronald Reagan.

The economic downturn of 1981-1982 may not have been quite as bad as that of 2007-2009 (although by some measures it was worse), but it was very deep. Unemployment reached 11%. The recovery was far more - and I mean far more - robust than what we have seen during the past three years. The growth rate was over twice what it has been over the past three years and the percentage of persons participating in the labor force rose sharply. Since the downturn of 2008-09, it has remained flat. In other words, measured by the percentage of people working, there has been no recovery at all.

But there's more. It turns out that the central premise of the Clinton/Obama defense of the administration's poor economic record may he ahistorical and wrong.

The story is told graphically by Stanford economist John Taylor in a "chartcast" produced with George Mason economist Russ Roberts (who is also a research fellow at Stanford's Hoover Institute). The central point being made by the Democrats is that the recovery has been so weak because the recession was so deep. The worse things get, they say, the more slowly they get better.

Taylor and Roberts show that this is not necesssarily so. It is simply not true that deep economic downturns are followed by slower recoveries.

In fact, just the opposite seems to be the case. Taylor and Roberts point out that the deeper the recession, the stronger the recovery may be. They refer to Nobel laureate Milton Friedman's  "plucking" model for the business cycle. Friedman used a guitar string as a metaphor. The harder you pull on it, the harder it reverberates and "bounces back."

There is some practical wisdom behind this. A deeper downturn will result in lower inventories, more deferred consumption, heavier reductions in employment such that, when a recovery begins, there is far more upside.

Of course, we can think of reasons why a recovery may not proceed in this way. Indeed, it would be overly simplistic to suggest that a hard fall is always going to be followed by a rapid rise. The point is that Clinton's argment - while superficially logical - may not hold water. Taylor and Roberts show, American recoveries often proceed in a very different way and, in our more recent years, milder recessions have been followed by milder recoveries.

There are two implications for the President's re-election bid. First, this illustrates the weakness of the Presidents'  "well, I stopped the recession" argument. Recessions end quite apart from governmental intervention. In fact, they tend to create the conditions for their own end. Inventories get drawn done and need to be replaced. Work forces can be reduced no more. While I suppose things could get worse in perpetuity, that tends not to be what happens.

So the real questions are, not whether there has been a recovery, but what kind of recovery it has been and how have the administration's policies helped or hindered it. The answer to the first question is easy.  The recovery of the past several years has been the worst of the post war era.

The answer to the second question will be a matter of dispute but we can say this. The President has spent an awful lot of money and left the country in materially worsened fiscal shape. We have little to show for it. To say "well, it could have been worse" and "no one could have done better' is unfalsifiable. It is also implausible.

Second, Taylor and Roberts blow apart the "it's not my fault" theme on which the President is running for relectioon. When Bill Clinton says that even he could not have done better and that "no President" could have, he's - at best - half right.  The so-called "Clinton recovery" actually began when George H.W. Bush was still in office. As I blogged last week, much of what Clinton did right - spending restraint and the absence of grandiose policies - was forced on him by a GOP Congress. He didn't have the votes to do otherwise. As a result, the policies that were actually implemented were nothing like what President Obama wants to do. It may well be that "even he" could not have done better.

But someone else might have. The deep recession of 1981-1982 was followed by an extremely robust recovery.

The President, as I said before, was Ronald Reagan.

Cross posted at Purple Wisconsin


Anonymous said...

"The economic downturn of 1981-1982 may not have been quite as bad as that of 2007-2009 (although by some measures it was worse)..."

Perfesser, please share with us your metrics that support this outrageous contention. The '81-82 recession was a walk in the park compared to our current predicament.

sean s. said...

More importantly, what recovery effort did Reagan ever ask for that the Democratic Congress refused him?

If Obama had a cooperative Congress, the story would be different.

sean s.

Anonymous said...

I wondered when I'd hear about the partisan hacks from my alma mater, which hosts the Mercatus Center.

Sure Rick, all things being equal, recoveries should be the same.

Was 2008-9 the same as 1980-2?

No. Not close. Few serious economists disagree.

1980-2 was caused by supply shocks and monetary policies: oil prices and high interest rates to fight inflation.

2008-9 was and is a balance sheet recession. Those take a lot longer because people and companies take a long time to pay down all that debt they accumulated, to the point they are comfortable again and can start spending.

Oh and about Bush II, what was he did that helped to bring down the debt, and therefore interest rates? It had something to do with "Read my Lips" if I recall. You rightly give him some credit but he deserves it because he raised taxes.

Oh, and the public sector grew under Reagan. Remember how you said a reduction in public employment saves money for taxpayers and therefore helps the economy? Well under your hero Reagan he did the exact opposite.

Unlike partisan hacks like yourself I can give credit where credit is due - thanks in part to the GOP Congress, spending was held in check which helped things out. But it goes both ways - Clinton vetoed tax cuts the GOP passed and also won the fight over spending to keep the government running. If your party had had its way, it's a different story.

Keep trying, you'll be right about something eventually.

Anonymous said...

Gah. Not Bush II. Bush I. The smart/sane one. The last sane Republican anyone remembers.

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