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June 04, 2011



Blah blah blah, it's all Obama's fault. It's sentiment, you see, which accounts for the economy dropping so very much harder than expected, of course! Of course, all the revisions to 2008's growth rates were (as is not uncommon at the beginning of a recession) negative, and very deeply so (which is less common). The deepest depths of the market happened before Obama's administration had really done anything at all - certainly his people hadn't been confirmed by congress, and even if they had, they would hardly have had time to do anything in just a few months. The pit of non-progress that was 2000-2009 is plausibly Clinton's and Bush's, but when I see people blame it on Obama's supposedly anti-business policies, I feel fairly confident that they are interpreting events to fit their prejudices. The constant references to sentiment don't seem to include links to actual surveys, but rather to people the author talks to. The counterfactual asseverations don't seem to come with any actual support. Krugman et al. can (and do) claim that the stimulus was much smaller than it should have been according to their calculations, and that seems to be a plausible and natural defense of the mismatch between claims of benefit and results. There's a significant chance that the defense is wrong, but it's not special pleading.

Personally, I agree with the historical analysis that recoveries from financial crises are always slow, and nothing enyone has ever done seems to have changed that. Maybe Krugman et al. are right and if we'd just done things the way they wanted then *this time* things would have been different. But I doubt it. the only real value I saw was in reducing the chances of deflationary/deleveraging implosion. At the same time, I don't see how it's easy to argue that it made things significantly worse, or that any other action would have put us in so much better of a position.

Basically, the GOP had things more or less their way for a decade, and the economy did terribly. TERRIBLY. As in, the worst in more than half a century. I don't peronally think this is because of the GOP, but it sure makes me roll my eyes when people want to blame the current economy on Obama, as if waving the magic wand the Republican way would OBVIOUSLY have resulted in so much better of an economy. I have no patience for this complete lack of humility and utterly tendentious argument.

And the thing is, I could agree with so much of what's being said, and sign on with so many criticisms of Obama's policy, if the critics' thesis wasn't "everything's so bad because of Obama and the Democrats!" I'm a moderate libertarian, and from my vantage point Obama is a moderate left-leaning president in action, very much like Clinton, and I don't see any particular signs that businesspeople in general are spooked by anything except the long term budget threat. If Obama lets the NLRB go too far, I can see that changing, or if he were to actually try to renegotiate NAFTA, or things along those lines, but fortunately, his liberalness is where he is truly more of a lip-service kind of guy. The left does not love Obama* anything remotely like the right loved Bush, and that's because Obama is much less of a leftist than Bush was a rightist (Bush's occasional significant departures from Conservative positions notwithstanding). The only people who seem to have any affection for Obama are moderates, small-c conservatives and other people who prefer no sudden moves**.

I've long ago stopped listening to the labor types, and the left-wing conspiracy theorists, and the actual socialists and the rest of the silly people who seem perpetually stuck in 1972, but I can't stop listening to their counterparts on the right, because they seem to be dictating the discussion for about 40% of the population. Even smart people on the right (like Nathan) take them seriously which both frustrates and scares me. It also just blows my mind. I don't understand how ordinarily reasonable people like Romney can say we're inches away from no longer being a free market economy, which is really a partisan eschatological vision more than a factual statement. There are always people on the fringes who think the other side is destroying the country and bringing everything to the brink of disaster, but if the leadership thinks that, or thinks they have to pretend that that's the case, then I don't see how we can have meaningful dialog.

And I have to say, if independent voters decide the GOP is crazy in 2012, it really will be a bad thing, because the Democrats have genuinely bad ideas that really will do damage in the long term. If EFCA was actually passed, that really would kill the US' manufacturing resurgence. If their thirst for vengeance against financiers was unchecked, then we would destroy the US financial industry (export it, really). It would also confirm in everyone's mind that mediscare tactics remain the most effective in politics, and confirm entitlements as the third rail. The reality of Obama is that, whatever he's said, he has expended no political capital on any of those things, but *actual* liberal democrats would.

But much like liberals that drew no distinction between Gore and Bush in 2000, Conservatives draw no distinction between Obama and Bernie Sanders now. It's likely to generate the same kinds of results for Conservatives that boosting Nader did for leftists. And I think that would be bad, because left of center economic policy is wronger than right of center economic policy.

On the other hand, I'll take wrong people with a sense of perspective and practicality over 'right' people who appear more strongly informed by faction resentments than reality.

My apologies for the rant, but I'm just sick of this whole situation.

*The most common comment is that Obama is Bush's third term.

**No, I don't agree that ACA was a sudden move. It was, I think, pretty minimalist given the very aggressive goals on which Obama campaigned: no single payer, no public option, no real collective bargaining, etc. If anything, I retrospectively wish there *was* a public option, because it would have offered a path out of employer-provided health insurance. At the time, I was against the public option, and now I think I was wrong. There's a variety of ways in which I think ACA takes us in bad directions, but not because they are *new*.

Nathan Smith

There's an interesting asymmetry here. I think the weak economy NOW is to a large extent Obama's fault. Not so much in 2009: I suspect that the Democratic victory in the wake of TARP did hurt confidence, but I think that was only a small part of the problem then. But NOW, with the recovery stalling three years after the crisis began, with the economy some 10% below trend and high and tenacious unemployment, the case that this is Obama's fault really has to be taken seriously. However, I'm willing to hear arguments on the other side. Nato, however, is not. His response is angry and dismissive. His evidence and arguments are not nearly strong enough to justify this attitude.

I'd like to hear more about the historical evidence of financial crises. Is it just the Great Depression they're talking about? If so, the fact that it's just one data point, and that there were huge and adverse policy changes that came shortly after that, would pretty much eliminate the value of that evidence. Or do they think the 1987 crash and the savings and loan scandal precipitated a recession with a slow recovery in 1991? That seems pretty weak. If you look abroad, the Russian default in 1998 was followed by a swift and strong recovery. So was the East Asian crisis. So I don't really see the evidence for the claim that financial crises cause particularly deep and lasting recessions. But even if you accept that claim, with 9% unemployment three years after the crisis and the recovery still not really taking off, the short-run stories' lease is running out.

re: "Basically, the GOP had things more or less their way for a decade, and the economy did terribly. TERRIBLY. As in, the worst in more than half a century." Nato, this is a silly claim. It's silly when it's stated so insistently. It depends on what measure you look at, and particularly on how you interpret the decline in labor force participation when unemployment was low. I was always inclined to think that at least part of that must be that people had less desire to work, since if they wanted jobs badly at all they would be looking for them and so would count as unemployed. If so, the Bush economy wasn't too bad. If people were dropping out of the labor force because employment conditions were bad, so that there was a lot of unemployment, the situation looks a lot worse. My preferred measure of how well the economy is doing is measured unemployment, and by that standard the Bush economy was one of the best since World War II. However, in hindsight I think the rise in housing prices should have been considered inflation which would make the "misery index" look higher for the whole period. So let's just say the evidence is mixed. But at a time when unemployment is now 9% (even without the hidden kind), we really can't afford to use strong language like "TERRIBLY" to describe the Bush economy. Those were the good old days, relatively speaking.

re: "I don't see any particular signs that businesspeople in general are spooked by anything except the long term budget threat"

Well, first, it's just common sense that if business is forced to adapt to big new regulations like Obamacare and Dodd-Frank that's likely to make them hesitant to invest. And labor unions, and trade... in short, all the stuff Barnes mentions, and more. What kind of particular signs would you be looking for? Failure to hire? We're seeing that. If surveys showed strong evidence that businesses were not in the least worried about Obamacare or Dodd-Frank I'd reconsider, but the presumption has to be that when these big systemic changes which would seem to make things trickier for business are followed by a hiring strike, they're doing damage. Second, yes, the long-term budget threat is a big problem, and it's gotten A LOT WORSE on Obama's watch. Of course that's more because of the bad economy and long-term demographics than because of new Obama policies, though Obama policies did make things worse. But that does NOT excuse Obama. As soon as the deficit spiked to 10% in 2009, it was his responsibility to try to bring that down. Not in the short run maybe; there is a case for counter-cylical fiscal policy; but certainly in the long run. He failed to do so. Ergo he owns the long-run deficit, at least to a large extent.

re: "The left does not love Obama* anything remotely like the right loved Bush, and that's because Obama is much less of a leftist than Bush was a rightist"

Baloney. There was a lot of solidarity with Bush on the right because people wanted to rally behind the national leader in a time of national crisis, but he was always heavily criticized by many on the right for his big-spending ways. Fiscally speaking, he wasn't really a rightist at all, except for the tax cuts, and that's not really a conservative policy if it's done, not only without corresponding spending cuts, but concurrently with spending *rises.* Bush was a shift *left* relative to Clinton, and Obama has been a shift still further left. We've had a decade of bigger and bigger government, and that's the root of the problem. The 2000s were not really "the GOP having its way."

Nato is angry at the right for blaming the bad economy on Obama. But he does little to answer Barnes' arguments.

re: "The pit of non-progress that was 2000-2009 is plausibly Clinton's and Bush's"

Why does Nato think the lags in policy effects are so long? I don't understand the economic logic of this. That's true in some cases, but in general I think the macroeconomy is driven up and down by its most forward-looking elements, by businessmen and investors. If there's an adverse policy change, or even an increase in the likelihood of an adverse policy change, a forward-looking investor will change plans immediately. There will be a jump, and then a shift to a new equilibrium.

How long, I wonder, does the economy stay bad before Nato deigns to tolerate speculation that... maybe... it's Obama's fault?

Nathan Smith

By the way, about Krugman. Krugman insists that we should take Keynesian theory as proven science. In fact, there's neither much empirical support for it, nor has it fared well at the level of theory. In spite of that, both Bush and Obama have in effect adopted highly Keynesian policies, using deficit spending to try to get the country out of recession. In Bush's case, it worked in the short run: the collapse of the investment-led boom in the 1990s, which some had predicted would follow the pattern of the post-1929 crash, turned out to be quite soft and was followed by a strong recovery. The recovery took the form, however, of a housing bubble, and was followed by a much worse crash. Under Obama we've been deficit-spending on the order of 10% of GDP, and got hardly any recovery. After hardly any macroeconomists (and not Krugman) predicted the crash, it would really be foolish for the public to put their faith in Krugman knowing the exact counter-factual, particularly when so many Nobel Prize-winning macroeconomists disagree with him. How much would we be deficit-spending if Krugman had had his way? Or would we have been hiking taxes in the midst of a recession, like Herbert Hoover did, and contrary even to the Keynesian model but purely in service to Krugman's desire to use the crisis and his technocratic credentials to make the government a lot bigger than most Americans want? Granted that, for the time being, the markets are still happy to buy US government debt, so continuing to borrow is an option for now. If we had followed Krugman's advice, I suspect that that would not be the case.

Nathan Smith

Evidence of "sentiment": http://gregmankiw.blogspot.com/2011/05/household-expectations.html


Regarding the last: That's household sentiment about the economy, not businesspeople about the government.

Regarding the second-to-last: I wasn't defending Krugman's rhetoric about the certainty of his conclusions, and indeed elsewhere you can see my criticisms of him along those lines. Perhaps you were agreeing with my skepticism of his position on the stimulus, in which case, well, of course I agree.

Regarding the first: I am absolutely willing to entertain arguments that his policies are the problem, but I have not yet encountered any that weren't based on assumed counterfactuals and dubious claims of sentiment. I have sometimes argued with these, and sometimes not, but it seems each time I've challenged them, the writer either retrenches somewhat or doubles down on the 'sentiment' point without offering additional evidence. Nathan's "...it's just common sense..." statement is, I submit, another example of this. "Of course businesspeople are going to have priorities that match my perceptions!" Really? The businesspeople I know don't seem to bear that out. Which isn't evidence, either, except that it shows that it's quite possible to have a different point of view.

I'd expect references to something at least like this: http://www.drivingbusinessforward.org/business_leader_poll
And even then, I'd want a historical comparison to show that the concern about government regulation and so on has *risen*.

It's possible I'm mistaken about the strength of these arguments, but it's not because I've failed to entertain them. More like those advancing them have failed to support them.

As for the terrible economy: Per capita GDP barely grew at all, and real average wages for the majority of the population either didn't increase or dropped, *average* household wealth barely grew (imagine median wealth), all of which was a break from a more or less unbroken half-century of improvement on all these fronts. Productivity gains are good, I suppose, but their advantages certainly didn't accrue to the median American.

And, as Nathan points out, the period ended with a financial crisis and a bursting bubble that was *far* larger than the DotBomb. As I've said before, the most relevant comparison is probably 1893, from which it took a decade to recover - and one can hardly blame an overweening government for that. Conservative estimates of unemployment for years following that panic place it much higher than we're experiencing now (from a base at least as low as in 2007). Is this because I think the administration's fiscal policy is grand? No, if anything, I'd say it's because monetary policy works.

My position is that critics like Nathan (as well as blow-hards like Krugman, of course) need to entertain the null hypothesis with respect to the government. Partisan economists never seem to do that, and I consign them all to perdition.

Now, if we want to (for example) compare industries coming under greater regulation and see what happens to their strength, then we can treat other industries as counterfactuals. So far as I can tell, they are not noticeably impacted. Of course, left-wing folks like Krugman wouldn't regard negative impacts as a bad thing because they think the industries need punishing, but that's not a view I share. There are rent-seeking industries like agriculture that I can see being seriously impacted in a negative way by salutary legislation, but I think it's highly illustrative that neither the financial nor the healthcare industry has been seriously impacted. (Their indices have stayed close to aggregate indices since the crisis)

In any case, Nathan says:

"[The deficit has deepened] more because of the bad economy and long-term demographics than because of new Obama policies, though Obama policies did make things worse. But that does NOT excuse Obama. As soon as the deficit spiked to 10% in 2009, it was his responsibility to try to bring that down. Not in the short run maybe; there is a case for counter-cylical fiscal policy; but certainly in the long run. He failed to do so. Ergo he owns the long-run deficit, at least to a large extent."

Which is basically my position, but it is not Barnes' position: "Obama’s policies are in large part responsible for the weak recovery and high unemployment is beyond dispute. Yet Republicans haven’t made the case effectively enough that Obama’s decisions are directly to blame.

They need to. The economy is languishing, joblessness is stuck at an abnormally high rate, the housing market remains in decline, the deficit will exceed $1 trillion for every year of Obama’s term, the national debt is north of $14 trillion, and markets are anxious. There’s a connection between our troubled economy and Barack Obama. If Republicans drive home the link, they’ll oust him and win big in 2012. It’s as simple as that."

I'll repeat that "Obama's decisions are directly to blame." This hyperbole is shameless factionalism. Politicians, of course, always pretend that everything bad is their opponent's fault and take credit for every good thing - Obama's claims that his policies are creating jobs are dubious at best, of course - but Barnes seems to be operating very much under the same delusion, in substantial contravention of what Nathan grants above.

Nathan Smith

If the claim that financial crises cause particularly long recessions is based on analogies to times when the monetary policy regime was totally different-- and also, very relevantly, bank regulations were totally different-- then the claim seems totally inapplicable to the present.

Barnes is over-confident when he writes the words "beyond dispute." But I think the claim that "Obama's decisions are directly to blame" is more than tenable. It's not an overstatement, it's probably not wrong, and it's a disservice to dismiss it as mere "partisan economics."

I'd be glad to see evidence of how expectations of business about future policy directions have changed in the past few years. But such research would be hard to do, and there wouldn't have been a lot of reason to do it during the "Great Moderation," when not so many sudden changes were happening. It may not exist, or it may not be of adequate quality to be usable. If that's the case, we can't just pretend that expectations don't have any effect. If "people respond to incentives," they must have an effect, probably a big one.


How is it not overstatement to say that Obama's decisions are directly responsible for the weak recovery, high unemployment, the deficit, and the anxious market, if the deficit is mostly a product of a bad economy that started well before Obama's tenure combined with demographics over which he has no control? Even if one believes he could have made some others decisions that would have prevented the other three items, that's rather different in implication than saying that the decisions he did make *caused* them. Say I could patronize a struggling coffee shop but instead buy my morning joe from a different shop, and I account for the margin between between the first shop staying open and it closing. It would be rather strange to claim that my decision to not patronize the struggling shop was directly to blame for it closing. I failed to help, of course, but it wasn't as if I stole their potted plants or broke their coffee machine. And even if I stole their potted plants, it would be hard to say that the shop primarily closed because I stole the plants.

Having said that, Obama failing to help with the deficit *is* morally culpable, and I'm very disappointed that he took no advantage of Simpson-Bowles. He needs to take some leadership on it, and what he's offered so far is deeply inadequate. Basically everyone has dropped that ball, but him dropping it is a bigger failing than for others because as the President he's capable of driving the discussion. So far he's excused himself as saying the economy is still shaky, but that excuse is wearing very thin, and I agree that for the recovery to continue there has to be more concrete signs that the government is going to bring its books back into balance somehow or other. I don't think business actually cares tremendously exactly how it's done, as long as the government makes it clear that it won't become a source of systemic instability. Anyway, someone has to do it, and Obama is the obvious person. I don't think there's anything necessarily partisan about that kind of grousing.

Regarding financial crises: 1929 is another financial crisis that compares somewhat to 2008, but in that case the government did take (counterproductive) interventionist steps and even more of the world was in crisis than in 2008, so it would be unfairly generous to compare Obama's performance to that. We could also compare to Japan, if you like. Then Obama's unemployment rate would look pretty bad, but in other respects he'd look great. 1893 is the best example of the null case that I know of. But take your pick. For any financial crisis in the last ~150 years (that I know of), the consequences have always been lasting and severe. Perhaps Nathan could offer a counterexample.


I contemplated the 1997 crisis, but there was no deflationary pressure there; quite the opposite. Also, the rest of the world was booming.

Nathan Smith

What Barnes wrote is that Obama's decisions are responsible for "the weak recovery." I think that's right. There's no reason the recovery should be so weak at this point, two and a half years after the worst of the financial crisis, and when TARP prevented the system from unraveling. That it is so is a bit mysterious, but one hypothesis, I think the strongest, is that new political risk and the long-term deficit are largely to blame for business's hesitancy to invest, in spite of strong profits and lots of spare capacity. So there's no overstatement here.

Barnes also said that they are responsible for "high unemployment." You could quibble with that on the ground that it seems unlikely that even with a strong recovery, it's unlikely that unemployment would be below, say, 7%, that is, it would probably still be "high" relative to the Bush years. This is really hair-splitting. The problem that really has people worried is not just that unemployment is high, but that it's showing no signs of coming down.

I don't think Barnes said that Obama's decisions are directly responsible for the deficit, at least, not the existence of it. He's made the problem somewhat worse, and more than that, has let it remain damagingly unresolved. So did Bush, but that was a little bit more excusable because in 2006/2007 the deficit was only 2% of GDP. Still, what with the long-run trajectory of entitlements, Bush, too, should have known better.

"Perhaps Nathan could offer a counterexample." As Nato says, 1987/the savings and loan crisis. Also, as I mentioned above, Russia in 1998, and East Asia in 1997/98, rebounded strongly and rapidly. Also, how would Obama "look great" compared to Japan? If we put 1929 to one side, since there was a big change in the role of government at that time that is more than enough to explain why the stagnation lasted so long, It seems like we're following the same course as Japan: Keynesian stimulus that just prolongs stagnation. This kind of ad hoc pseudo-empirics seems a bit unhelpful, though. Maybe 1987 isn't applicable, but you'd need a theory explaining why. The similarity between 1980s Japan and 2008 America is mainly that it was an *asset price* bubble, especially real estate. If you think stock markets are what matters then 1929 and *2001* would both be applicable-- and we're doing a lot worse than after 2001. But what's your theory? If the performance of the rest of the world matters, we should be doing well this time, with so many other places booming. Actually, I think it does matter, and it makes Obama's performance look even worse.

Nathan Smith

By the way, here are my two favorite theories for why financial crises might lead to particularly painful and lasting recessions:

1. Debt-deflation. Economic growth needs a lot of risk-takers, people with sanguine, optimistic temperaments, instinctive borrowers and builders. Deflation, whether it be of asset prices, real estate prices, or consumer prices, gets debtors in a lot of trouble. It puts the energy to grow the economy into deep freeze.

2. Market delegitimization / rent-seeking. The majority is always poorer than average income, and stand to gain, at least in an immediate way, from redistribution. Envy reinforces self-interest. And of course, reliable property rights are essential to economic growth. And in an economy with a complex division of labor there are a thousand ways to redistribute property, and interest groups will know how to find them. So there's a permanent tendency to replace productive capitalism with a political tug-of-war over resources. How do you avoid this? Well, it's a bit of a mystery, and I think the Christian teaching against covetousness might be at the bottom of why the West has historically succeeded at it fairly well. But the short answer is: habit and tradition. It's best if people just don't think much about why he has this and she has that, we just all sort of accept it. A financial crisis makes property looks more arbitrary and raises calls for the government to step in and manage things. And that slows the economy.

Both (1) and (2) apply to the Great Depression. The data points are so few, though, that testing any general theory seems impossible. If my guesses are right, the solution may be as simple as: boost the money supply and eschew populism.


There was no lockup and deleveraging in 1987, so while there was a financial "crisis", it wasn't one it the sense that I mean. Japan may not be comparable because there was no real deleveraging, though some of the effects were the same because new credit was clamped. I don't really know. 1997 and 1998 are more comparable because there was deleveraging, but as I said, there was no deflationary pressure, so most of the bad debt shrank away. Since I agree with your #1 above, you have to have the full cycle in place for it to be comparable.

Having thrown that off the cuff, I'm supposed to go pick up some macaroons for a BBQ and I'm going to get in trouble if I keep typing.

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