David Leonhardt does a nice job of describing where Obamanomics went wrong.
WORKING out of cramped, bare offices in a downtown building here in Washington, President-elect Obama’s economic team spent the final weeks of 2008 trying to assess how bad the economy was. It was during those weeks, according to several members of the team, when they first discussed academic research by the economists Carmen M. Reinhart and Kenneth S. Rogoff that would soon become well known.
Ms. Reinhart and Mr. Rogoff were about to publish a book based on earlier academic papers, arguing that financial crises led to slumps that were longer and deeper than other recessions. Almost inevitably, the economists wrote, policy makers battling a crisis made the mistake of thinking that their crisis would not be as bad as previous ones. The wry title of the book is “This Time Is Different.”
In my interviews with Obama advisers during that time, they emphasized that they knew the history and were determined to avoid repeating it. Yet of course they did repeat it. After successfully preventing another depression, in 2009, they have spent much of the last three years underestimating the economy’s weakness. That weakness, in turn, has become Mr. Obama’s biggest vulnerability, helping cost Democrats control of the House in 2010 and endangering his accomplishments elsewhere.
Entire books and countless articles have taken Mr. Obama to task on the economy, and administration officials have a rebuttal that makes a couple of important points. The Federal Reserve and many private-sector economists were also too optimistic, Obama aides note. And they argue that the Senate would not have passed a much larger stimulus in 2009, given Republican opposition, regardless of the White House’s wishes.
But from these reasonable points, the Obama team then jumps to a larger and more dubious conclusion: that their failure to grasp the severity of the slump has had no real consequences. Even if they had seen the slow recovery coming, they say, they couldn’t have done much about it. When Mr. Obama has been asked about his biggest mistake, he talks about messaging, not policy.
“The mistake of my first term — couple of years — was thinking that this job was just about getting the policy right,” he has said. “The nature of this office is also to tell a story to the American people that gives them a sense of unity and purpose and optimism, especially during tough times.”
We can never know for sure what the past four years would have been like if the administration and the Fed had been more worried about the economy. But my reading of the evidence — and some former Obama aides agree — points strongly to the idea that the misjudging of the downturn did affect policy and ultimately the economy.
Mr. Obama’s biggest mistake as president has not been the story he told the country about the economy. It’s the story he and his advisers told themselves.
Of course, there were major GDP revisions well after Obama’s team made their decisions in late 2008. It was only much later that we realized the fourth quarter GDP of 2008 was the worst since the Great Depression. That said, it should not have taken them long to figure out that this was, in many ways, a worse international economy than we faced in 1929. As Leonhardt notes, having never faced this kind of economy before, the Obama team decided this time was different also. Having stopped the acute output drop, they assumed that the economy would right itself fairly quickly and/or there was nothing else they could do. Which is why we get the chart of the day* at the top of the post.
Our growth in debt has far outpaced our economic growth. In particular, household debt had reached record levels akin to what we saw in 1929. I think that if the CEA had recognized that we would enter a sustained period of deleveraging, that we may have seen a different policy response. A failure to diagnose properly, lead to inadequate treatment.
* Chart is from the FRED site. At that site you can download the raw data along with the graph of your own making. The raw data shows that our total debt went from about 1.8 times GDP in the 50s, to over 4 times GDP in 2008.