The Secret of Our Non-Success
Published: October 22, 2012
NEW YORK TIMES
The U.S. economy finally seems to be recovering in earnest,
with housing on the rebound
and
job creation outpacing growth in the working-age population.
But the news is good, not great
— it will still take years to restore full employment
— and it has been a very long time coming.
Why has the slump been so protracted?
The answer — backed by overwhelming evidence
— is that this is what normally happens after a severe financial crisis.
But Mitt Romney’s economic team rejects that evidence.
And this denialism bodes ill for policy
if Mr. Romney wins next month.
About the evidence:
The most famous study is by Harvard’s Carmen Reinhart and Kenneth Rogoff,
who looked at past financial crises
and
found that such crises are typically followed
by years of high unemployment and weak growth.
Later work by economists at the International Monetary Fund
and
elsewhere confirmed this analysis:
crises that followed a sharp run-up in private-sector debt,
from the U.S. Panic of 1893 to the Swedish banking crisis of the early 1990s,
cast long shadows over the economy’s future.
There was no reason to believe that this time would be different.
This isn’t an after-the-fact rationalization.
The Reinhart-Rogoff “aftermath” paper was released almost four years ago.
And a number of other economists, including, well, me, issued similar warnings.
In early 2008 I was already pointing out the distinction
between recessions like 1973-5 or 1981-2,
brought on by high interest rates,
and
“postmodern” recessions brought on by private-sector overreach.
And I suggested that the recession we were then entering
would be followed by a prolonged “jobless recovery”
that would feel like a continuing recession.
Why is recovery from a financial crisis slow?
Financial crises are preceded by credit bubbles;
when those bubbles burst,
many families and/or companies are left with high levels of debt,
which force them to slash their spending.
This slashed spending, in turn, depresses the economy as a whole.
And the usual response to recession,
cutting interest rates to encourage spending, isn’t adequate.
Many families simply can’t spend more,
and
interest rates can be cut only so far — namely, to zero but not below.
Does this mean that nothing can be done to avoid a protracted slump after a financial crisis?
No, it just means that you have to do more
than just cut interest rates.
In particular, what the economy really needs after a financial crisis is a temporary increase
in government spending,
to sustain employment while the private sector repairs its balance sheet.
And the Obama administration did some of that,
blunting the severity of the financial crisis.
Unfortunately, the stimulus was both too small and too short-lived,
partly because of administration errors
but mainly because of scorched-earth
Republican obstruction.
Which brings us to the politics.
Over the past few months advisers to the Romney campaign
have mounted a furious assault on the notion
that financial-crisis recessions are different.
For example,
in July former Senator Phil Gramm and Columbia’s R. Glenn Hubbard
published an op-ed article
claiming that we should be having a recovery comparable
to the bounce back
from the 1981-2 recession,
while a white paper from Romney advisers argues
that the only thing preventing a rip-roaring boom is the uncertainty
created by President Obama.
Obviously, Republicans like claiming that it’s all Mr. Obama’s fault,
and
that electing Mr. Romney
would magically make everything better.
But nobody should believe them.
For one thing,
these people have a track record:
back in 2008, when serious students of history
were already predicting a prolonged slump,
Mr. Gramm was dismissing America as a “nation of whiners”
experiencing a mere “mental recession.”
For another, if Mr. Obama is the problem,
why is the United States actually doing better
than most other advanced countries?
The main point, however,
is that the Romney team is willfully,
nakedly,
distorting the record,
leading Ms. Reinhart and Mr. Rogoff
— who aren’t affiliated with either campaign
— to protest against “gross misinterpretations of the facts.”
And this should worry you.
Look, economics isn’t as much of a science as we’d like.
But when there’s overwhelming evidence for an economic proposition
— as there is for the proposition that financial-crisis recessions are different
— we have the right to expect politicians and their advisers to respect that evidence.
Otherwise, they’ll end up making policy based on fantasies rather than grappling with reality.
And once politicians start refusing to acknowledge
inconvenient facts,
where does it stop?
Why, the next thing you know Republicans
will start rejecting
the overwhelming evidence
for man-made
climate change.
Oh, wait.
XXXXXXXXXXXXXXX
YES,
OBAMA
HAS
THE CAPACITY
AND
THE CREDIBILITY
TO
LEAD, NAVIGATE, COMMUNICATE AND GUIDE
THE UNITED STATES OF AMERICA
IN A COMPLICATED
AND
COMPLEX WORLD.
ROMNEY’S ONLY TEMPLATE IS BAIN.
THINK ABOUT THAT FACT, PATTERN, REALITY
AND
THAT RIGID LEADERSHIP STYLE
IN AN EVER-CHANGING WORLD
AND
GLOBAL ECONOMY.
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