Wednesday, January 25, 2012

Responding to John & Andrew

My friend John asked me what I thought about Andrew Sullivan's paean to Obama's first term. Since I wrote so much, I can't help but post it here.

Andrew Sullivan doesn't understand economics. He calls the missed predictions on the recession "miscalculations". You can't miscalculate a guess at the future - it's a guess. And what's more, recessions aren't purely exogenous, like (say) hurricanes. They are ameliorated or exacerbated by gov't policies. He also gives Obama too much credit on unemployment. Sullivan writes:
The right claims the stimulus failed because it didn’t bring unemployment down to 8 percent in its first year, as predicted by Obama’s transition economic team.
In fact, the projection/promise of Obama's team (Romer & Bernstein) was that unemployment would not even *reach* 8% without the stimulus (1). Since there is no conclusive economic evidence that stimulus spending helps an economy in recession (2), it's not unfair for critics of the administration to hold them accountable for economic policies that saw unemployment rise from 7% to 10% under his watch (3). The Obama team's main defense is "we didn't know how severe it was going to be". But if you want to play doctor with the economy, being capable of making accurate diagnoses is pretty important!

Back to Sullivan. His defense of the Obama economic record is an imaginary counterfactual - without the "floor" put under the recession by the stimulus package, we could have ended up in the second Great Depression. Well, given that economists already refer to this period as the "Great Recession", and unemployment is still at 8.5%, it's pretty much the worst economic period since the Great Depression, and there's no guarantee that it's over. More to the point, Sullivan is relying on his imagination to construct the counterfactual. But there have been many recessions since 1940, and all of them have ended faster than this one. So, if you arbitrarily compare this downturn to a previous one, chances are the previous one will look less painful, mostly because the economy usually has bounced back rapidly, not hung around in the doldrums for 3 years.

Also, the whole tone of Sullivan's piece is a little funny. Republicans are wrong because Obama is a moderate, pragmatist at heart. But liberals are wrong because Obama is really a leftist. They can't both be wrong!

I guess Sullivan is writing press releases for the Obama administration. He glibly quotes the presidents own spin: "To use the terms Obama first employed in his inaugural address: the president begins by extending a hand to his opponents; when they respond by raising a fist, he demonstrates that they are the source of the problem" ... and then goes on to say, "If I sound biased, that’s because I am. Biased toward the actual record, not the spin". Um, ok.

That characterization certainly fails the smell test in, for instance, the battle over the debt ceiling. The president wanted to raise the debt ceiling; freshmen Republicans had been elected by promising not to do so, and senior GOP members wouldn't sign on without real concessions. When it became clear that a simple solution was not going to arise, the GOP offered to sign a short-term bill that would raise the ceiling for about 6 months more spending in exchange for concomitant concessions. The President said absolutely not - and refused to even consider any compromise that would allow the issue to arise again before his reelection. Obama has shown a consistent and uncompromising willingness to push off hard decisions to the other side of the election. He's willing to lower taxes, but only for the election year. He's willing to make a final decision on Keystone XL, but only in 2013 (the GOP forced his hand on that one). From the NYTimes:
The move is the latest in a series of administration decisions pushing back thorny environmental matters beyond next November’s presidential election to try to avoid the heat from opposing interests — business lobbies or environmental and health advocates — and to find a political middle ground. President Obama delayed a review of the nation’s smog standard until 2013, pushed back offshore oil lease sales in the Arctic until at least 2015 and blocked new regulations for coal ash from power plants.
Of course, this doesn't contradict Sullivan - the president is indeed playing a sort of "Long Game", but that long game is mainly about retaining power. To do that, he's willing to mortgage the future (with short-run tax policy, e.g.) in exchange for an electoral boost now. This isn't new behavior. Look at the ends of the last few 8-year administrations. Bush fils' 8 years ended with a 2007 recession. Clinton's 8 years ended with the burst of the dot-com bubble. By contrast Bush pere raised taxes, governed responsibly, and saw a mild recession under his watch - and lost his re-election campaign. The lesson? If you want the country to serve you for 8 years, shift consumption to the present - boom now, bust later.

Every indication is that Obama is following this pattern. That's not a long game, that's a shell game.

3 comments:

Chops said...

I edited the original for clarity and grammar.

Carol L. Douglas said...

Thanks, Chops. What do you think about 0% effective interest rates as an economic strategy?

Chops said...

I don't think they do much harm or good. Interest rates change a ton over the business cycle, but in my lifetime, they haven't ever had a huge impact.

A big part of that is that the US and most other governments are very predictable, and that's a good thing.