Ezra Klein published a post this Saturday at his Washington Post-based blog about the current state of the US economy and how we got here.
The Washington Post blog article “Could this time have been different?” focuses not on what could be, but rather on the decisions that were made, the forecasts surrounding them, and the difficulty in making economic policy match economic models.
In post-Lehman and post-housing bubble collpase December 2008, Christina Romer flew to Chicago to brief then President-elect Obama on economic forecasts with and without proposed stimulus plans. Her models were considered the mainstream, implementing data from the Bureau of Labor Statistics, the Bureau of Economic Analysis, and the Federal Reserve.
Her predictions were bleak. But after The American Recovery and Reinvestment Act was passed, reality turned out to be bleaker. When unemployment peaked over 10% in late 2009, the mainstream proved to be wrong.
In reality, the administration could only hit it with everything it could persuade Congress to give. And that wasn’t enough… But it is hard to credit the argument that the stimulus could have been much larger at the outset… Even if Congress had been more accommodating, there was a challenge to vastly increasing the size of the initial stimulus: The more you spend, the less effective each new dollar would become.
- According to Klein, there were alternative stimulus models that the administration could have followed. Unemployment benefits, state and local aid, and tax cut legislation could have been broken into separate legislation and spread over a longer time frame rather than being set to expire after two years. But, even if that were done and coupled with short-term infrastructure plans, there’s little reason to believe they would have positively affected unemployment.
- Klein believes that one of the Obama administration’s main failure was focusing on stimulus rather than housing policy. The leigslation they did pass, “The Home Affordable Modification Program” and “The Home Affordable Refinance Program” were weak and ineffectual, falling short on their goals to help homeowners. Proposals to force banks to eat the debt, and forgive homeowners, were shot down due to fears of causing more unpopular bailouts.
- The Fed could have proposed to increase inflation, which would decrease the real value of debt and make US exports more competitive. But creating inflation is difficult when demand for goods is low and Bernanke was skeptical it could even be done.
- While government-incentives such as subsidized salaries for private sector and a no-layoff policy for all public positions are costly for short-term recessions, Klein argues they make sense for the long-term by preventing further stagnation and loss of employee value.
Ezra Klein believes that the Obama administration did too little, ignored its Keynsian roots, and could have had more aggressive legislation with better outcomes. He shies away, though, from pointing to exact policies that would lead to specific numbers.
Klein also laments the unfortunate politics involved. The voters don’t see the jobs we saved or give the stimulus credit for what it did do. Yes, things could have been different, and could have been better. But even as The Great Stagnation pans out, hindsight may never be 20/20.