Economists to Romney campaign: That’s not what our research says, part II

August 16, 2012

Two of Mitt Romney's key economic advisers, Kevin Hasset and Glenn Hubbard, have an op-ed in this morning's Washington Post making the case that the Obama recovery has been slower than the recession can explain and that Obama's policies were the reason.

The first part of the op-ed reprises the argument from an earlier paper Hasset and Hubbard released on behalf of the Romney campaign: While financial crises might lead to slow recoveries internationally, they don't lead to slow recoveries in the United States. Again, the citation goes to "an extensive study of recessions in the United States" by Michael Bordo of Rutgers University and Joseph Haubrich of the Federal Reserve Bank of Cleveland, which found that the recovery from this recession has been unusually slow.

As in the original paper, Romney's economists blames this on the Obama administration's economic policies. And, also like in the original paper, they omit what Bordo says when you ask him about the study, which is that this recession was unusually long because it was driven by a housing collapse. “We found that a lot of the difference between what would’ve been predicted by the normal behavior of recessions and what we observed now is explained by the collapse of residential investment," he told me. "Put another way, if residential investment were what it was in a normal recovery, we would have recovered already.”

But then the op-ed diverges from the paper to make a more interesting point. If you assume that this recession was a "Rogoff-Reinhart" recession — so named for Ken Rogoff and Carmen Reinhart, who wrote the seminal study on the slow recoveries that typically follow large financial crises — then "the White House should concede that it was mistaken when it proposed a stimulus."

The argument here, essentially, is that if a recession is going to be long, then short-term policies to boost growth don't make much sense. Such policies, write Hasset and Hubbard, are only reasonable "if a recession were expected to be short and deep."

The experts on Reinhart/Rogoff recession are, well, Carmen Reinhart and Ken Rogoff. And, as it happens, they've been quite forthcoming with their opinions over the years.

For instance, if you look at the leaked memo that the Obama administration was using when they constructed their stimulus, you'll find, on page 10 and 11, a list of prominent economists the administration consulted as to the proper size for the stimulus package. And there, on page 11, is Rogoff, with a recommendation of "$1 trillion over two years" — which is actually larger than the American Recovery and Reinvestment Act. So if they'd been following Rogoff's advice, the initial stimulus would have been even bigger — not nonexistent.

As for Reinhart, I asked her about this for a retrospective I did on the Obama administration's economic policy. “The initial policy of monetary and fiscal stimulus really made a huge difference,” she told me. “I would tattoo that on my forehead. The output decline we had was peanuts compared to the output decline we would otherwise have had in a crisis like this. That isn't fully appreciated.”

Now, it's true that Reinhart and Rogoff have opposed "indefinitely sustaining aggressive post-crisis fiscal stimulus" without accompanying deficit reduction. But even in an op-ed making that case, Rogoff was careful to say, "aggressive fiscal stimulus in the run-up to the financial crisis was reasonable as part of an all-out battle to avoid slipping into a depression."

So if fiscal stimulus is not appropriate during the beginning of a Rogoff/Reinhart recession, someone should tell that to Rogoff and Reinhart.

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