What ‘Obamanomics’ got wrong

October 2, 2012

David Leonhardt's critique of "Obamanomics" is worth reading. I agree with almost all of it. And yet, I think it also functions as something of a critique of the critiques of "Obamanomics."

Leonhardt's argument -- which is similar to my argument in "Could This Time Have Been Different?" -- is, basically, that the Obama administration wasn't sufficiently quick in recognizing that we were in a prolonged slump rather than an unusually severe recession. This is, by now, something close to conventional wisdom.

The tough question is the one that comes next: Assume the Obama administration had perfect foresight in 2009. What could they have done differently, and how much would it have mattered?

Pete Souza/White House

Leonhardt offers three answers to "what could they have done differently?" They could have "immediately nominated people to fill the Fed’s seven-member Board of Governors, rather than leaving two openings," "added provisions to the stimulus bill that depended on the economy’s condition," and "taken a different path on housing."

Leonhardt doesn't attempt an answer to "how much would it have mattered?" But, so far as these policies go, I'm skeptical. Adding two more members to the Fed's Board of Governors might have nudged Bernanke in a more aggressive direction, but it wouldn't have been a phase change. Tying the stimulus bill to unemployment measures would have been desirable, but the likeliest candidates for that kind of policy were the expanded unemployment insurance and tax cuts, and the Obama administration has managed to keep extending both. As for housing, almost everyone agrees that the White House's housing policy hasn't worked. But they get a little quieter when asked what would work, and Leonhardt doesn't offer details.

I'd add to Leonhardt's list. If the Obama administration had better understood the lasting nature of the slump, they could have fought for more work-sharing and direct employment measures in the stimulus. On housing, they clearly should have prioritized confirming a director for Fannie Mae and Freddie Mac -- instead, they waited until November 2010 to make a nomination, and are now stuck with negotiating with Ed DeMarco. There's a case to be made -- though even liberal economists like Brad DeLong, Christina Romer and Paul Krugman didn't realize it at the time -- that Bernanke shouldn't have been reappointed. While a few more Fed appointees might have nudged policy in a slightly aggressive direction, a different chairman could potentially have driven policy in a much more aggressive direction, much earlier in the process.

But how much would all this have mattered? That's the hard part, and the part that tends to get neglected in these kinds of articles. Any policy on the list could have backfired. If the Obama administration had replaced Bernanke, perhaps their replacement would have alienated the Fed's Board of Governors and ended up with less room to push aggressive monetary policy. If they had gone for more direct employment measures, perhaps conservative Democrats would have pushed back, and the resulting near-death experience on the stimulus would have led to a small bill overall. 

In the end, I'm confident the administration, in a perfect performance, could have brought unemployment down by a few tenths of a percentage point more than they have. That matters. But we'd still be having this same conversation. Conversely, I'm quite sure that Congress, through much more aggressive fiscal policy -- like passing the American Jobs Act in 2011 -- and much less insane brinksmanship could have made a big difference on unemployment. But in general, there seems to be more interest in "what could Obama have done differently" than "what could Congress have done differently".

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