According to Macroeconomic Advisers, growth for the rest of the year is tracking at about 2.4 percent — not nearly enough to bring down the unemployment rate. That’s down from estimates that we would grow by more than 3 percent this year. Forecasters uniformly believe that another recession, perhaps driven by events in Europe, is a real possibility. And new data out of the Census Bureau show that median incomes have fallen by almost 10 percent over the past three years.
But why? For the past few months, I have been pestering every economist and economic policymaker I can think of with the same question: Could the recovery have been substantially different? Could unemployment today be substantially lower, growth substantially quicker, incomes substantially higher?
The result of my inquiries appeared in Sunday’s Washington Post and is available online. At almost 7,000 words, it’s a hefty piece. But the point of it was to better convey the tough decisions, hard tradeoffs and incomplete information that defined the policy process. In this column, I’ll relay some of my conclusions.
Let’s begin with the stimulus. It needed to be bigger. But there were two problems with bigger: Congress wouldn’t have gone for it, and the administration probably couldn’t have spent it effectively. Tax cuts, which can be done quickly and at any size, aren’t very stimulative because they get saved rather than spent. And infrastructure investment, which is very stimulative, can’t be ramped up quickly.
But it could have been longer. The stimulus was a two-year shot, and it was too small even before we knew that the recession was larger than it initially appeared. The administration wrongly figured that if it needed more, Congress would be happy to comply. That was a costly miscalculation.
If the White House had better understood the likely length of the recession and designed the stimulus funds to be spent over four years, it could have included a larger and smarter infrastructure component and tied the size and duration of the tax cuts, unemployment benefits and state and local aid to the unemployment rate.
In all likelihood, however, Congress would have objected to setting fiscal policy for 2012 in 2009. Waging and losing a battle over the structure of the stimulus might have helped President Obama shift blame for the country’s current condition when the stimulus that did pass proved inadequate, but such rhetorical victories are often lost on a public that doesn’t check its current opinions against past press releases.
Housing is a clearer case of the administration failing to get anything near the boundaries of the possible. No one I spoke to inside the administration is happy with how its housing policies turned out. In this area, the two clear missed opportunities were the administration’s failure to move quickly in appointing a friendlier regulator to lead Fannie Mae and Freddie Mac — it didn’t nominate anyone until November 2010, by which time emboldened Republicans were filibustering Obama’s nominees — and to push legislation allowing bankruptcy judges to reduce mortgage principal. Together, the two moves could have led to more refinancing for underwater homeowners and more recourse for bankrupt homeowners.
The game changer, however, would have been massive debt forgiveness. This could have been done through a federal program to purchase troubled mortgages and give homeowners better rates, as John McCain proposed late in the 2008 campaign, or by nationalizing the banks and taking the bad debts off their books, or some other option. But the politics of using taxpayer dollars to pay off mortgages were horrible. How do you explain to people who decided against buying homes they couldn’t afford that they’re now paying the mortgages of those who made the opposite decision?
Fundamentally, the stimulus was an attempt to grow our way out of the recession, and our housing policies were an attempt to reduce the debt that was keeping us in the recession. It was what I call “offensive policy.” In retrospect, however, we could have used more “defensive policy.” We were so focused on getting out of the crisis that we ignored some of the policies that would have helped us endure it.
Chief among these were policies to either save jobs or create them directly. In the first case, we could have taken a page out of the German playbook and launched a program to pay employers who cut hours rather than fired workers. In the second case, the government could have provided more help to state and local governments, which have lost more than 500,000 jobs, and tried direct-employment schemes like Christina Romer’s idea to hire 100,000 teacher’s aides.
Finally, the Federal Reserve acted with extraordinary speed and aggressiveness to prevent the crisis from becoming a calamity. The Fed has been more tentative in its efforts to speed the recovery. A more aggressive Federal Reserve could have used everything from jawboning the market to purchasing larger quantities of housing and corporate bonds to ending interest payments for banks that are simply socking away the money.
Would any or all of these policies have turned the unrecovery into a real recovery? They certainly could have helped. The good news, of course, is that they could help now, too. The problem isn’t that we are out of policy ammunition. It’s that Republicans in Congress don’t want to pull the trigger.