Kevin Hassett is director of economic policy studies at the American Enterprise Institute. Glenn Hubbard, dean of Columbia Business School, was chairman of the Council of Economic Advisers under President George W. Bush. They are economic advisers to Republican presidential candidate Mitt Romney.
President Obama’s principal economic argument for reelection now appears to be that he has an excuse for the U.S. economy’s extremely weak recovery from the deep recession of 2007 to 2009: that recoveries after financial crises are always slow. The president said in Ohio in June, in language that has been echoed by his surrogates, that “this was not your normal recession. Throughout history, it has typically taken countries up to 10 years to recover from financial crises of this magnitude.”
In other words, according to the excuse narrative, even though the Obama stimulus was brilliant and timely, it could not deliver a normal recovery because the financial crisis made that impossible.
To be sure, financial crises have often been associated with slower recoveries; economists Carmen Reinhart and Kenneth Rogoff documented this in their landmark book “This Time Is Different.” But their study of large and small countries around the world cannot be used as a logical explanation for the economic policies advanced by the administration. Here’s why:
The president’s first problem is that the results obtained by Reinhart and Rogoff do not necessarily apply to the United States. Economists who have looked at U.S. recoveries after financial crises have generally found that the recoveries have not been slow.
Michael Bordo of Rutgers University and Joseph Haubrich of the Federal Reserve Bank of Cleveland concluded after an extensive study of recessions in the United States that, contrary to the findings of Reinhart and Rogoff, recessions stemming from financial crises in the United States tended to be followed by faster recoveries. Bordo and Haubrich point out that the 2007-09 recession is actually a negative outlier.
The president’s second problem is that his campaign rhetoric is inconsistent with the analysis of his own economic team. The Obama administration’s economic advisers do not appear to have factored the Reinhart and Rogoff results into their analysis and forecasts, which have repeatedly called for an extremely rapid recovery.
The budget that Obama proposed shortly after taking office included projections of growth in gross domestic product climbing to 4.6 percent this year. Even after these early estimates proved incorrect, the administration continued to forecast high growth, always predicting rapid recovery around the corner. Even today, Obama is implicitly declaring that we are doomed to a slow recovery for five more years — the administration’s estimates call for GDP growth climbing to 4.1 percent in 2015.
These high-growth forecasts are not just academic. Those on Obama’s economic team can justify the president’s proposed tax increases only if they are willing to assert that growth will be so high that we can afford the drag associated with higher marginal tax rates. The economic team’s forecasts at least provide some internal consistency, but the president’s campaign rhetoric is inconsistent with his staff’s analysis.
Finally, the administration’s previous policies are questionable if one accepts that Reinhart and Rogoff are correct and that we are destined for a protracted recovery.
A Keynesian stimulus like the one the Obama administration advanced in 2009 would be appropriate if a recession were expected to be short and deep, followed by a quick and robust recovery. Such a stimulus has three stages: the initial short increase in GDP from the spending, a subsequent phase of approximately equal reductions in GDP after the stimulus runs out, and then an additional reduction in GDP when higher borrowing or taxes are needed to pay for the stimulus. If you expect a recession to be long and drawn out, a Keynesian stimulus is likely to be ineffective, because the hangover from the second two stages could easily push the economy back into recession. In such a world, policies that stimulate long-run growth such as fiscal consolidation and tax reform are clearly preferable to a Keynesian stimulus.
Thus the administration’s economics suggest mistakes of diagnosis or cure, or both. If the Obama administration believes that the Reinhart and Rogoff analysis is correct, then the White House should concede that it was mistaken when it proposed a stimulus that would boost growth for only a short time, and it should stop calling for marginal hikes in tax rates.
If the president wants to continue claiming that the stimulus was the appropriate economic policy and that we can afford the damage from higher taxes because growth is going to be high in the near future, then he should concede that Reinhart and Rogoff’s results do not explain the slow recovery of the U.S. economy — and that the more likely explanation is the failure of his own policies.
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