The hardest question in assessing the U.S. economy over the past few years — and thus in judging President Obama's performance — is: "compared to what?"
The mark of a lazy pundit or a political hack is their dodging of this question. They'll say something like "unemployment is still above 8 percent" or "we've had 30 months of straight private-sector job growth" and then sit back as if they've closed the case. They haven't. They've said what is. They haven't said what would've been had we chosen another path. They haven't said what could've been if we'd chosen the best possible path.
Here's the thing about once-in-a-lifetime economic storms: They don't happen very often. And so we don't have much data about them. And without having a really solid understanding of what usually happens, or what could have happened, it's hard to come to solid judgments about how policymakers performed. Trying to judge the aftermath of a historic financial collapse against the baseline of a perfectly normal economy is a fool's errand.
Josh Lehner, a senior economist at Oregon's Office of Economic Analysis, decided to try to judge the past few years against a more appropriate baseline. He picked through Carmen Reinhart and Vincent Rogoff's epic history of financial crises and pulled out "the big five" of the last century: Spain in 1977, Norway in 1987, Finland in 1991, Sweden in 1991 and Japan in 1992. Then, just for good measure, he added the Great Depression.
First, he checked to see whether these crises were close in severity to the crisis we've just been through. They were. This table measures the change in the unemployment rate, home prices, and other economic indicators from the pre-crisis peak to the lowest point in the recession. As you can see, we're pretty much in the ballpark. Just your "garden variety, severe financial crisis," as Reinhart and Rogoff have said.
The "financial crisis" part of our financial crisis was very much in line with the other crises on this chart, and perhaps even a bit worse. Housing prices fell even further than the average. But the hit to the unemployment rate and economic growth was significantly less. That gets us back to Lehner's employment chart, which is also at the top of this post:
So our financial crisis was very bad. But the damage to the real economy, while bad, was less than it's been in the past.
I spoke with Lehner about his results earlier today. "I would say the immediate response once we realized that everything was in a freefall in late 2008 was pretty good," he said. "There was a coordinated worldwide effort from both central banks and governments that managed to throw a lot of money into the system to ease financial conditions and stop the freefall at a spot that was less severe."
That's what you see on the graph. We begin plummeting at much the same rate we did during the Great Depression — but then we stop. There's good reason to believe that stop was, as Lehner says, the result of the financial rescue and the global stimulus efforts.
What happens after the stop, however, is less impressive. The recovery is steady, but it's slow. Much slower than what we see elsewhere on the graph. "The recovery to date has been more disappointing," Lehner says.
The question, of course, is why. Is it simply unrealistic to think we could bounce back from such a severe financial crisis much more quickly? Was the stimulus too small? Too short in duration? The wrong approach altogether? Where would we be if we'd passed the American Jobs Act, or if the Federal Reserve had moved to nominal-GDP targeting? How about if we'd done more to bail out underwater homeowners?
Longtime readers know my read of the evidence is that more stimulus would've been helpful, and the Federal Reserve could have done more. I'm less certain of how fast a recovery policymakers could actually have achieved. In a world of perfect policy, is unemployment 7 percent today? Or is it 6 percent?
Sadly, there's nothing on Lehner's graph that answers that question.
— Reinhart and Rogoff, "The Aftermath of Financial Crises." (pdf)