Thursday, February 23, 2012

Yes, the Economy is Healing -- Although Slower Than We Would Like

Jeff Frankel:
With November’s election fast approaching, the Republican candidates seeking to challenge President Barack Obama claim that his policies have done nothing to support recovery from the recession that he inherited in January 2009. If anything, they claim, his fiscal stimulus made matters worse.  And, despite recent improvement, the level of unemployment indeed remains far too high.

Obama’s Democratic defenders counter that his policies staved off a second Great Depression, and that the US economy has been steadily working its way out of a deep hole ever since.  Middle-ground observers, meanwhile, typically conclude that one cannot settle the debate, because one cannot know what would have happened otherwise.

There is a good case to be made that government policies - while not strong enough to return the economy rapidly to health — did indeed halt an accelerating economic decline.    By “government policies,” I mean not just the fiscal stimulus the new president steered through Congress when he took office, but also the Obama version of TARP, and Fed Chairman Ben Bernanke’s aggressive monetary stimulus.   All three policy initiatives remain extremely unpopular with Republicans, and ambiguous among swing voters.

But the middle-ground observers are of course right that one cannot prove what would have happened otherwise.   It is also true that it is rare for a government’s policies to have a major impact on the economy immediately.  These things usually take time.  One cannot infer the merit of a new president’s policies from the path of the economy during his first few months in office.  (For example, I did not blame George W. Bush for the recession that began two months after he took office in 2001. There hadn’t yet been time for bad policies to damage the economy.)

But here is the remarkable thing: whether one listens to the Republicans, the Democrats, or the middle-ground observers, one gets the impression that the economic statistics show no discernible improvement around the time that Obama took office. In fact, the reality could hardly be more different.
First, please read his entire article.  It's nuanced and detailed, which means 99% of the people who should read it won't (even if they did, they probably wouldn't understand it).

As usually happens when the debate turns political, the debate becomes at best murky and at worst, impossibly corrupted by theory, desire and opinion rather than facts and data.  As such, listening to either side of the political debate to obtain economic information is at best a waste of time and at worst a great way to get confused.

However, the free fall is clearly over and improvements are occurring on multiple fronts.

Does this mean that I endorse those policies that led to this?  Yes.  I argued fairly aggressively for the stimulus and continue to argue for increased infrastructure spending as a way to increase/stabilize growth.  As I have stated in the past, Keynes was right.  His theories have been proved correct both from a positive perspective (those countries that use his polices ameliorate the effects of economic downturns) and a negative perspective (name one current EU country engaging in austerity policies that is seeing growth).

Does that mean things could be better?  Sure.  However, it's important to recognize that the depth of the recession was far greater than originally thought -- meaning the hole we had to climb out of was far bigger than we planned for -- and we're also in a different kind of recovery.  Instead of this being a simple "Fed raises interest rates to slow inflation, Fed lowers rates to spur growth" recovery, we're instead in a debt deflation recovery, which takes longer to cover from and which requires different policies to recover from.

This also does not mean -- in any way, shape, or form -- that I think things are just hunky dory.  They most assuredly are not; long-term unemployment is still a horrible problem; Europe still has some soul searching to finish (although I do think they are on the right track); the US needs to seriously address the deficit situation (just not yet) .. you get the idea.

But, compared to where we were when this thing started, the measures are indeed better.

As an FYI -- the last time I took a comprehensive look at the economy was on February 10th.  You can read the stats here.  Simply put, they show an improving picture.  No -- it's not perfect.  And no, I'm not saying that, either.