Thursday, February 9, 2012

Breathtaking Cluelessness

If Bloomberg Businessweek was a teenager, it would be one of the annoying ones that tries too hard to be noticed by the popular kids.

So, to me, it’s not surprising that they have a piece this week on how much harder the economy has been on Obama now than it was on Reagan 30 years ago.

Arguably, this position is correct, but more reasonably the economy has been lousy for both of them. But they’ve gone way over the top to make their point in “A Tale of Two Election Year Recoveries”. As a student you need to start to recognize gross misinterpretations like this.

… President Barack Obama’s recession is a lot more complicated than the one Reagan tussled with in 1981.

Superficially, their predicaments are similar. Both presided over economic downturns considered to be the worst since the Great Depression.

Not exactly. Reagan had a full-blown recession that started 6 months after he came into office and lasted for 18 more. Obama took office with a recession in its 14th month with only 6 more to go. And, as horrible as that hard slide in 2008-9 was, we saw the first signs of the economy starting to bottom out just before Bush left office.

… They lost congressional support in midterm elections and were presiding over economic recoveries as they geared up for reelection campaigns.

Actually, only Obama’s party lost control of one of the houses of Congress. Reagan dealt with a Democratic House, and lost votes in the midterm elections, but he had a Republican Senate and gained a vote in the midterm election. Obama’s party had control of both houses for 2 years. Reagan never did.

Now the differences. The economy surged under Reagan. Gross domestic product in the final three months of 1983 rose at an annualized 8.5 percent. For Obama, the economic engine is running much more slowly. He narrowly avoided a double-dip recession in mid-2011, and growth accelerated in the fourth quarter to a 2.8 percent rate—the fastest the country experienced in 18 months. The unemployment rate in December 2011 was 8.5 percent, vs. 8.3 percent in December 1983. Yet joblessness 29 years ago dropped 2.5 percentage points in just 12 months, compared with a decline of less than 1 percentage point in 2011.

Correct me if I’m wrong here, but aren’t they saying that “Obama’s recession is a lot more complicated” because he hasn’t gotten the growth that Reagan did?

Most people conclude from this that Reagan had good policies and Obama not-so-good ones. Yet the tone here is that this is a problem that Obama had no hand in.

I’m not too much of an Obama basher, but I don’t think it’s a stretch to reinterpret this as: Obama’s situation is more complicated because he’s screwed it up worse.

Obama has struggled to master a far more complex situation.

I think it’s fair to say he has a different situation. “More complex”? I don’t think so.

… The Reagan recession was sparked by the high inflation of the Jimmy Carter years and the decision by then-Federal Reserve Chairman Paul Volcker to raise interest rates to as high as 20 percent in May 1981 to smother higher prices. Although the high rates caused a lot of pain, they left Volcker with plenty of room to cut until the recession had eased. Rate cuts started in June 1981. By December 1982, rates were down to 8.5 percent. The economy responded quickly to monetary easing. Fed Chairman Ben Bernanke, in contrast, has little room left for cuts; the federal funds rate is close to zero. “When you have a deep financial crisis paired with recession, it’s a completely different animal than a normal recession,” says Kenneth Rogoff, an economics professor at Harvard University. “The one in the Reagan Administration was a more normal one.”

Compared to what? How was Reagan’s recession more normal when Reagan had to deal with the highest inflation we ever had in a recession America? The name for this was stagflation, and it’s wishful thinking to call it normal. Our textbooks still don’t have a policy prescription for stagflation. Telling me that’s not a sign of a complicated situation is a fib.

The presence of so much debt in the economy makes companies and consumers reluctant to borrow and banks reluctant to lend, no matter how low interest rates go. Debt today remains a greater drag on the U.S. than in 1983 …

That is true.

Obama has worked with an economy that was weak even before the recession officially started in December 2007.

Ummm … no. The 2001-7 expansion was one of the longest on record. It was also fairly strong in 2003-6.

The expansion that started in late 2001 under President George W. Bush was among the most lackluster in modern U.S. history, providing little cushion against a possible downturn. By the start of the recession in December 2007, payrolls had grown less than 6 percent during the decade that started in 2000.

In order for payrolls to grow, you either need 1) lots of unemployed to re-employ, or 2) lots of young people entering the work force. The 2000-1 recession was so mild there wasn’t much unemployment, and I’ve already discussed in class that we are in a demographic period when people are leaving the labor force. So, low payroll growth was something most economists expected of Bush after he won the election.

… Payrolls grew 20 percent during the 1980s and 1990s and 27 percent during the 1970s.  …

These two periods fit the two criteria I just mentioned for strong job growth.

Many of the jobs generated during the Reagan recovery were well-paid factory work. Although Billy Joel was lamenting the decline of Industrial America in his 1982 hit Allentown, manufacturers maintained considerable might in 1983 and 1984: At the end of 1983, almost a fifth of working Americans—19 percent—labored in manufacturing. Fewer than 9 percent of workers do today. “Back then a larger fraction of the workforce was in manufacturing,” says Soss. “And you hire those people back when business gets better. There’s less of that going on now.”

This is mostly true, although factory workers get paid more now because they are more productive.

“Reagan could talk about morning in America and could come from that perspective,” says Peter D. Hart, who was a pollster for Walter Mondale, Reagan’s Democratic opponent in 1984. “The major difference this time is that Americans are much more likely to believe we are in a long-term decline.”

I think the bigger question is why they might think that at all. Have you checked your closets lately? They’re full of stuff. Have you checked how many hours you spend not working? We have more leisure than ever. Have you checked on all the fun things you can do with your time? Life wasn’t always like this.

Note that I am not claiming that the last 4 years have been any fun economically. I’m just claiming that we should be realistic and recognize that we’re going through a once every generation event. Not a once-in-a-lifetime or once-per-century event.

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