Wednesday, April 24, 2013

What Lessons Should be Learned from the Aftermath of the Great Recession?

David Wessel, a fairly good economics columnist from The Wall Street Journal lists out the 7 things he thinks we should learn from the last 6 years. It’s tone is similar to my 26 short posts.

A generation ago, unemployment of 7.6% would have been considered a bad recession in the U.S. Now it's a sign of improvement …

Is this the best we can do?

It's hard to know what might have been. This episode is not yet over, so no one can know the ultimate consequences of what has been done. That said, a few early lessons seem clear:

Lesson one: Get the diagnosis right.

Ken Rogoff, a Harvard economist … says the single most important thing to remember is this: "When you have a recession accompanied by a deep financial crisis, you are in for a long period of slow growth."

… This sort of recession is more like a chronic disease. … "This is really about whether you are going to have slow growth for five years or 15," he says. Neither the U.S. nor Europe understood this in when the first major financial shocks hit.

Lesson two: When in doubt, do more, not less.

… Recent history demonstrates that initial forecasts are rarely gloomy enough …

… Recent history doesn't yet provide much support that less stimulus would have been better.

Lesson three: A financial crisis is about economics, not morality.

There's a temptation to preach after so many people make so many mistakes: Avoid the sins that created the crisis. Punish the perpetrators. Pursue the economic rectitude of thrift.

… There's a strong case for …  temporarily putting aside the fear …

Lesson four: Mind the banks.

During the Great Depression, as Ben Bernanke showed in his academic work, the economy suffered from the Federal Reserve's failure to see that dying banks were clogging the credit arteries of the economy. … During the 2000s, the U.S. learned from that history; Europe did not.

So U.S. banks are widely regarded as healthy, and are beginning to lend more readily. Some major European banks, meanwhile, are still seen as shaky.

Lesson five: Mind the borrowers, too.

If a borrower truly can't pay back a loan, then pretending he will does neither borrower nor lender any good—and it can cripple an economy. But the politics of writing off debts, especially at taxpayer expense, can be an insurmountable obstacle.

… Neither the Bush nor the Obama administrations ever found a vehicle with a payoff that they thought worth the economic and political cost. Their critics say this excessive caution prolonged the housing bust and slowed the recovery.

In Europe, there was a reluctance to appear to be rewarding profligate peripheral economies (see Lesson three) by forgiving their debts. …

Lesson six: Go for long-acting, time-release fiscal policy.

With hindsight, the composition of the small Bush fiscal stimulus of 2008 and the big Obama fiscal stimulus of 2009 weren't suited to the problem. …  Had Congress been willing, a smarter stimulus would have been …  more "speedy, substantial and sustained"

Lesson seven: Have an exit strategy and explain it.

There is still a nagging worry that this is going to end badly, and that can lead businesses, consumers and politicians to hold back and hurt the economy.

Typically, I agree with a big chunk of what Wessel says, but rarely all of it. Same here.

  • I agree with Lesson One. The Great Recession was bad but not horrible; but what made is bad was the combination of a recession and a financial crisis for the first time in 75 years.
  • I agree with the motivation for Lesson Two. But I have grave doubts about the ability of elected officials to ever do both “more” and “better” at the same time.
  • I agree with Lesson Three. Armchair quarterbacks rarely bring up moral failings in sports, but it’s a peculiarly American sport to use moral failings as a justification for bizarre policies.
  • I agree with Lesson Four. I think the unsung hero of the last several years was FDIC, and Sheila Bair (it’s boss for most of the time).
  • I do not agree with Lesson Five. One point where I do think we need to be more morally high-falutin’ is with borrowers. We bitch a lot about predatory lenders, but the story of this recession was predatory borrowing. What else do you call borrowing money to buy houses to flip?
  • Lesson Six is a crock. Sometimes Wessel’s Keynesian colors show through clearly, and they do on this count. If anything, Obama’s stimulus package was too stretched out. To claim that it wasn’t is denying facts.
  • I agree with Lesson Seven. The thing is, I don’t think the Obama administration has a clearly defined end goal. Their treatment of the Great Recession is similar to the treatment of Iraq and Afghanistan by Bush: what is the hurdle we have to clear to stand down?

Read the whole thing, entitled “Seven Lessons for Fixing an Economy” in the April 20 issue of The Wall Street Journal.

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