President Obama can be wonky when he describes his policy goals to audiences. So it is often easy to trace what he says back to the thinkers, theory, white papers, books and arguments that preceded it.
While I was on vacation, President Obama did a townhall at facebook where he took some specific questions on the economy. Several people asked him why he wasn’t more concerned about the short-term economic and jobs crisis. He mentioned one specific reason why the recovery is so bad and why he thinks the government should transition to long-term problems (my bold):
[Obama] So those were all investments that we made in the first two years. Now, the economy is now growing. It’s not growing quite as fast as we would like, because after a financial crisis, typically there’s a bigger drag on the economy for a longer period of time. But it is growing. And over the last year and a half we’ve seen almost 2 million jobs created in the private sector.
Because this recession came at a time when we were already deeply in debt and it made the debt worse, if we don’t have a serious plan to tackle the debt and the deficit, that could actually end up being a bigger drag on the economy than anything else…
So you’re right that it’s tricky. Folks around here are used to the hills in San Francisco, and you’ve driven — I don’t know if they still have clutch cars around here. Anybody every driven a clutch car? (Laughter.) I mean, you got to sort of tap and — well, that’s sort of what we faced in terms of the economy, right? We got to hit the accelerator, but we’ve got to also make sure that we don’t gun it; we can’t let the car slip backwards. And so what we’re trying to do then is put together a debt and deficit plan that doesn’t slash spending so drastically that we can’t still make investments in education, that we can’t still make investments in infrastructure — all of which would help the economy grow.
The second and third paragraph are, in Atrios’ phrase, a “word salad” of self-conflicting deficit hawkery.
But I find the bolded in the first paragraph very telling – Obama has it in his mind that the financial crisis means there’s going to be a weak recovery and a longer period of suffering and waste from mass unemployment just because it was a financial crisis and there’s little to be done in terms of energy or priorities from the government. Better to go and fight a battle decades from now than try and change the current problems. This argument comes from Kenneth Rogoff and Carmen Reinhart’s book This Time Its Different.
It’s funny because Ben Bernanke was asked about this at his historic first press conference: Rogoff says there’s been a financial crisis and financial crises have slow recovery so shouldn’t we just suck it up and live with another two years away from full employment? And unlike Obama, Bernanke – Bernanke! The former George W. Bush Chairman of the Council of Economic Advisors, Ben Bernanke! - pushed back. Transcript:
REPORTER: Mr. Chairman, Ken Rogoff, wrote a book looking at 800 years of financial history and discovered when you have a financial crisis it takes a lot longer for the economy to recover.
Are people expecting too much from the Federal Reserve in terms of helping the economy recover? Has that complicated your monetary policy making?
CHAIRMAN BERNANKE: Let me say first that Ken Rogoff was a graduate school class mate of mine. I even played Chess against him, which was a big mistake. I enjoyed that book very much. I thought it was informative and as you say, it makes the point that as a historical matter, recoveries following a financial crisis tend to be slow.
What the book didn’t do is give a full explanation of why that’s the case. Part of it has to do with the problems in credit markets. My own research when I was in academia focused a good deal on the problems in credit markets on recoveries.
Other aspects would include the effects of credit problems on areas like housing and so on. We are seeing all that, of course, in our economy.
That said, another possible explanation for the slow recovery from financial crises might be that policy responses were not adequate. That the recapitalization of the banking system, the restoration of credit flows and the monetary fiscal policies were not sufficient to get as quick a recovery as might otherwise have been possible.
And so we haven’t allowed that historical fact to dissuade us from doing all we can to support a strong recovery.
Last spring/summer Arjun Jayadev and I had a bunch of discussions about what economic narratives would show up arguing that a slow, protracted recovery that took years to get to full employment was a necessary thing, and what research would be needed to be done to counter them. We thought about how to research and argue about “structural unemployment”, the bizarre contractionary-policy-is-now-expansionary-policy thinking, that there’s a magic cutoff on debt/gdp ratios that, once past, will slow growth. etc. We did mentioned the idea that we have a bad recovery just because of a financial crisis because we didn’t think Obama, Democrats or media would be that motivated by it. (I turned this blog into a clearinghouse of structural unemployment arguments instead.)
Because this argument has been considered by many. Here’s Joe Gagnon making the argument for QEII in December 2009 and taking on the Rogoff/Reinhart thesis directly:
Some have argued that economies take longer than normal to return to full employment after ﬁnancial crises (Reinhart and Rogoﬀ 2009). However, there is a wide range of growth outcomes after ﬁ nancial crises, and the worst outcomes tended to be associated with the poorest policy responses.
The goal of policymakers should be to learn from the past and achieve a better outcome than simply the average of past outcomes. In the current crisis, the zero bound on interest rates has been a major factor preventing monetary policymakers from doing as much as they otherwise would to speed recoveries. But, as discussed below, the zero bound is not a limit on what monetary policy can do. There is plenty of scope for further monetary stimulus.
Yes, yes there is. But apparently the White House is running on the nothing to be done here, move along, economic theory of the recovery.