Was This Time Different On the Economy?

Ezra Klein wrote a 7,000 word summary of what went right and wrong on economic policy during the first three years of the Obama campaign. It’s well-reported and fun to read, and you should check it out. I imagine that the piece will function as a kind of baseline argument for critiquing the Obama administration on the economy from the liberal wonkosphere corner of the blogosphere. I’m going to throw out some critical thoughts below.

The piece is quite consciously avoiding the narrative, storytelling approach to politics and the Presidency. It reads as almost the mirror-image of something like Drew Westen’s approach to how Obama did on the economy – Obama’s passion isn’t in question here. In Klein’s piece it is all projections based on available evidence, political possibilities given political constraints and negotiating with hostile counterparties.  As such, there’s a couple of ideas level issues at play that should be made more explicit.

Fiscal

First off, Obama is much more of a fiscal conservative than I had imagined. Or more specifically he’s someone who generally takes Rubinonomics for granted but couldn’t shift gears when it came to the largest downturn since the Great Depression. Hence a lot of concerns over the deficit and, more important, a real focus on only expanding the short-term deficit if and only if it involved closing the long-term deficit.

Noam Schieber at the New Republic was getting word from Treasury as early as late 2009 that they thought that they needed “some signal to U.S. bondholders that it takes the deficit seriously” and “spending more money now [on stimulus] could actually raise long-term rates, thereby offsetting its stimulative effect.”  This naturally lead to wanting to strike “grand bargains” with the other side, a path that lead the administration down some bad roads in terms of the agenda.

The flip side of this is the administration’s focus on “confidence” – financial markets, Wall Street and business community – as a way of bringing growth up and unemployment down.  This has most obviously driven policy in regards to Wall Street and the financial markets (more on that in a second), but we see this in terms of dealing with the deficit.  It has also brought in approaches emphasizing positions that are much more “supply-side” – patent reform, regulation cutting, appointing senior business leaders to key positions, a key State of the Union based on “Winning the Future” through education investments – that can’t be justified as getting us back to full employment.  By the debt ceiling fight these administration talking points were becoming a parody of right-wing talking points and Hooverism.

In the article the consequences of misjudging the severity of the recession ended up as being not able to go back to Congress later.  I think a more important problem is that it created an priority for tax cuts over longer-term investments which would have been better stimulus.  I’ve had staffers tell me on background that members of Congress would approach the administration in 2009 looking to build out huge, New-Deal style infrastructure as a separate track, only to be told that the recovery would be fully underway by the time it kicked in – thus wasted.  There was no response to this.  That’s a problem given the narrow window they could operate in the Senate.

Monetary

Ryan Avent has tackled the Federal Reserve problem here.  There’s a new Federal Reserve iPad app. It is pretty rad.  You can click on all the members of the FOMC.  You can also click on the two vacant seats and it says that they are vacant:

Even iPad apps are mad at Obama for not being aggressive on the Fed appointments!

Housing

First of all, the article focuses on a “This Time Is Different” approach to financial crises.  One antibody our country had for financial crashes in the 19th century, pre-Keynes, was mass temporary bankruptcy for bad debts.  During the 19th century you saw bankruptcy laws passed in the aftermath of bad financial crises to assign the losses and move the economy forward, and repealed shortly thereafter. You saw this with the Panic of 1837, which had a devastating recession following it.

The Obama administration was either indifferent or hostile to changes in the bankruptcy code – cramdown – following this crash, even though Obama campaigned on it. Technical: cramdown isn’t about making the banks eat the loss, it’s about the loss coming from credit writedowns versus a firesale of a house in foreclosure – hence evidence that cramdown wouldn’t raise costs.  But either way,  in addition to forgetting things since Keynes, we are also in the business of forgetting things from the 19th century.

David Dayen wrote up the housing failures.  The important thing to follow is that the whole housing market approach was predicated on not upsetting the financial sector – even to the point of not investigating basic unlawful behavior in foreclosures – so that this “confidence” would get us back on track. Backing the financial sector, instead of housing and people, turned out to be backing the wrong horse.  There’s a backlog of housing that isn’t going to go anywhere, armies of creditors and rentiers fighting each other indefinitely in the courts, investment wary to invest in a neighborhood when 2 million foreclosures hang over the economy each year, peoples lives devastated, etc.  Dayen:

The Administration set aside $75 billion through TARP for HAMP, and to date have used $1.6 billion or so on a program that is effectively irrelevant at this point (and they have cleverly revised history to claim that it was only a $50 billion allotment, to make this look a little better). Without any need to clear Congress, the Administration had all the authority they needed to put this $75 billion to work, including the ability to punish servicers who failed to comply with guidelines…

Then, for two years, Treasury swore up and down there was nothing they could do to punish servicers who didn’t comply. Finally, a few months ago, they started withholding incentive payments for noncompliance, as if they just magically acquired the power. It turns out, as Paul Kiel from Pro Publica displayed in a story this week, that Treasury wasn’t even checking on servicer compliance for at least the first year of the program…

The truth that emerges from all of these facts is that the Administration had no interest whatsoever in using more than a token amount of the TARP authority they had already husbanded for mortgage relief and foreclosure mitigation….You can call this the function of bad politics, but I’d say it was more an extension of bank policy, a policy to preserve the wonderful sub-1 percent growth and still-vulnerable financial system we have going for ourselves….Even today there are programs that could be scaled up to work for the mass of homeowners. They aren’t being done not because of some Tea Party-fueled backlash, but because Wall Street would face trouble.

Crisis

But the final take is that they got some right, some wrong, but were ultimately boxed in by failing institutions and a crisis too big to handle.

For a fun counterpoint, Corey Robin in Dissent recently:

My impression of American history was that those presidents universally considered great—Washington, Lincoln, Roosevelt—were beset by crises: the founding of a new nation, the Civil War, the Depression, the Second World War. And far from “balancing crisis management” with their pursuit of long-term goals, the great presidents saw, or found, in those crises an opportunity for reconstructing American politics from the bottom up. It was the crises, in other words, or at least how they handled those crises, that enabled them to pursue their long-term goals.

That at any rate was the final judgment Teddy Roosevelt rendered on his own presidency: that he would never be remembered as another Lincoln because he didn’t have the benefit of confronting catastrophe.  Or so I remember reading somewhere, perhaps here.

Whatever one thinks about Obama, it really makes no sense to say that he can’t be all that his supporters want him to be because of the Great Recession, two (now three) wars in the Arab and Muslim world, a recalcitrant opposition, and so on. Other presidents would have killed for opportunities like these.

Your thoughts?