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.


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.


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!


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.


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?

This entry was posted in Uncategorized. Bookmark the permalink.

20 Responses to Was This Time Different On the Economy?

  1. NSH says:

    Mike your blog is indispensible reading, and I was hoping that you would respond to Klein’s lengthy WaPo piece. For some time, I have found EK’s writing on the Obama Administration becoming more of an apologia of the Admin. and its policies, like he is an extension of the WH Press Secretary. I can’t agree that Klein covers all of the available evidence because there is no mention of Richard Koo and his writings on balance sheet recessions, his book on Japan’s economic crisis was contemporaneous with Reinhart and Rogoff. At that time there were other credible naratives/theories available to the Admin.that suggested and different and “stronger” policy responses. To assert that the admin was ultimately boxed in is to ignore that admin’s failure to develop a Plan B.

  2. TK421 says:

    “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.”

    What a great, great point that is. I hope many people read that.

    Anyway, the more Obama’s supporters tell me there was nothing– and is nothing– he can do, the less interest I have in helping him stay in the White House.

  3. Ouch!
    I keep reading these articles and I know everyone means well, including Klein and the host of others: Randall Wray, Krugman, etc.

    There is the Rogoff, the housing bubble, Obama, stimulus, the Fed, the banks, Wall Street, TBTF., etc..

    It’s not just the US. It’s everywhere, The EU is in worse shape than the US, the Japanese are saddled with the worst government since Adolf Hitler, the Russians are failing, so are investor’s pets Brazil, Vietnam, India, etc. It’s not about debt, mortgages gone bad or Keynes, who is irrelevant.

    America invented the waste-based economy, it runs on cheap petroleum. The so-called ‘triumph of the West’ and neo-liberalism exported the waste-based economy everywhere around the world. What’s wrong?

    Dollar for dollar peak oil took place in 1998, when a barrel of Saudi crude cost $12. Today the same barrel costs $115. The use of that barrel does not return enough to pay for it. The West has been borrowing to make up the difference since 1998 and the world is flat broke.

    It gets worse! The cost of the replacement barrel is sharply rising toward $100 as wells must be drilled into small, tight formations or under 10,000 feet of ocean. When the economic use of oil returns less than the cost of replacement that new oil stays in the ground! This is happening right now and nobody is paying attention to it.

    Also (it gets worst) the credit system is breaking down — because there are no returns, see Greece. When credit is stripped away leaving a cash price there will be shortages and these shortage will be permanent. This is taking place right now in China where fuel shortages have been underway for a year with no end in sight.

    We have an energy crisis that is intermediated by debt. We’ve spent ourselves into a hole with an economy that orbits around auto use; what is taking place right now is the end of the waste-based economy and the de-automobilization of the world it is starting in Greece you just watch. Krugman, Klein et all will wring their hands and nothing can be done to nothing can be fixed the only possible solution is stringent conservation and a new kind of economy.

    Kiss yr kids it’s going to be tough sledding.

  4. anon says:

    Thoughts? Sure. I am thoroughly disppointed in Obama and what I thought was going to be delivered. Ican can only assume that the Yes, We Can stuff was electioneering, and that he is still conservative. He has the cahnce now, given the extreme right wing opposition toat least “appear” as if he wants real job creation. Waiting to see it….

  5. Confidence comes from living within a system that works. In America today, we have hardly any systems that work. And, as the Onion said recently, the last man who knew what the f*** what he was doing just died.

    Our leaders in both business and in government are terrible. Over at GM, a man who occupied the C-Suite for 20 years, Rick Wagoner, drove a major US corporation into the ground. Did he get fired? Yes, by Obama (American capitalism at work!) But he also was rewarded with a very rich golden parachute worth about $10 million. That’s just the retirement package. The compensation he earned driving his company into the ground is unimaginable to the 99%.

    What about auto workers? Well, to keep their jobs, the unions negotiated a two-tier system – new employees get about $14/hour and the seasoned employees get about $28/hour. (http://wapo.st/oqEclN) For new employees (if my math is correct), they make less than $30K a year. And there’s no golden parachute for them if they screw up as royally as Wagoner did.

    Due to consolidation and business failure, our financial sector is even more TBTF than in 2008. Thus, the highly compensated bankers know that they will continue to be bailed out when their business practices result in failure. And they will look to recent history and know that despite their failure, they will continue to get their bonus.

    What about those who took on mortgages they could not afford? They’re getting forced out of their houses….

    And who’s gone to jail for making money by issuing fraudulent loans? Hmmm….

    I like Steve Randy Waldman’s take on Klein’s piece – http://bit.ly/q8eTEg. The political approach Democrats and Republicans have taken since the crisis has been disgracefully unfair, favoring, as it does, those who completely screwed over the economy – and who profited in both the run up to the crash and via the government’s response post-crash. How our leaders of both parties addressed the structural issues that led to the crash has been despicable.

    We have a consumer-driven economy. To overlook the consumer in a time of crisis is not only unfair, but stupid – and clearly has not worked. Obama has forgotten his 2008 platform – “change we need” and instead, settled for supporting a very conservative agenda in terms of the financial situation. And when we needed to focus on solving the problems of the great recession/little depression, he shifted focus to the Afghanistan of American domestic politics – health care. Thus, a great crisis has been wasted….

  6. Pingback: Legends Of The Fall (Of 2009) - NYTimes.com

  7. Andrew Burton says:

    I don’t agree that Klein is an apologist for the Administration: I think he’s more interested in how potentially effective policy does or doesn’t survive the political process, without the gossip about personalities (did you know Larry Summers isn’t universally beloved?)

    I read this piece, and I didn’t dislike it, but I wasn’t whacking my head every ten minutes saying “that’s new!” or “I’d never have thought of that!”

    One issue that wasn’t covered in any real depth is Mike’s observation, which I agree with, that Obama took Rubinomics for granted, and has backed the financial sector wherever possible rather than take it on directly. Geithner’s PPIP had as much chance of success as Paulson’s Super SIV, which is to say none at all. And the stress tests were obviously pure film-flam.

    So, my question would be – could a Democratic Administration have taken power in 2009 that wasn’t cognitively captured by the finance sector? And could it, with the constellation of political forces arranged against it – the Republican mighty Wurlitzer, including congressional opposition, the expected dissent of Democratic senators like Schumer, Dodd and Lieberman, and the ferocious lobbying power of a cornered finance industry – have delivered wholesale, rather than ersatz, financial sector reform in 2009? And finally, would that have made a genuine difference to unemployment, inflation, interest rates, trade balances or any other political economy metric? Or would it have been a virtuous deed that went unrewarded or punished?

  8. The notion that all of these “elites” can’t see it coming is just too much to take. Something is very wrong with our “elites” in that they don’t understand the world at all, in which case they have no business being in the positions that they are in, or they are delusional to the point of believing that despite the ways things seem to be they can will them to be different, or they are all just flat out liars.

    Going back the run-up to the Iraq War in 2002 it was obvious to me that we were being lied to by the Bush administration before the war even started, in fact it inspired me to create a website dedicated to the subject that has grown into something bigger since, but I documented the argument against Bush’s case for war back in 2002 and 2003 and it held up extremely well as the evidence came to light in 2004-2006.

    So if I, an armchair observer, could figure it out it means that folk in the top tiers of government, the Senate, etc., should have been able to figure it out. Either they knew and were cowards or they were idiots.

    (Oh BTW, I put my investments into gold back in 2002, even though I think investing in gold is stupid. Its done well…)

    That’s just issue #1. Now we move on to the housing bubble. I saw that coming a mile away too. Back in 2005 (I lived in South Florida where it was pretty obvious) it was obvious to me and my other friends we all talked about, we all expected a crash, indeed my error was that I expected it sooner than it happened. For the bankers and the mortgage brokers, etc. to come out and claim that “oh this was an unforeseeable crisis”, etc. is a bunch of hogwash. It was clear as day, all you had to do with look at the price of houses vs media incomes or housing prices vs rental prices and the bubble was plain to see. And yet, we’ve largely gone along with this narrative too that the multi-billionaires, the supposed “best and brightest” got caught in an unpredictable crisis. Bullshit!

    And now we get to the double dip recession that we are either already in or driving into. Once again, it was totally predictable. The fact that I, once again an armchair observe sitting in my home watching news and reading articles, figured this out means that either the “best and the brightest” ARE NOT the “best and the brightest” or they are lairs or they are delusional or all of the above.

    And here are some links from my site to back these things up:

  9. Peter K. says:

    My take is similar to others like DeLong. The stimulus wasn’t big enough, the should have had a plan B. The Federal Reserve should have shown some Volckerian resolve on the jobs recession. Instead Bernanke is just worried about keeping deflation at bay. The 3 regular dissenters on the Fed board are all appointed by the banks and carrying the banks’ water. High unemployment isn’t a concern. (To me leaving 2 spots open on the board is like leaving 2 spots open on the Supreme Court.)

    The problem isn’t that they misjudged the depth of the recession, it’s that they were confident that the private sector would pick up the growth baton and that the economy would reach takeoff velocity. (No doubt the Federal Reserve was telling them this misinformation). The stimulus was a cushion and they were expecting a “V” shaped recovery when we got a “L” shaped one. This led to the fatal pivot to deficit-cutting. Obama must have been smoking some Hawaiian green shoots.

  10. Peter K. says:

    One other thing. I am more sympathetic to Obama than most. I hope he wins re-election b/c the Republicans are so awful, but he if he does manage to win, a horrible byproduct will be having to read many analyses which say that the unemployment rate before an election doesn’t matter. (however median incomes have been falling also so there’s that and the bad atmosphere).

    David Leonhardt recently reported that college graduates with a 4 year degree have an unemployment rate of 4.3 percent. Here’s a NYTimes graph from a piece on Obama’s re-election strategy:

    Obama became President by winning purple states like Virginia and Colorado that have highly educated voters. All the red states have lower education levels. He is counting on winning all of the high education states again to win the electoral college. I don’t like the cynical implications, but it may be partly why he turned to green shoot talk.

    • Yeah, but historically the unemployment rate for college grads is under 2%, but still, yeah…

      And as someone who enthusiastically voted for Obama in 2008, I’m definitely not voting for him again, if it means letting a Republican win. I don’t believe that if a Republican wins the presidency that it would result in all kinds of horrible policies, all it would really result in would be total gridlock, as the Democrats would then (hopefully) be as obstructionist or more against a crazy Republican President and House.

      Honestly I think we would be better off today if McCain had won, not because McCain would have been a better president, but because the Democrats would have just road blocked him and nothing would have gotten done, as opposed to now where Obama has pushed through some of the most anti-working class set of legislation in our history. We’d probably be in FEWER wars now with McCain due to Democratic opposition as opposed to Obama pulling them across the line, etc.

      • TimmyB says:

        I am sad to write, as a former Obama doner, that I agree with this 100%.

      • Tim O. says:

        As much as I feel that Obama has let us down in a diverse number of ways, I can’t stomach the thought of another republican president. I am currently reading “Looking Forward” by FDR, and he writes in the second chapter he doesn’t believe that the economy, something man-made, cannot be steered by man. All I hear from republicans is deregulation (what started this mess), less is more (austerity hurts the middle class’ buying power), and run of the mill gibberish. FDR goes on to say America can’t be afraid of trying and failing to fix the great depression rather than following old remedies. I think we can all agree no matter who took office we would still be in this mess today.

      • TimmyB says:

        No, Tim O, we can’t all agree. Someone else, who wasn’t in the pocket of Wall Street & didn’t appoint failures such as Tim G could have done much better. It isn’t Fate that brought us here.

  11. Pingback: The two economies of American politics

  12. Pingback: What I’m Reading Saturday, October 15, 2011 | Rationally Thinking Out Loud

  13. mje says:

    The piece corraborates others who have indicated the BHO administration has no plan to bring down unemployment from 9.1 % or 16 % (if you count U-6). This is innmoral in my book.

  14. Pingback: Sunday Reading « zunguzungu

  15. Pingback: Not a good idea to bet against Paul Krugman « Julio Huato @ SFC

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s