This morning the Bureau of Economic Analysis released its first estimate for 2011 GDP. It showed national output for the first time surpassing the pre-recession peak, which occurred in the last quarter of 2007. (See chart below) The expansion in 2011 was led by autos, computers, and other manufactured goods.
Given that the economy hit its trough in mid-2009, the long slow climb since then has been disappointing. The outcome turns out to have been worse than the conventional wisdom that sharp declines tend to be followed by sharp recoveries. On the other hand, the outcome turns out to have been somewhat better than the Reinhart-Rogoff thesis that when the cause of a recession is a financial crisis, the recovery tends to take many years.
When the Treasury came out with its $750 bailout plan on September 22, Ithought it lacked so many necessary ingredients that it deserved a thumbs down.(Many others had similar objections, including George Soros.)
But in the negotiations between the Treasury and Congressional leaders over the course of last week, most of the missing ingredients were inserted.Starting with the additions that were most necessary on the merits, and moving toward the ones where the necessity was more political, they were:
Someone this week asked me what I thought of policy-makers who ex ante profess a free-market ideology and acute sensitivity to the dangers of moral hazard from financial bailouts, but who toss that ideology overboard when faced with a financial crisis.The reference was to Treasury Secretary Henry Paulson’s lobbying this week in support of a rescue for Fannie Mae and Freddie Mac, the two big home mortgage agencies, following on the rescue of Bear Stearns in March.My reply was:“They say there are no atheists in foxholes.Perhaps, then, there are also no libertarians in financial crises.”