Commentators are taking note of the five-year anniversary of the fiscal stimulus that President Obama enacted during his first month in office. Those who don’t like Obama are still asking “if the fiscal stimulus was so great, why didn’t it work?” What is the appropriate response?
Those who think that the spending increases and tax cuts were the right thing to do have given a number of responses, which sound a bit weak to me. The first is that the stimulus wasn’t big enough. The second was that the Great Recession would have been much worse in the absence of the stimulus, perhaps a replay of the Great Depression of the 1930s. (The media are fond of this line of reasoning because it allows them to escape making a judgment. They can just say “nobody knows what would have happened otherwise.”) The third response is that the fiscal stimulus was short-lived, and in fact was reversed by the Congress by 2010.
The recent release of a revised set of GDP statistics by Britain’s Office for National Statistics showed that growth had not quite, as previously thought, been negative for two consecutive quarters in the winter of 2011-12. The point, as it was reported, was that a UK recession (a second dip after the Great Recession of 2008-09) was nowerased from the history books — and that the Conservativegovernment would take a bit of satisfaction from this fact. But it should not.
The world is in the grip of a debate between fiscal austerity and fiscal stimulus. Opponents of austerity worry about contractionary effects on the economy. Opponents of stimulus worry about indebtedness and moral hazard.
Is austerity good or bad? It is as foolish to debate this proposition as it would be to debate whether it is better for a driver to turn left or right. It depends where the car is on the road. Sometimes left is appropriate, sometimes right. When an economy is in a boom, the government should run a surplus; other times, when in recession, it should run a deficit.
With November’s election fast approaching, the Republican candidates seeking to challenge President Barack Obama claim that his policies have done nothing to support recovery from the recession that he inherited in January 2009. If anything, they claim, his fiscal stimulus made matters worse. And, despite recent improvement, the level of unemployment indeed remains far too high.not blame George W. Bush for the recession that began two months after he took office in 2001. There hadn’t yet been time for bad policies to damage the economy.)
The Obama Recovery. The U.S. economy was in free fall in late 2008, whether measured by GDP statistics, the monthly jobs numbers, or inter-bank spreads. Was the end of the recession in mid-2009 attributable to policies adopted by President Obama? A full evaluation of that question to economists’ standards would require delving into the complexity of mathematical models. The public generally has a simpler standard: was the impact big enough to be visible to the naked eye? Amazingly, the answer is “yes.” Whichever of those statistics one looks at, and whether it is coincidence or not: the economic free-fall ended almost precisely the month that Obama took office, January 2009.
Emerging markets have generally had much better economic fundamentals over the last decade than advanced economies. For example, one third of developing countries have succeeded in breaking the historical syndrome of procyclical (destabilizing) fiscal policy. For the first time, they took advantage of the boom of 2003-08 to strengthen their budget balances, which allowed a fiscal easing when the global recession hit in 2008-09.
The 15-year cycle in EMs. Market swings that start out based firmly on fundamentals can eventually go too far. Some emerging markets like Turkey look vulnerable this year. A crash would fit the biblical pattern: seven fat years, followed by seven lean years. Here are the last three cycles of capital flows to developing countries:
1975-81: 7 fat years (“recycling petrodollars”)
1982: crash (the international debt crisis)
1983-1989: 7 lean years (the “Lost Decade” in Latin America)
1990-1996: 7 fat years (Emerging Market boom)
1997: crash (the East Asia crisis)
1997-2003: 7 lean years (currency crises spread globally)
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.
THE BIGGEST THREAT TO THE GLOBAL ECONOMY IS … Anti-market bias. -Bryan Caplan • Procrastination. -Peter Diamond • Short-term thinking. -Esther Dyson • A euro meltdown. -Dean Baker • Tax-cut fanatics. -Jeffrey Frankel • The bond market. -Andy Sumner •
MY OUT-OF-THE-BOX SUGGESTION TO REVIVE THE GLOBAL ECONOMY IS Wipe out debts. -Daron Acemoglu • Require candidates for national office to pass ninth-grade tests on arithmetic, history, and geography. -Jeffrey Frankel • Double down on science. -Tyler Cowen• A government lottery where winners have mortgages, student loans, or other debt paid off. -Mark Thoma • We don’t need “out-of-the-box” solutions; we need “head-out-of-the-sand” ones. -Adam Hersh • Pray. -David Smick
December 31 is technically the end of the first decade of the 21st century. It is perhaps an appropriate time to review one’s predictions. It seems to me that I got some things right over the last decade. Indulge me while I review the predictions that came true, before turning to those that did not work out as well.
Stock market peak At the end of the 1990s, I felt that the dizzying ascent of equity prices could not continue into the new decade, that there was “…a bubble component in the stock market” (Nov. 20, 1999). This was four months before the bubble burst in 2000. So far so good.
The NBER‘s Business Cycle Dating Committee, of which I am a member, announced this morning that June 2009 was the trough of the recession that began in December 2007. It was the longest recession since the 1930s.
It is the fate of the Committee to be teased mercilessly every time we make one of our formal declarations of a turning point in the economy. We get it from both directions: We waited too late to call the end of the recession, or we did it too early. (Occasionally someone makes both criticisms simultaneously!) Even The Daily Show got in on the fun this time.
The NBERBusiness Cycle Dating Committee this morning posted an announcement that it had met in person April 8 - an infrequent event - but that it had not yet decided to call the trough in the recession that began in December 2007. The meeting has led to lots of questions from the press over the weekend, for stories that appeared today, and then more questions today in response to those stories. Here are some of the questions that have come up the most often, and my own personal answers, speaking for myself and not the Committee of which I am a member. Continue reading →