A quarterly magazine of urban affairs, published by the Manhattan Institute, edited by Brian C. Anderson.
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As Noam Scheiber tells it, the Obama administration hasnt spent nearly enough.
27 April 2012
The Escape Artists: How Obamas Team Fumbled the Recovery, by Noam Scheiber (Simon and Schuster, 368 pp., $28)
During the George W. Bush years, a fact-resistant argument arose on the left about why Republicans kept winning elections: social issues such as abortion, it was said, so unnerved white working-class voters that they voted Republican no matter what—even if doing so worked against their own economic self-interest and aggrandized the rich. Thomas Franks 2004 book, Whats the Matter with Kansas?, is the locus classicus of this argument.
The actual record, however, tells a different story. Bush spent the short honeymoon of his presidency designing one of the biggest federal giveaways to the working class in history. Instead of delivering a clean cut to marginal income-tax rates, as hed suggested hed do in his 2000 campaign, Bush gave a fig to the rich in exchange for a load of goodies for Mom & Pop. He slowed the drop in the top income-tax rate to a half-point cut per year and trimmed the estate tax while cutting the lower-rate tax brackets sizably and all at once. Bush neutered the marriage penalty, upped the child tax credit to $1,000, and put rebate checks in the mail to millions of Americans. No matter. The Thomas Frank critique remains current on the left to this day.
Now in the Obama years, another dubious argument circulates in liberal precincts: the economy has failed to recover substantively from the Great Recession because the presidents $800 billion stimulus plan of 2009 was too small. Echoes of this view resound in the writing of Nobel Prize winners Paul Krugman and Joseph Stiglitz, the recent public statements of Bill Clinton, and any number of progressive blogs. In Noam Scheibers Escape Artists—a heavily researched, 300-page study of Obamas economic policymaking—it forms the organizing principle and thesis.
While Escape Artists details how Obamas advisors formulated each aspect of their economic plan—the stimulus package, the bailouts, the regulatory pushes, the extension of the Bush tax cuts, the jobs bill—it doesnt have much of a point to make about these components. Scheiber keeps returning to the argument that the 2009 stimulus package was too small—and thus, the economy Obama must run on in this presidential election year remains in a weakened state. It is an exceedingly difficult case to prove. Obamas budget deficits have shattered all previous peacetime records. As a percentage of GDP, the average deficit of the Obama years has been half again greater than the biggest of the Ronald Reagan years. And we are to believe that the Obama fiscal intervention wasnt big enough?
For Scheiber, the key moment occurred in December 2008, a month before Obamas inauguration, when Christina Romer, the incoming chair of the Council of Economic Advisors, suggested that a proper government response to the economic downturn had to be in the range of $1.8 trillion. Scheiber recounts how, in the internal hurly-burly that followed, various Obama advisors—particularly Larry Summers—decided that proposing any figure over $800 billion would both brand the new administration as wild-eyed (or nonplanetary, in the Summers argot) and fail in Congress. Ultimately the president, given two options for the stimulus package—one amounting to $600 billion and the other $800 billion—chose the larger one, and Congress acquiesced.
In Scheibers telling, the smaller stimulus rendered the administrations Keynesianism insufficient and the economic recovery that ensued only sluggish: Romer was right. Escape Artists doesnt bother with the arcana of economic theory, but its likely that Romer drew her calculations from an application of something known in economics as Okuns law, after Arthur Okun, chair of the Council of Economic Advisors under Lyndon Johnson. (Romers syllabus from her course at Berkeley certainly puts Okuns law in lights.) A common version of Okuns law holds that every 2 percentage-point increase in GDP provides about one-half a percentage points reduction in unemployment. Government expenditures and personal consumption are, of course, components of GDP; if significantly increased, they will help create not only a jump in GDP, but a decline in unemployment.
Assuming Scheibers account is accurate, we can infer that in December 2008, Romer argued that a $1.8 trillion stimulus—say, a mix of government spending and non-marginal tax cuts, rebates, and the like—would create a proportional GDP increase. That is: at the trough of the recession in 2009, a $1.8 trillion addition to GDP would have represented a 14-percent boost. Thus, by the Okuns law formula, unemployment would have dived by 3.5 percent. The 10 percent unemployment the nation suffered that year would have soon evaporated to only 6.5 percent, below even todays 8 percent-plus rate.
The question that arises, though Scheiber doesnt address it, is whether Okuns law has any business being treated as a plaything of policymakers as opposed to what it is: a simple descriptor of the economys normal operations. Properly conceived, Okuns law is not so plastic as to support the idea that a ginning up of GDP by whatever fiat government deems appropriate will produce the desired effects. Rather, the law is useful in pointing out the employment effects of the business cycle in the absence of governmental machinations.
The real story here is that Romer was so irresponsible as to misrepresent the governments ability to manufacture an Okuns-law effect on unemployment. Escape Artists could just as easily have been a tale of how Obamas economic team prevented one of its top members from taking the economy (not to mention the deficit) to the edge of the cliff. Scheiber, however, writes in support of the Romer position and is thus forced into some strange assertions.
Perhaps the strangest is that all along, Obama has had a fateful weakness for fiscal conservatism. Though hed entered office with an activist agenda, he had always been a deficit hawk at heart, Scheiber writes. As for budget director Peter Orszag, he had come under the spell of dubious political-economic theory—one that elevated deficits above all else—and so the upshot of his considerable talents was to nudge Obama in the wrong direction. Again, the presidency under discussion here is the one that sent federal spending soaring to a quarter of GDP (from below one-fifth) and has accumulated a deficit of $1.3 trillion a year.
The more credible conclusion to draw from the Obama economic policy is that in 2009, Keynesianism was given one last try to prove its legitimacy in the real world—and failed. Keynesianism had shuffled off the stage in the 1980s after its activist monetary and fiscal policy in the 1970s delivered stagflation—the intolerable simultaneous increase in prices and unemployment along with meek economic growth. The ensuing Reagan Revolution lightened the heavy hand of fiscal and monetary institutions on the economy in the 1980s, producing a collapse in inflation and unemployment and the resurgence of growth.
Recent history has been a bitter pill for Keynesians to swallow. First, their beloved theory took blame for stagflation, and then its repudiation solved the problem. After a long period in the wilderness, Keynesianism has once again proved ineffective. Thus the new liberal shibboleth, which Scheibers Escape Artists exemplifies: that Keynesian stimulus hasnt failed under Obama because it hasnt really been tried.