US recovery rate under Obama far from poor
ECONOMICS:HOW BADLY has the US economy performed under President Barack Obama? Ronald Reagan posed the political version of this question in his presidential debate against Jimmy Carter in 1980, when he asked: “Are you better off than you were four years ago?” It is, naturally, the question Mitt Romney asks now.
At first glance, the answer is: just a little better off. In the second quarter of 2012, real gross domestic product was 5.2 per cent higher than in the fourth quarter of 2008, the last full quarter before Mr Obama took office.
The seasonally adjusted unemployment rate of 7.8 per cent in September was the same as in January 2009. Yet, since he took office when the economy was in the throes of a huge financial crisis, analysts must ask whether this performance is decent in the circumstances, as supporters argue, or disappointing, as opponents insist.
John Taylor, professor at Stanford University, a highly regarded macroeconomist, has no doubt of the answer. In a recent blog, he argues that strong growth normally follows US financial crises, the exception to this rule being the current recovery.
Moreover, he argues, bad policy is to blame. True, Prof Taylor is a member of Mr Romney’s economic team. Yet the question remains: is he right? The answer is: no. But it is important to ask why.
The first question is whether Prof Taylor is comparing like with like. Against him is widespread agreement that the aftermaths of systemic financial crises are worse than those of more normal downturns. The seminal research of Carmen Reinhart and Kenneth Rogoff in their classic book, This Time is Different, has shaped this consensus. It is also supported by the work of the economic historian Alan Taylor, of the University of Virginia, included in a recent paper entitled The Great Leveraging.
Profs Reinhart and Rogoff distinguish a “systemic financial crisis” as one characterised by a real estate bubble and high levels of debt. Neither of these preceded the recessions of 1973 and 1981, which are included in Prof Taylor’s chart. Both the precursors and results of the recent crisis were quite different from the downturns in the mid-1970s, early 1980s and early 1990s. This is true of real house prices, inflation, interest rates and debt.
The second question is whether speed of recovery is a good measure of success. The answer is: no. To understand this, focus on the systemic financial crises that began in 1893, 1907, 1929 and 2007, respectively. Prof Taylor relies on a paper by Michael Bordo of Rutgers and Joseph Haubrich of the Federal Reserve Bank of Cleveland. What marks out the recent recession is not the weakness of the recovery, but that of the contraction. The main reason the recovery seems weak was that the contraction was so mild, given the scale of the financial crisis. That was a huge policy success.
In their response to Prof Bordo and Mr Haubrich, Profs Reinhart and Rogoff also note that the economic contraction after the recent crisis was smaller than after prior systemic crises. Moreover, five years on, real GDP per head, relative to the baseline, is higher than in the average of prior systemic crises. That is what matters. A stronger recovery from a steeper plunge is hardly a better outcome than a slower recovery from a milder plunge.