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Obama and Reagan cont'd

obamareaganapproval.jpg

According to Mike Allen, the Wall Street Journal's monthly survey of economists will show that most predict the unemployment rate will be above 8.5 percent in June 2011. So it's worth talking a bit more about the Gallup graph I posted the other day showing an almost eerie synchronicity between Ronald Reagan and Barack Obama's approval ratings (that graph is also atop this post; click on it for a larger version).

Whether Obama's polling follows Reagan's has less to do with whether Obama "is" Reagan and more to do with whether Ben Bernanke is Paul Volcker. The recession afflicting Ronald Reagan was, in large part, Volcker's creation. It was an attempt to break inflation, and it worked. The strategy was simple: Raise interest rates. And thus, the recovery was simple, too: Lower interest rates. GDP growth went from negative in 1982 to 7 percent in 1984. If that happens to Obama then, as Matthew Yglesias says, he'll indeed cruise to reelection.

The problem for the Obama-Reagan comparison is that this isn't a Fed-created recession. It's a financial crisis. And they take longer to recover from. For the economy to recover in 1982, the Fed just had to lower interest rates. For our economy to recover, consumers need to get out from the debt they're under and then figure out how to keep spending more and more -- or exporting more and more -- under some paradigm that isn't based on debt.

The good news for the Obama administration is that employment actually seems to be keeping pace with Reagan's recovery: At the end of 1983, unemployment was at 8.3 percent, and at the end of 1984, it was at 7.3 percent. We're on track to match that. But the economy had finally beaten inflation, and growth was roaring. We're unlikely to see a recovery that robust, for reasons that financial-crisis scholar Carmen Reinhart explains here. And we're particularly unlikely to see a recovery that robust if the Federal Reserve doesn't see encouraging that sort of recovery as part of its mandate.

Which is neither to say Obama is doomed, nor that his victory is assured. It's to say that presidents are partially made by other actors and factors. Without Volcker, or with a different economy, Reagan would be remembered very differently. And Bernanke's actions, and the speed with which we recover from this financial crisis, are going to be similarly decisive in Obama's legacy.

By Ezra Klein  |  August 13, 2010; 10:31 AM ET
 
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Comments

Ezra

You can not make the claim the fed had nothing to do with the current recession unless you are privy to the secret inner working of the fed.

Elected people like Grayson and Sanders have been (in vain) trying to get the fed to reveal what kinds of actions and how many dollars they have been throwing around. Even their recent audit of the fed is very limited.

So, if you indeed know the inner workings of the fed, please let us all know what they did.

In the meantime, I'd like to see links that allow you to claim the fed had nothing to do with the current recession. The fed has significant influence (at the least) to every facet of our economy, including how the SEC will do (or not do) it's job, what market controls will be enacted into law, etc..

Posted by: lauren2010 | August 13, 2010 10:55 AM | Report abuse

Ezra, there's an important detail that you're leaving out of the story: the actual inflection point in Fed policy in 1982 came in August of that year, when the Fed (to the surprise of many) lowered interest rates in response to Mexico's default on its foreign loans. In contrast, and despite mounting evidence that the Greek crisis kicked up the uncertainty and slowed the recovery, the Bernanke Fed has been exceedingly unwilling to take any decisive action to loosen policy. Nevertheless, its still August, the FOMC has the ability to act outside of its regular meeting schedule, and if Obama recess-appointed Yellen, Raskin, and Diamond they could reconvene the committee and adopt a more aggressive QE plan.

Posted by: rwclayton7 | August 13, 2010 10:57 AM | Report abuse

I agree with rwclayton. After the 1982 recovery, jobs were added at an extremely rapid pace. By the time Reagan was running for re-election, he could claim that more Americans were at work than ever before. In contrast, Obama would need 320,000 jobs per months created to be able to claim this by August 2012.

If I were Obama I would be very worried. Now is the time to damn the torpedoes and go full speed ahead. The Federal Reserve has a full employment mandate along with its price stability mandate. What is it going to do about it?

Posted by: Factaaa | August 13, 2010 11:00 AM | Report abuse

"For our economy to recover, consumers need to get out from the debt they're under and then figure out how to keep spending more and more -- or exporting more and more -- under some paradigm that isn't based on debt."

Wouldn't tax cuts put money into consumers' hands? Perhaps by following the now-proven-successful lead of Germany -- by implementing federal austerity efforts which reassure conservative consumers and boost domestic demand further -- we could shrink the federal government and help consumers in the very manner you suggest.

More on Germany's growing economy, which results from government austerity, is appearing today on the WSJ (eg http://online.wsj.com/article/SB10001424052748703960004575427020601807384.html).

Posted by: rmgregory | August 13, 2010 11:03 AM | Report abuse

rmgregory,

Germany implemented stimulus, not austerity. The 'austerity' measures promised don't even begin to take effect until 2011, so they played no role in today's numbers. Germany also bailed out Greece to the tune of a few hundred billion dollars. Perhaps that's the path we should take?

The reality is that Germany's strong growth comes from strong export growth, mainly to Asia. Germany is the world's second largest exporter, runs Europe's largest trade surplus by far, and exports to China, which enacted the largest stimulus in the world in 2008-09, surged.

Posted by: Factaaa | August 13, 2010 11:06 AM | Report abuse

thank you, factaaa, for making it possible for me not to waste my time educating rmgregory, you're having done such a fine job of it.

i'll just add that, of course, in relative terms, we are implementing austerity right here in the us of a righ this very minute, as the stimulus winds down and nothing else is added: it's doing one helluva lotta good for us, isn't it rmgregory?

now, as to the real topic: it's bernanke's actions that will really strike future historians as bewildering. here is a man who studied the precise set of problems we are facing, and yet, in office, he seems to have lost his memory or his courage or his analytic skills or, or, or....

maybe it's just those who can't, teach, and we're discovering that princeton was bernanke's best place of employment.

Posted by: howard16 | August 13, 2010 11:15 AM | Report abuse

I can't believe I'm reading a little boy pretend to talk about economics in the pages of the Washington Post.

A little boy at the center of the JournoList scandal.


Posted by: happyacres | August 13, 2010 11:16 AM | Report abuse

"The good news for the Obama administration is that employment actually seems to be keeping pace with Reagan's recovery: At the end of 1983, unemployment was at 8.3 percent, and at the end of 1984, it was at 7.3 percent. We're on track to match that."

Ezra, this completely ignores the fact that unemployment under Reagan peaked at 10.8% at the end of 1982, not 8.3% at the end of 1983. The rapid portion of the Reagan recovery was from 1983Q1-1984Q2 - by the end of 1983 2/3s of that recovry was already over. The Obama recovery will not come close to matching it, although in fairness Reagan would have a more difficult time with a balance sheet recession too.

Furthermore, the decline in the unemployment rate is entirely a result of people leaving the labor force.

If the labor force had grown with the adult population since last fall we'd be sitting at around 10.3% unemployment (total labor force of 153,927k in Sept2009 + 100k/mo = 154,927k in July2010, actual July 2010 = 153,560k. Current # of jobs = 138,960k. 154,927k - 138,960k = 15,967k unemployed. 15,967k/154,927k = 10.3%). By contrast, the labor force participation rate was in an uptrend from 1982-1984.

There hasn't really been a recovery. The unemployment rate is artifically kept down by people dropping out of the labor force, and GDP growth has been largely an inventory cycle. Final sales of gross doemstic product have grown extremely slowly (by the way, I offer a correction in my comments to Patrick in earlier posts for claiming demand has come back - final sales is the better number, and it has muddled along at 1% real growth, slower than the 1.4% real growth during the first 5 quarters of the last recovery).

Posted by: justin84 | August 13, 2010 11:50 AM | Report abuse

i just noticed hoenig's call for higher rates: clearly, the man doesn't believe in the dual mandate, but why that should limit bernanke's options isn't clear to me....

Posted by: howard16 | August 13, 2010 12:45 PM | Report abuse

It's been rather morbidly fascinating to observe the truth staring Ezra in the face over and over again and wonder when or if he'll ever see it.

This is indeed a crisis very unlike the one that faced Reagan. This crises is a result of the massive bursting of a global credit bubble; resulting in the cratering of asset values, and chaos in financial markets due to the uncertainty of when, if, how, and even whether the debt incurred during the bubble will ever be paid back. "Stimulus", whether through tax cuts or spending increases will achieve nothing but a temporary reprieve and some short-lived blips in data points (which always seem to subsequently revised downwards anyway). (But the party in power can always hope to hang on for just a bit longer if they only continue throwing enough borrowed money at the problem.)

The debt overhang has got to be resolved once and for all, for better or worse, richer or poorer. And the more of it we accumulate, the deeper the doo doo in which we will find ourselves.

Posted by: bgmma50 | August 13, 2010 12:51 PM | Report abuse

The problem for the Obama-Reagan comparison is that this isn't a Fed-created recession.


Scarily enough I agree with Lauren. Interest rates at below market levels for what seems like forever absolutely impacted cheap money/housing crisis.

Sure you had to sprinkle in unscrupulous lenders, SEC regulators spending too much time surfing porn and idiotic lawmakers but don't go acting like the Fed is little Ms. innocent here. They're not.

Posted by: visionbrkr | August 13, 2010 12:55 PM | Report abuse

bgmma50: i love seeing comments like "the debt overhang has to be resolved once and for all," for one simple reason: they indicate the writer can safely be ignored.

that statement has zero meaning, and anyone who would type it as though it represented a chin-stroking moment of blinding insight really doesn't have a clue.

Posted by: howard16 | August 13, 2010 1:03 PM | Report abuse

howard16,

Just because you don't understand the term debt overhang, it doesn't necessarily follow that it has zero meaning. For a basic definition you can look here: http://www.investopedia.com/terms/d/debtoverhang.asp or here: http://en.wikipedia.org/wiki/Debt_overhang

Once you manage to absorb the concept, I'll be happy to school you on what is meant by resolving it.


Posted by: bgmma50 | August 13, 2010 1:08 PM | Report abuse

justin84 has it pegged right.

How bad was it in 1981-82? For those of you who weren't even born at the time:
http://www.youtube.com/watch?v=BHnJp0oyOxs&feature=av2e

This downturn has been and still is much worse.

Posted by: tebrom50 | August 13, 2010 1:43 PM | Report abuse

bgmma50: oh yawn frickin' yawn. i know how you think you were using the term: it simply is a meaningless construct, not an explanatory theory, and even if it were a meaningful construct, it couldn't be solved "once and for all."

Posted by: howard16 | August 13, 2010 2:22 PM | Report abuse

howard16, the explanatory theory would be "balance sheet recession". If you ever figure out what the significance of "debt overhang" is, you might try googling "balance sheet recession". That's what we're in, and that's why the things that worked for Reagan aren't going to work for Obama.

Posted by: bgmma50 | August 13, 2010 4:21 PM | Report abuse

It will also help you understand why the things Obama has done have failed.

Posted by: bgmma50 | August 13, 2010 4:22 PM | Report abuse

"bgmma50: oh yawn frickin' yawn. i know how you think you were using the term: it simply is a meaningless construct, not an explanatory theory, and even if it were a meaningful construct, it couldn't be solved "once and for all."

Howard16,

If this was just a normal but deeper recession, why has there been no recovery? Why have we not experienced the normal bounce back of pent up consumer demand? Why has this been the weakest recovery on record, as measured by final sales of gross domestic product (i.e. ignoring the inventory bounce)?

Tapped out consumers unwilling to go further into debt and who want/need to pay down debt helps explain this.

Posted by: justin84 | August 13, 2010 5:04 PM | Report abuse

"It will also help you understand why the things Obama has done have failed."

Actually, those economists who have written most extensively about the concept of "balance sheet recessions" (most notably Richard Koo), consistently argue that the solutions that are most likely to accelerate the needed deleveraging are fiscal stimulus and direct injections of capital into the balance sheets of the financial system ,to restore liquidity and credit>With TARP and ARRA , those are exactly the major strategies that have been attempted. Some economists believe that tax reduction can also be helpful, and of course tax credits were part of ARRA and Obama lowered income taxes as well. So we have done all of the recommended strategies, although we can argue forever if any of our attempts should have been bigger.

And those strategies have managed to achieve a return to modest GDP growth and stabilization of job losses, though not any sort of roaring recovery. As Ezra regularly reminds us, ARRA has been offset by anti-stimulative spending reductions by state and local governments. And Koo talks about the fact that when there are multiple "balance sheet recessions" taking place in economies worldwide, the dynamics of recovery are especially challenging.

For an overview of the theory of "balance sheet recession" you can hear a podcast of a lecture by Koo here:

http://media.csis.org/er/090326_koo.mp3

or read an overview here:

http://www.scribd.com/doc/13970982/Richard-Koo-Presentation

Posted by: Patrick_M | August 13, 2010 5:04 PM | Report abuse

Patrick,

I'm familiar with Richard Koo. Japan has been following his prescriptions for balance sheet recessions for a couple of decades now with dismal results. And they had the headwinds of an export economy and a global economic boom behind them. So, while Koo does write on the subject, the results his recommendations have achieved in Japan are not reassuring.

TARP was the least bad of the attempts to deal with the financial crisis. Unfortunately it was not followed up with any meaningful attempt to force the banks to correct their balance sheet issues. They are still on the verge of insolvency, if indeed not insolvent, kept afloat by the spreads they can earn on near zero interest rate borrowing, accounting gimmicks, and profits earned by their trading desks.

The can has just been kicked down the road. Nothing has been solved.

Posted by: bgmma50 | August 13, 2010 6:07 PM | Report abuse

bgmma50,

My links to Koo were not directed at you, but instead to anyone that is interested in learning the difference between a "balance sheet" recession and a standard "business cycle" recession.

I think that it is always a bit of a stretch to adhere too closely to any one model in describing the kind of severe downturn we are now trying to steer out of, or to use an economic downturn in another society as our guide. If there was a clear and easy way out, we'd be taking it already. An post in yesterday's Economist describes our current sluggish recovery situation as "uncharted territory" ( http://www.economist.com/blogs/freeexchange/2010/08/americas_jobless_recovery_2 )

There are some similarities between our current experience and Japan's "lost decade," but given the fact that our worst problem at present is high employment, Japan's current 5% rate does not seem to be such a dismal result.

In any event, I don't know of many economists that would argue that Japan suffered from excessive government intervention. And I don't know of many economists that would argue with Koo's analysis that balance sheet recessions take time to self-correct, but can be helped to correct more quickly via fiscal stimulus and injections of capital.

But at present my opinion is that the major problem is not insolvent zombie banks failing to lend, but lack of demand due to massive unemployment, which threatens to become structural. Part of the lack of demand is due to household asset depletion and excessive household debt causing depressed "balance sheet" issues for middle class consumers, but the bigger problem holding back prospects for growth is the number of idle workers that are not bringing home a paycheck and can't spend at all.

If businesses saw good reason to expand, but could not obtain needed credit for new investment, that would actually be a step forward from the problems of today, where few businesses see any potential for new demand upon which they can capitalize, whether or not investent capital is avaialable.

Posted by: Patrick_M | August 13, 2010 6:48 PM | Report abuse

"If there was a clear and easy way out, we'd be taking it already."

I certainly hope that nothing I said implied that there was a clear and easy way out. There most definitely is not a clear and easy way out. That's one of the many objections I have to the stimulus and other "fixes" that have been offered.

"In any event, I don't know of many economists that would argue that Japan suffered from excessive government intervention."

My concerns about Japan's handling of their problems isn't about government intervention, it's about the fact that their efforts at stimulating their economy and enabling the continued insolvency of their banks have not solved their problems but have instead resulted in the largest sovereign debt in the industrialized world. They have not yet reached the point that the bond markets have lost faith in their ability to service that debt, but woe be to them when that day comes.

I don't disagree with your comments on our jobs situation. However, I would have taken much more direct and market based solutions. Rather than shovel borrowed money to states to shore up public employee jobs, I would have taken a very hard look at temporarily removing every impediment to jobs creation that I could think of. Among the things I would have considered suspending would be minimum wage, enforcement of all union contracts and rules, family and medical leave benefits, etc. I would also have tried to take a much more visionary approach to infrastructure spending, and tried to focus on a theme (like energy independence) that would have captured the desire of everyone to create something of lasting benefit to the country.

Posted by: bgmma50 | August 15, 2010 8:11 PM | Report abuse

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