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.)

Obama’s Democratic defenders counter that his policies staved off a second Great Depression, and that the US economy has been steadily working its way out of a deep hole ever since.  Middle-ground observers, meanwhile, typically conclude that one cannot settle the debate, because one cannot know what would have happened otherwise.

There is a good case to be made that government policies - while not strong enough to return the economy rapidly to health — did indeed halt an accelerating economic decline.    By “government policies,” I mean not just the fiscal stimulus the new president steered through Congress when he took office, but also the Obama version of TARP, and Fed Chairman Ben Bernanke’s aggressive monetary stimulus.   All three policy initiatives remain extremely unpopular with Republicans, and ambiguous among swing voters.

But the middle-ground observers are of course right that one cannot prove what would have happened otherwise.   It is also true that it is rare for a government’s policies to have a major impact on the economy immediately.  These things usually take time.  One cannot infer the merit of a new president’s policies from the path of the economy during his first few months in office.  (For example, I did

But here is the remarkable thing: whether one listens to the Republicans, the Democrats, or the middle-ground observers, one gets the impression that the economic statistics show no discernible improvement around the time that Obama took office. In fact, the reality could hardly be more different.

This is especially true if one looks at revised economic statistics, which show the US economy to have been in far worse shape in January 2009 than was reported at the time. In January 2009, the annualized growth rate in the second half of 2008 was officially estimated to have been negative 2.2%; but current figures reveal it to have been a horrendous negative 6.3%. This is the main reason why the level of economic activity in 2009 and 2010 was so much lower than had been forecast, which in turn explains why unemployment was so much higher.

Figure 1 shows the quarterly economic growth rate. The maximum rate of contraction — a veritable freefall in the economy — came in the last quarter of 2008 (the quarterly GDP data come from the Bureau of Economic Analysis of the U.S. Commerce Department).   More specifically, it came in December, according to the monthly GDP estimates from the highly respected MacroAdvisers.   (See monthly income figures in the form of growth rates in Figure 2 or levels of GDP in Figure 3.)  This was the month before Obama was inaugurated.  The situation miraculously began to improve as soon as Obama’s term began! 

(click here for larger graphs)

The full force of the fiscal stimulus package began to go into effect in the second quarter of 2009.    The NBER officially designates the end of the recession as having come in June of that year.  GDP growth turned positive in the third quarter.

US economic growth slowed down again in late 2010 and early 2011, as one can see in Figure 1.  The timing coincides with the beginning of withdrawal of the Obama fiscal stimulus. Indeed, the government has been the one sector to experience contraction in income and employment over the most recent five quarters.  The private economy has been expanding.

Other economic indicators, such as interest-rate spreads and the rate of job loss, also turned around in early 2009. Labor-market recovery normally lags behind that of GDP - hence the “jobless recoveries” of recent decades. But the graph of monthly job losses and gains reveals that here, too, the end of the freefall came precisely when Obama was inaugurated.  The last two charts show the same “V” shaped pattern in the monthly job change figures that are released by the Bureau of Labor Statistics, as the GDP growth figures that are released by the BEA.  The rate of job growth over the last two years, inadequate as it is, actually exceeds the rate of job growth during the Bush Administration, even if one counts only the period before the big recession hit in December 2007.

Again, these graphs do not demonstrate that Obama’s policies yielded an immediate payoff. In addition to the lags in policies’ effects, many other factors influence the economy every month, making it difficult to disentangle the true causes underlying particular outcomes.

What is the right way to assess whether the fiscal stimulus enacted in January 2009 had a positive impact?   Start with common sense. When the government spends $800 billion on such things as highway construction, teachers and policemen who were about to be laid off, and so on, it has an effect. Workers who would otherwise not have a job now have one. Furthermore, they may spend some of their income on goods and services produced by other people, creating a multiplier effect.

Those who claim that this spending does not boost income and employment (or that it even hurts), apparently believe that as soon as a teacher is laid off, a new job is created somewhere else in the economy, or even that the same teacher finds a new job right away. Neither can be true, not with unemployment so high and the average spell of unemployment much longer than usual.

They also think that the government deficit drives up inflation and interest rates, thereby crowding out other spending by consumers and firms. But interest rates are rock bottom, even lower than they were in January 2009, while core inflation is running at its lowest levels since the early 1960’s. The conditions of the last four years - high unemployment, depressed output, low inflation, and low interest rates - are precisely those for which traditional “Keynesian” remedies were designed.

Economists’ more sophisticated forecasting models also show that the fiscal stimulus had an important positive effect, for much the same reasons as the common-sense approach.   The non-partisan US Congressional Budget Office reports that the 2009 spending increase and tax cuts gave a positive boost to the economy, and indeed had the extra multiplier effects of the traditional Keynesian models. Allowing for a wide range of uncertainty [to allow for different economists' views], the CBO estimates that the stimulus added 1.5 percent to 3.5 percent to the level of GDP by the fourth quarter, relative to where it otherwise would have been.  The boost to 2010 GDP, when the peak effect of the stimulus kicked in, was roughly twice as great.

To be sure, of the many theoretical models produced by eminent macroeconomists at prestigious universities, some say that fiscal stimulus has no positive effect on the economy, even under recent economic conditions.  (The theoretical innovations underlyng the models have even won Nobel Prizes for the innovators, and not without justice.)  But these models are not sufficiently realistic to meet the market test:  they are not used by private businessmen for whom getting good forecasts matters to their planning and in turn to the success of their businesses.

Of course, econometric models do not much interest the public at large. A turnaround needs to be visible to the naked eye to impress voters. Given this, one can only wonder why basic charts, such as the 2008-2009 “V” shape in growth, have not been used - and reused - to make the case.

(Click here for larger versions of all 5 graphs.)

[Appears also at Fair Observer,with a nice presentation of the charts.

A shorter version appeared as an op-ed at Project Syndicate, which has the copyright.]

A recent video interview from Project Syndicate recaps some of my recent op-eds.  It covers the following territory:

•           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)
  • 2003-2011: 7 fat years (the triumph of the BRICs)
  • 2012: ?

Personal saving rose again in the second quarter. “Does this mean the stimulus tax cut has failed, as the 2008 tax cut stimulus did?”, asks The National Journal.

My answer:

Martin Feldstein and others predicted that the tax-cut component of the 2009 fiscal stimulus package would have substantially less expansionary bang-for-the-buck than the spending component of the package, because much of the tax cut would be saved, as had been the case with the 2008 tax cut.  (“Bang for the buck” in this case could be defined as demand stimulus divided by budget cost.)   We knew this from Milton Friedman’s permanent income hypothesis, or even from good old Keynesian multiplier theory.

But in February President Obama had to get those last three (Republican) votes to pass the stimulus bill in the Senate, and those three Senators insisted on raising the tax cut component of the stimulus package a bit and lowering the spending component. Their motivation presumably was to mollify their fellow Republicans, many of whom still claim that ONLY tax cuts provide stimulus, and that spending does not (and perhaps even has a negative effect) — which is even more extreme than the claim that a tax cut creates stimulus equal to spending. After the failures of the Bush tax cuts (and Reagan’s before him), I don’t know if any economists still cling to such “supply sider” notions — or indeed if these congressmen would be able to state their logic. Regardless, I think the Feldstein prediction has been borne out since then.   Talk about irony!   The Reagan tax cuts of 1981-83 and the Bush tax cuts of 2001-03 were both explicitly designed to boost saving — hence their focus on capital income and higher income brackets — and yet in both cases private saving fell in their aftermath.   The tax cuts of January 2008 and February 2009 were both explicitly designed to boost consumption; yet private saving rose in their aftermath !   

Fortunately, the majority of the Obama stimulus package took the form of increased spending, much of which has yet to come.

None of this is to deny that efficiency is an important consideration, and cost-benefit calculations should always enter into the choice of both what kind of tax cuts to adopt and what kind of spending increases to adopt. But if it is short-term demand stimulus we are after, and we are, then government spending gives more bang for the buck than tax cuts.

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          We often hear the question “isn’t this economic crisis becoming as bad as the Great Depression?” Economists can offer a variety of reassurances, but each of them is quite circumscribed:
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           Congress has finally agreed on a $790 billion stimulus package.   Is it too small, as many Democrats claim (such as Paul Krugman), or too big, as many Republicans claim (such as the minority party leadership in Congress)?     The answer is yes.     It is too big and too small.

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