Thursday, October 09, 2014

Paul Krugman agrees with me

Back when  Paul "the stimulus was too small!" Krugman was in full Cassandra mode, just after the November 2010 shellacking, I took issue with one of his numerous whacks at Obama:

...take this sideswipe at the stimulus in Krugman's latest crie de coeur about the Fed's refusal to raise its inflation target:
...fearing opposition in Congress, the Obama administration offered an inadequate plan, only to see the plan weakened further in the Senate. In the end, the small rise in federal spending was effectively offset by cuts at the state and local level, so that there was no real stimulus to the economy.
Wasn't one of the core purposes of the stimulus to offset spending cuts by state and local governments? That's what stimulus does -- offset drops in demand. Of course, Krugman believes that there was too little state aid, along with too little of everything, in the Recovery Act, and naturally a stimulus should do more than offset other government spending cuts. But still, offsetting those cuts is a "real stimulus to the economy." The Recovery Act unquestionably preserved hundreds of thousands of state and local government jobs, and GDP would have been lower if this hadn't been done.

This may seem a semantic quibble. But it's a symptom, I think, of an oversimplified narrative. Krugman has implied elsewhere that the right-sized stimulus would have set the economy roaring back to life (as has Martin Wolf). To what degree is that credible? If Obama had asked for $1.2 trillion and got $950 billion, what's the math on the counterfactual? Unemployment at 8.3%?  And the effect of such a drop on the electorate? I confess it could be substantial. But there's an awful lot of what-ifs there, beginning with the premise that a substantially larger stimulus could have got through the Senate. And the narrative leaves out some externalities, such as the Euro sovereign debt crisis, which seemed to stop a decent-looking recovery in its tracks. Not to mention the credible possibility, forecast now by a growing number of economists and business leaders (e.g., here and here), that a substantial recovery may be on the horizon now. 

Some time in 2012, Krugman had a change of heart about Obama, and now he is out with a defense of Obama's record just as a host of ex-cabinet members and in-office Democrats is piling on (he himself notes the irony in this). Now behold his retrospective view of the (still too-small) stimulus:

You'd never know it listening to the talking heads, but there's overwhelming consensus among economists that the Obama stimulus plan helped mitigate the worst of the slump. For example, when a panel of economic experts was asked whether the U.S. unemployment rate was lower at the end of 2010 than it would have been without the stimulus, 82 percent said yes, only two percent said no.

Still, couldn't the U.S. economy have done a lot better? Of course. The original stimulus should have been both bigger and longer. And after Republicans won the House in 2010, U.S. policy took a sharp turn in the wrong direction. Not only did the stimulus fade out, but sequestration led to further steep cuts in federal spending, exactly the wrong thing to do in a still-depressed economy.

We can argue about how much Obama could have altered this literally depressing turn of events. He could have pushed for a larger, more extended stimulus, perhaps with provisions for extra aid that would have kicked in if unemployment stayed high. (This isn't 20-20 hindsight, because a number of economists, myself included, pleaded for more aggressive measures from the beginning.) He arguably let Republicans blackmail him over the debt ceiling in 2011, leading to the sequester. But this is all kind of iffy.
Iffy, indeed. When it was struck, Krugman lamented that deal as "surrender" and "a catastrophe on multiple levels."  And I don't think he was far wrong as to the "surrender" charge. But he's not only forgiven the president, he seemed oddly blase when Obama let the sequester lock in in early 2013, when he had the powerful leverage of the Bush tax cuts' expiration to press for a shutoff or moderation. Krugman now paints the sequester as a (literal) drag, but hardly a catastrophe. 

Over the course of many years, Krugman has been an effective Cassandra, forecasting disasters from the Bush deficits to the housing bubble to the Iraq debacle to the euro crisis. But at some point in the last couple of years, Cassandra seems to have looked around and noted that Troy is bruised and battered but not yet razed. And he is modestly thankful for that.

P.S. If I may indulge in one more time-lapsed confluence: back in 2012, when Romney was asserting that Obama's economic policies had made the recession worse, and Democrats were countering that Romney's Massachusetts ranked 47th among the states in job growth, I sought a peer group for Obama:
And what could be fairer than the OECD, which includes Korea, unemployment rate 3.7% at present, and Japan, clocking in at  4.5%?  So let's have a look.

For the OECD as a whole, according to an April AFP article, the unemployment rate was 8.2% in February 2012 (based on 24 of 36 countries), 8.2% in 2011, and 8.6% in 2010 (number of countries included unspecified).  For the U.S., the rate was 8.3% in January 2012, 9.0% in January 2011, and 9.7% in January 2010.  Remember, by current Romney rules, you discount the executive's first year (as really, you should).  So, from early 2010 to early 2012, a period in which the OECD unemployment rate dropped four tenths of a percent, the US rate dropped about 1.4 percent.  

Arguably, a fairer -- and sharper -- comparison is to be made between the U.S. and the national economies of Europe, which turned more quickly and more radically to austerity in the face of the large budget deficits generated by the financial crisis and so provide a foil for Obama's moderate early stimulus and more recent restrained austerity. In the 17-country Eurozone,  unemployment zigzagged from 10.1% in October 2010 to  8.9% in April 2011 and up to 11.0% in April 2012. In the broader EU 27, including the austere U.K., the rate went from 9.5% in April 2011 to 10.3% in April 2012 (chart for April 2011--April 2012 here).

I'd like to see an economist do a more rigorous comparison.  Given the austerity mania in Europe, I'm confident that Obama's tepid and GOP-braked stimulative measures stack up well in any fairly constituted peer group.
Cf. Krugman:
Or compare our performance with that of the European Union. Unemployment in America rose to a horrifying 10 percent in 2009, but it has come down sharply in the past few years. It's true that some of the apparent improvement probably reflects discouraged workers dropping out, but there has been substantial real progress. Meanwhile, Europe has had barely any job recovery at all, and unemployment is still in double digits. Compared with our counterparts across the Atlantic, we haven't done too badly.

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