“Say It Ain’t So”: Face It Republicans, Reagan Was A Keynesian
There’s no question that America’s recovery from the financial crisis has been disappointing. In fact, I’ve been arguing that the era since 2007 is best viewed as a “depression,” an extended period of economic weakness and high unemployment that, like the Great Depression of the 1930s, persists despite episodes during which the economy grows. And Republicans are, of course, trying — with considerable success — to turn this dismal state of affairs to their political advantage.
They love, in particular, to contrast President Obama’s record with that of Ronald Reagan, who, by this point in his presidency, was indeed presiding over a strong economic recovery. You might think that the more relevant comparison is with George W. Bush, who, at this stage of his administration, was — unlike Mr. Obama — still presiding over a large loss in private-sector jobs. And, as I’ll explain shortly, the economic slump Reagan faced was very different from our current depression, and much easier to deal with. Still, the Reagan-Obama comparison is revealing in some ways. So let’s look at that comparison, shall we?
For the truth is that on at least one dimension, government spending, there was a large difference between the two presidencies, with total government spending adjusted for inflation and population growth rising much faster under one than under the other. I find it especially instructive to look at spending levels three years into each man’s administration — that is, in the first quarter of 1984 in Reagan’s case, and in the first quarter of 2012 in Mr. Obama’s — compared with four years earlier, which in each case more or less corresponds to the start of an economic crisis. Under one president, real per capita government spending at that point was 14.4 percent higher than four years previously; under the other, less than half as much, just 6.4 percent.
O.K., by now many readers have probably figured out the trick here: Reagan, not Obama, was the big spender. While there was a brief burst of government spending early in the Obama administration — mainly for emergency aid programs like unemployment insurance and food stamps — that burst is long past. Indeed, at this point, government spending is falling fast, with real per capita spending falling over the past year at a rate not seen since the demobilization that followed the Korean War.
Why was government spending much stronger under Reagan than in the current slump? “Weaponized Keynesianism” — Reagan’s big military buildup — played some role. But the big difference was real per capita spending at the state and local level, which continued to rise under Reagan but has fallen significantly this time around.
And this, in turn, reflects a changed political environment. For one thing, states and local governments used to benefit from revenue-sharing — automatic aid from the federal government, a program that Reagan eventually killed but only after the slump was past. More important, in the 1980s, anti-tax dogma hadn’t taken effect to the same extent it has today, so state and local governments were much more willing than they are now to cover temporary deficits with temporary tax increases, thereby avoiding sharp spending cuts.
In short, if you want to see government responding to economic hard times with the “tax and spend” policies conservatives always denounce, you should look to the Reagan era — not the Obama years.
So does the Reagan-era economic recovery demonstrate the superiority of Keynesian economics? Not exactly. For, as I said, the truth is that the slump of the 1980s — which was more or less deliberately caused by the Federal Reserve, as a way to bring down inflation — was very different from our current depression, which was brought on by private-sector excess: above all, the surge in household debt during the Bush years. The Reagan slump could be and was brought to a rapid end when the Fed decided to relent and cut interest rates, sparking a giant housing boom. That option isn’t available now because rates are already close to zero.
As many economists have pointed out, America is currently suffering from a classic case of debt deflation: all across the economy people are trying to pay down debt by slashing spending, but, in so doing, they are causing a depression that makes their debt problems even worse. This is exactly the situation in which government spending should temporarily rise to offset the slump in private spending and give the private sector time to repair its finances. Yet that’s not happening.
The point, then, is that we’d be in much better shape if we were following Reagan-style Keynesianism. Reagan may have preached small government, but in practice he presided over a lot of spending growth — and right now that’s exactly what America needs.
By: Paul Krugman, Op-Ed Columnist, The New York Times, June 7, 2012
“The Land Of The Not-Free”: Meet Mitt Romney, The Real European
An odd thing happened during Mitt Romney’s victory-lap speech after Tuesday’s Republican primaries: He didn’t once mention the word “Europe.”
The absence was jarring, because Romney’s claim that President Obama is dragging the United States toward a loathsome European-style “social welfare” future has been a staple of the former Massachusetts governor’s shtick ever since he started campaigning in earnest.
It’s always been an easy line for him: Europe, Romney’s audience understands, is the land of the not-free. The continent gave birth to Karl Marx, for crying out loud! Every now and then, socialist political parties actually take power!
But there is a big problem with Romney’s formulation. For the last year or two, Europe has been implementing, in real time, exactly the policies that Romney and congressional Republicans fervently believe are the best strategy for boosting economic growth. It’s called “austerity,” and it means cutting deficits, slashing spending, and chipping away at all those goodies the social welfare state provides.
And guess what? It’s not working. Compared with the United States, Europe is in shambles. Unemployment is rising across the continent. Just this week, the United Kingdom, which has pursued an austerity regime so severe that it makes House Republicans drool with lust, slipped back into recession. In France, the socialist candidate for president (and likely winner), François Hollande, has been campaigning against austerity. Italy’s prime minister, Mario Monti, is expressing qualms. The latest news out of Brussels, according to the Daily Telegraph, suggests “a major shift in economic strategy” as fears spread “that excessive fiscal tightening will inflict unnecessary damage on a string of eurozone countries.”
The evidence keeps amassing. Maybe, just maybe, John Maynard Keynes was right: Cutting government spending in the face of a weak economy is a recipe for further decline. In a startling turnabout, political leaders all over Europe are questioning the merits of austerity and calling for more stimulative policies.
You can see the problem Romney faces, and why he might suddenly be reluctant to utter the word “Europe.” The facts are uncomfortable: Under Obama, the United States has recovered more quickly from the Great Recession than has Europe. Economic growth is steadier, and unemployment is falling faster. But if Romney wins the White House, bringing along with him Republican majorities in both the Senate and the House, he will have the power to do exactly what he says he wants to do: slash government spending and cut the deficit.
It’s a plan that runs the very real risk of sabotaging the economic recovery. It’s a plan, in other words, that would make the U.S. just like Europe.
Romney’s efforts to tar Obama as a fifth columnist for French-accented Really Big Government have been unrelenting. In December, he told voters in Iowa that Obama’s polices “were making us like Europe,” and “I don’t want Europe here.” In January, after winning the New Hampshire primary, he lambasted Obama for wanting “to turn America into a European-style entitlement society.” Just a few days ago, he explained to Fox News that the conservative base would rally behind his candidacy, because “President Obama has taken America in such a different course than we have ever gone as a nation before. We are becoming far more like a European social-welfare state, and people don’t want to see that.”
Never mind that by historical standards Obama’s efforts to strengthen the American safety net do not come close to the transformational efforts of presidents like Franklin Roosevelt and Lyndon Johnson, making Romney’s assertion that Obama is taking America on “such a different course than we have ever gone as a nation before” transparently ridiculous. If anyone running for president this year in the United States is a pioneer in European-style liberalism, it’s got to be Romney, the first governor to preside over the creation of a statewide universal healthcare plan. (And for a guy who seems to despise Europe so much, Romney sure seems to enjoy vacationing in France.)
But whatever. Romney’s Europe-bashing rhetoric serves multiple purposes. It labels Obama as something different, a “foreigner,” un-American. It also directly appeals to conservative concerns that the social welfare state is unaffordable. In this vein, unless governments everywhere tighten their belts, balance their budgets and get their ships in order, we’re all headed down the hopeless path of Greece, doomed to bankruptcy and social chaos.
Most importantly, Romney’s opposition to European-style Big Government stakes an implicit position on the great economic debate of our time: How best to spur economic growth?
The stances of the two main camps have been clear for years and endlessly debated by economists and pundits. The pro-stimulus, Keynesian argument holds that the problem afflicting stagnant economies all over the world is a lack of demand. When everyone is worried about their economic future, everyone simultaneously tightens their belt, and the capitalist machine stops in its tracks. Since no one is willing to buy anything, companies can’t sell their goods and services and respond by laying off their employees, and that further exacerbates the overall problem. Under such constraints, only the government has the power to step in and stimulate demand. Once the economy is growing strongly and consistently, only then do you look for ways to balance the budget — a task that becomes much easier when tax revenues are booming again.
The opposing camp, now commonly referred to as “Austerians,” believes the problem isn’t a lack of demand, but a lack of confidence. People are afraid to invest and buy and take risks because they’re worried that high deficits inevitably lead to high taxes, or high interest rates, or general fiscal chaos (or all of the above). And they’re going to hunker down until they’re sure that governments intend to act responsibly, and live within their means.
The Austerian camp’s stance translated into one of the most delightfully mindbendingly oxymoronic proposals to enter the economic policy parlance in years: “expansionary fiscal contraction.” Cutting government spending will boost confidence, which will lead to growth! To get big, one must first get small.
It was all the rage two years ago. Today, not so much. The problem with expansionary fiscal contraction is that when you try it at a time when the economy is stagnant or recessionary, you run a real risk of exacerbating the problem you are trying to cure. Slashing government spending subtracts demand from the economy. Growth slows, tax revenues fall, and suddenly the government has even less to spend, which subtracts even more demand from the economy.
And that’s exactly what appears to be happening in Europe — in countries such as Greece, Italy, Spain and France, and perhaps most intriguingly, in the United Kingdom, where David Cameron’s new conservative government pursued austerity with a vengeance. From the outset, a clamor of voices warned that the risks were huge, and so far, their worries have been validated. On Monday, the U.K. registered its second quarter of economic contraction, the rule-of-thumb definition for a recession.
It’s very rare that one gets a real-time demonstration of how two different economic policies compare, but the numbers are hard to argue with: In the “euro area,” where austerity has reigned, GDP growth has declined for each of the last four quarters. In the U.S. it has risen. In the euro area, unemployment has been rising for a year. In the U.S. , it’s been falling. As Felix Salmon observes, when one compares the United States, the U.K and the euro area, “the tougher and more credible the austerity, the worse the GDP performance.”
The trend lines are far too obvious to ignore, and they have sparked a political counter-reaction that appears to have reached critical mass this week. In Italy, France, Spain and the Netherlands, austerity is suddenly out of favor.
Meanwhile, the United States, despite the best efforts of Republicans, never pursued austerity as devoutly as Europe. Which is not to say the U.S. hasn’t tightened its belt at all. Perhaps the most stunning counter-argument to Romney’s accusation that Obama is pushing for a government-centered European-style government can be seen in the decline in the size of the public sector under Obama: During his presidency, employment in the public sector — local, state and federal government — has fallen by almost 600,000 jobs. In comparison, Bill Clinton added over 600,000 and George Bush added 800,000. As Paul Krugman points out, if Obama’s administration had added public sector jobs at the same rate as George Bush, unemployment would currently stand around 7 percent.
But even with those headwinds blowing against it, the U.S. has done surprisingly well. The first guess at GDP growth for the second quarter of 2012, due out Friday morning, is likely to peg growth at around 3 percent. Meanwhile, the most recently available statistics for the euro area show it contracting.
Which leads us back to the all-important question: What happens if Romney wins the election? The chances are good that if he is victorious, he will bring in Republican control of Congress along with him. Anything budget-related can be passed using the congressional technique known as “reconciliation,” which means Senate Democrats won’t be able to filibuster. He’ll be able to do what he wants.
Once upon a time, Mitt Romney supported stimulus spending to boost the economy. But now he sings a different tune. He has endorsed Paul Ryan’s budget, — “It’s an excellent piece of work, and very much needed” — which would combine huge cuts to social welfare programs with dramatic tax cuts for the wealthy — an austerity program directly targeted at the poor. Romney’s speeches are generally devoid of specific policy proposals, but he’s fond of encapsulating his overall economic strategy with the three Tea Party-friendly words “cut,” “cap” and “balance” — the simplest definition of austerity one could ask for. And as he said in Philadelphia on April 12, “The economy is struggling because government is too big, and we have to bring it down to size.”
All together, everything points to a plan for turbo-boosted austerity. That’s exactly the model that Europe has tried and is now finding wanting. And it’s exactly the wrong medicine for a country in which economic growth is still very vulnerable and unemployment is still high.
Wanna be like Europe? Elect Romney.
By: Andrew Leonard, Salon, April 27, 2012
Why Gas Prices Aren’t Likely To Decide The 2012 Election
This morning’s Washington Post-ABC poll shows that President Obama’s poll numbers are falling in tandem with rising gas prices. Nearly two-thirds of Americans say they disapprove of how he’s handling the situation at the pump. Could gas prices end up swaying the 2012 election after all?
It’s hard to rule anything out, but evidence remains thin that gasoline will be a determining factor in November. While Americans love to grumble about expensive gasoline — and with good reason — political science research suggests that it’s not the main thing that shifts votes. Nate Silver, for one, has found that “there’s not a lot of evidence that oil prices are all that important” a factor in presidential elections. Nor do gasoline prices necessarily dictate the public’s view of the White House: Back during George W. Bush’s presidency, there was a much-linked graph showing his approval ratings climbing and dipping in lockstep with gas prices. But subsequent analysis by political scientist Brendan Nyhan showed that the correlation was just a “statistical artifact.”
The more severe worry for Obama, at this point, is that soaring gas prices could stomp on the nascent economic recovery. The way this typically happens is that pricey gasoline starts crimping the checkbooks of U.S. consumers, who then have less money to spend on other things. (In the Post-ABC poll, most respondents said they were already feeling the pinch.) That leads to slower growth. And slower growth, political scientists agree, really can sink a presidency. As Silver puts it, “higher gas prices are important to the extent that they affect things like G.D.P., inflation and unemployment. But there isn’t evidence that they matter above and beyond that.”
That said, it’s not yet clear whether oil prices actually will crush the current recovery. There’s certainly reason for concern: James Hamilton, an economist at UC San Diego, has found that most U.S. recessions since World War II have been preceded by a sharp run-up in oil prices. But, oddly enough, one person who isn’t gloomy about our current predicament is Hamilton himself. “I find myself in the unusual position,” he recently wrote, “of being less concerned about the impact of oil prices on the U.S. economy than many other analysts.” Hamilton notes that, for now, oil prices are simply moving back to 2011 levels. And price increases that simply reverse earlier declines are less harmful than historic new highs.
For instance, high oil prices have historically inflicted disproportionate harm on the U.S. economy by leading to a cut-back in sales of SUVs and other inefficient vehicles that Detroit has long specialized in. But this time around, he notes, sales are holding steady — perhaps because U.S. automakers have shifted to selling fuel-efficient models. Moreover, low natural gas prices, a warm winter, and improved fuel efficiency have helped insulate U.S. consumers from pricey oil to date. Overall energy expenditures are actually down this year. Americans have been grappling with expensive oil for several years now, and they appear to be adapting.
That should come as a quiet relief to most incumbent politicians. Because the unsatisfying reality is that there’s not a whole lot the White House or Congress can actually do to lower gasoline prices. Oil prices are skyrocketing because global crude supplies remain tight and tensions with Iran are making traders skittish about a possible conflict in a crucial oil-producing region. If Obama could figure out a way to calm down the situation with Iran, that might cause crude prices to settle back down.
But apart from that, options are limited. More domestic drilling won’t bring back $2.50-per-gallon gas, as Newt Gingrich has suggested — oil prices are dictated by the vast world market, of which U.S. production is just a small fraction. The still-in-limbo Keystone XL pipeline is just as likely to raise gasoline prices in the Midwest as anything else. Cracking down on “financial speculators,” as many Democrats have called for, isn’t particularly promising, as many oil traders simply appear to be following fundamentals. And, judging by past experience, releasing oil from the Strategic Petroleum Reserve won’t offer much more than very short-lived relief. Meanwhile, Americans are becoming significantly more oil efficient, but that’s a slow, painstaking process.
That won’t stop politicians from talking about the issue. And it won’t stop Americans from expressing their disapproval. But those are two very different things from swaying an election.
Update: Here’s another notable aspect of the Post-ABC poll to consider, pointed out to me by Third Way’s Josh Freed. At the moment, 63 percent of Americans say that gas prices are causing them financial hardship, with 36 percent saying the gas squeeze is causing “serious” financial hardship. (See Question 11.) But those are actually the lowest hardship numbers since May of 2008 — and, in fact, it’s virtually identical to what Americans were saying in May of 2004, six months before George W. Bush won re-election.
By: Brad Plumer, The Washington Post, March 12, 2012
Mitt Romney’s New Problem: A Rising Sun
Mitt Romney was on the campaign trail in South Carolina yesterday, and brought up the issue he expects to ride into the White House: the U.S. economy. Unfortunately for the former governor, the message isn’t quite the same as it was a few months ago.
In his remarks [Friday], Romney also acknowledged the economy was getting better — something he has said before….
“And [President Obama]’s going to say the economy is getting better,” Romney said. “Thank heavens it’s getting better. It’s getting better not because of him, it’s in spite of him and what he’s done.”
For those keeping track, Romney said twice in three sentences that he believes the economy is “getting better.”
I’ve noticed over the last week, this keeps coming up. Shortly before the New Hampshire primary, Romney said he’s “glad” the economy is improving, but quickly added that President Obama “doesn’t deserve” credit. In an interview with Bloomberg Television, Romney also said the economy is recovering, but said “this president has not helped it.”
And in a debate for the Republican presidential candidates last weekend, Romney made his case this way:
“The president is going to try to take responsibility for things getting better. It’s like the rooster trying to take responsibility for the sun rising. He didn’t do it.”
I believe campaign professionals call this a “losing argument.”
Look, I don’t know whether the recovery will strengthen in 2012. The recent evidence has been mixed; experts’ projections vary widely; and the global threats to the economy remain real and hard to predict. There is, however, room for some optimism and Romney himself believes, in his words, economic conditions are “getting better.”
But as a campaign matter, if Romney is right about a strengthening recovery, he has to realize he’s going to lose. For the entirety of 2011, the former governor had a single message he repeated ad nauseum: Obama made a bad economy worse. It wasn’t true, but so long as the recovery was largely invisible, it was a message that could fool a lot of the people a lot of the time.
Two weeks into 2012, Romney has a new message: don’t give Obama credit for making the economy better. In effect, the Republican is arguing, “Sure, Obama inherited a deep recession. And sure, he took a bunch of steps to turn the economy around. And sure, we’re now seeing more jobs being created and more economic growth. But vote against him anyway.”
This isn’t just a tough sell; it’s an impossible one.
Look again at what Romney said in last weekend’s debate: “The president is going to try to take responsibility for things getting better. It’s like the rooster trying to take responsibility for the sun rising.”
By Romney’s own reasoning, the sun is rising and it’s morning in America. As Jon Chait put it, “This seems like a shockingly weak line — if you concede that it’s morning, you’ve lost the argument.”
By: Steve Benen, Contributing Writer, Washington Monthly, Political Animal, January 14, 012
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