Obama’s Stimulus Predicted to Underwhelm 14 Days Before He Became President

Paul Krugman, winner of the Nobel Prize in Economics and op-ed writer for the New York Times, which gives him some (Wall)street cred, predicted the Obama stimulus plan that was emerging after his election would be judged a failure. This in a January 6th, 2009 New York Times article, a full 14 days before he was even president.

He wrote a wonkish article with a lot of economic theory and lingo. But a couple excerpts give the outcomes of that wonkishness:

The bottom line is this: we’re probably looking at a plan that will shave less than 2 percentage points off the average unemployment rate for the next two years, and possibly quite a lot less. This raises real concerns about whether the incoming administration is lowballing its plans in an attempt to get bipartisan consensus….

And that gets us to politics. This really does look like a plan that falls well short of what advocates of strong stimulus were hoping for — and it seems as if that was done in order to win Republican votes. Yet even if the plan gets the hoped-for 80 votes in the Senate, which seems doubtful, responsibility for the plan’s perceived failure, if it’s spun that way, will be placed on Democrats.

I see the following scenario: a weak stimulus plan, perhaps even weaker than what we’re talking about now, is crafted to win those extra GOP votes. The plan limits the rise in unemployment, but things are still pretty bad, with the rate peaking at something like 9 percent and coming down only slowly. And then Mitch McConnell says “See, government spending doesn’t work.”

Let’s hope I’ve got this wrong.

To summarize what he was getting at, the Great Recession took out a lot more money, mostly in stock and housing values, than the emerging stimulus was going to put in. Krugman’s model, based on Keynesian economics, suggested this would stop the plunge but do little to bring us back to full employment; and that the Republicans, who turned the budget surplus they inherited from the Clinton administration, into such a major deficit the USA was hemmed in from borrowing the sums it needed to fully stimulate the economy, these same Republicans would blame Obama and Keynesian economics for the failure.

In fact looking back at that old prediction we can see it has come pretty much true with one caveat: Krugman, Obama, and the country were unaware at the time that the recession was much worse than they thought. More recent analysis published here in a July 29th, 2011 Huffington Post article entitled Great Recession Substantially Worse Than Previously Thought: Report says:

The 2007-2009 recession, already in the record books as the worst in the 66 years since the end of World War II, was even worse than previously thought.

From the start of the recession at the end of 2007 to the end in June of 2009, the U.S. economy shrank 5.1 percent. That is 1 percentage point worse than the previous estimate that the recession reduced total output during that period by 4.1 percent.

In short, had Krugman known how bad it really was he’d have suggested an even bigger stimulus was needed. At least in his first six months Obama stopped the collapse into a New Great Depression, and as Krugman predicted, set us on the course for a slow recovery.

I don’t like to identify myself as a Democrat or Republican. I don’t even like to be affiliated with an ideology like conservative or liberal. I like to identify myself as an American Pragmatist, finding what works, not demanding things be “shoulda, coulda, oughta”. The use of the scientific method for policy and politics. Here we have a prediction, based on 70 years of economic theory and practice. It seems to be pretty close to right, even in its political components suggesting the Republicans blaming Obama and the Democrats for the failure of the stimulus package which required support from them that they wouldn’t give.

While Republicans blame, a September 2012 CNN poll shows the public is much more nuanced than saying, “Well Obama is president now so it’s all his fault.” The poll found:

Since President Barack Obama’s first year in office, a majority of Americans have said that former President Bush’s policies were more responsible for current economic problems than Obama’s policies were. That figure is at 57% today, with 35% saying the current president and Democrats are mostly to blame for economic problems.”

It goes without saying this is not the result the Republicans had hoped for. For me the reality is closer to Bill Clinton’s recent DNC speech, the Republican’s argument is: “We left him a total mess. He hasn’t cleaned it up fast enough. So fire him and put us back in.”. The Democrats argument is: “He inherited a deeply damaged economy. He put a floor under the crash. He began the long, hard road to recovery and laid the foundation for a modern, more well- balanced economy that will produce millions of good new jobs, vibrant new businesses and lots of new wealth for innovators.”

I’m not sure how well those foundations for a modern economy have been laid, but I am sure that Republican policy directions for the past 30 years have done more to harm the economy and the middle class than Democratic ones. I understand that Republicans wish to blame the man, George “W”, but it is really their ideas and policies that are bankrupt (I will write more on that later). Perhaps another Obama win can restore this party to its sensibilities to work cooperatively in finding solutions for the country.

5 thoughts on “Obama’s Stimulus Predicted to Underwhelm 14 Days Before He Became President

  1. Hello Brother Robert ,
    What a wonderful surprise to find this, my daughter is teaching me new ideas about Facebook all the time. Please allow me a conservative response.
    As I understand the genesis of the economic collapse it was based in the collapse of of the housing market. This was due to people getting into loans that they could not afford or sustain. The conservative believes that this was spurred by Democrats insisting that there be some “fairness” in housing. People being in loans that they cannot sustain regardless of the intentions is obviously unwise from an economic standpoint.
    I am always amused by the “It was worse than we thought” argument. Why did the Democrats not know exactly how bad it was when they took on the problem? Was it an inadept assessment of the situation? Or were they foolish enough to believe the very people (Republicans) they are now spending millions of dollars to convince us have no idea how to handle an economic situation? Why believe them on one hand and then tell us that they don’t know what they are doing?
    This is fabulous! Now that I have discovered this medium, you’ll be hearing more from from me. Take care. Floyd

    • Hi Craig! [full disclosure: Craig was my best friend in high school, and remains very close]

      Interesting that you found this! Let your daughter show you how to subscribe on an RSS feed and you can keep up, and I think be the first feeder on this new blog. We always had interesting discussions so here goes:

      To answer the 2nd issue first, why didn’t they know how bad it was at the end of the Bush administration and beginning of the Obama administration? The answer is the economy is very complex and it takes time to measure it. In fact I have to revise what I wrote. I thought I’d heard of a recent revision but my first Google search yielded the 2011 revision. It turns out the Commerce Dept issues yearly updates for the last three years. The latest update is reported in Bloomberg Business Week, July 27, 2012; Gov’t: Great Recession bit less weak than thought. The end result is the first estimate was the economy shrank 4.1%, the second estimate a year later and the one I used in the post was it shrank 5.1 %, and now the most recent is the shrinkage was 4.7%. Apparently most of the change is caused by better estimates of state and local government expenditures. The bottom line is that no one knew how badly things were deteriorating.

      I think it’s a fair summary to say conservatives believe the markets do a near perfect job, based on self interest, of allocating resources, and thus any government involvement interferes with this best possible outcome. There are mathematical models showing this isn’t true, but for now I need not go into it. Instead I’ll rely on what we know. For the sake of this discussion only, let me concede that the government somehow forced unwilling banks to make loans to people unable to pay them. Once the loans were made banks found they could make lots of money bundling them together to ostensibly spread the risk of loan defaults, then get insurance companies to insure these packages, and then sell them to investors. I’ve heard no claim by anyone that the government forced or incentivized any insurance company (which in this case looked a lot more like financial institutions) or investors to take these packages. If the markets worked perfectly then at this point the loaning and insuring would have stopped because, acting on their own self interest, insurers and investors would not have insured or invested in these toxic mortgage backed securities and what we’d have seen instead is banks unable to sell their mortgages. In other words they’d need to hold these things like they did 30 years ago. Instead the less government regulated part of the system couldn’t get enough of these things, despite their self interest, and the whole thing collapsed. Alan Greenspan, friend and supporter of Ayn Rand and the conservative movement, and head of the Federal Reserve that participated in this collapse by reducing government involvement admitted this to congress saying, “Those of us who have looked to the self-interest of lending institutions to protect shareholders’ equity, myself included, are in a state of shocked disbelief.”

      Those are my thoughts and observations.

  2. Hi Guys,
    I like the idea of staying non-partisan about this issue and following history. Back in 1933 the Glass-Steagall Act was ushered in to provide a firewall of sorts between investment & commercial banking. Through the years the Act was chipped away at until by 1999 it was so degraded that President Clinton declard it dead and the Gramm-Leach-Blily Act finally repealed it. So both parties have to admit their fair share of negligence on looking out for the small investor. By the time of the most recent Recession, their was virtually no one around to watch over the interests of the Little Guy. Now that even Greenspan has been found to be so wrong, it amazes me that the Right still cling to their philosophy that the Market is God. As you said, Bob, things are a lot more complicated that that…both Democrats AND Republicans ought to have known better but too often partisan politics gets in the way of what’s best for the Country.

    • I couldn’t agree with you more Joan. While I think it’s true the Republican party pushes this agenda more, it’s also clear it had Democratic support, e.g. Bill Clinton as you mentioned above. My position is that the (political) cultural pendulum has swung too far into the deregulate arena and now needs to be brought back. I am concerned we’ve forgotten or somehow think “Things Are Different This Time” so we are exempt from the lessons learned during previous great down turns.

  3. Pingback: Do Tax Cuts Lead to Economic Growth? | Life's Very Curious Walkabout

Leave a Reply