The Mistaken Decision To Turn The Corner

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I think it’s a bit of a fool’s errand to worry too much about what it is that high-level government officials “really” think about things. Policy is an inevitable blend of views of different people about feasibility, priorities, desirability, etc. Something I’ve learned over the past few years of observing the Obama administration is that to be successful in government, you need to be good at persuading yourself that the outputs of these processes are really the right ones. What’s important to remember is that at least by April, the administration had adopted the view that it didn’t make sense to spend further time and energy worrying about the short-term economic situation.

During his Facebook town hall, he explained that the time had come to pivot to longer term considerations, specifically closing the long-term budget gap in a way that’s consistent with key investments in education, infrastructure, science, and energy:

Now, the economy is now growing. It’s not growing quite as fast as we would like, because after a financial crisis, typically there’s a bigger drag on the economy for a longer period of time. But it is growing. And over the last year and a half we’ve seen almost 2 million jobs created in the private sector.

Because this recession came at a time when we were already deeply in debt and it made the debt worse, if we don’t have a serious plan to tackle the debt and the deficit, that could actually end up being a bigger drag on the economy than anything else. If the markets start feeling that we’re not serious about the problem, and if you start seeing investors feel uncertain about the future, then they could pull back right at the time when the economy is taking off.

What Obama’s referring to there is a result from Carmen Reinhardt and Kenneth Rogoff which demonstrates empirically that, yes, financial crises usually lead to unusually long and painful recessions. There are a number of different conclusions you could draw from this. My preferred conclusion is the one that Treasury Secretary Tim Geithner believed in back in March 2010 — it’s politically challenging to mount an adequate policy response to financial crises. Here’s the end of John Cassidy’s profile of him:

“Why do policymakers screw up financial crises?” he said before I left his office. “They screw up financial crises because the politics are horrible, and that deters action. They are slow and late and tentative and weak because they are scared to death of the politics. But sometimes a policymaker has to say, I’ll take pain now against pain later.”

Some time in the ensuing year, the administration abandoned this Geithner/activist interpretation of the Reinhardt/Rogoff result and instead shifted to a fatalist interpretation. Yes, the economy is in bad shape. And yes, growth is likely to continue to be disappointing. But not because of policy failures. It’s just one of these things, like how it gets cold in the winter. You deal with it. But you don’t let it dominate your life. You focus on the long term. It’s a convenient story to believe, because it aligns with short-term political imperatives. It’s also flattering, it says to the people in charge, “It’s not your fault, there’s nothing more you can do.” But it’s wrong.