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The Drudge Report recently linked (“OBAMA VS. REAGAN ON GROWTH — NOT EVEN CLOSE”) to a Gateway Pundit blog post featuring the above jobs chart, which was first posted at IJ Review. Now, it is hardly the only or first chart to highlight that the economic recovery after the 1981-82 recession was stronger than the recovery we’ve seen after the 2007-2009 recession. I’ve done a few of them myself. I mean, it’s not a difficult point to argue when economic growth was so much faster in the 1980s. In the 23 quarters since the end of the Great Recession, real GDP is up 14% vs 30% after Really Bad Recession. Or to put it another way, the “Reagan Recovery” was twice as strong as the “Obama Recovery.” The Four Percent Recovery vs. the Two Percent Recovery.
But what conclusions should we draw from that comparison? And how should those conclusions inform both economic policy going forward and responses to future downturns? Now, I am not about to write the definite blog post that answers those questions. Instead, I will ask even more questions: Were the two recessions of a similar kind? And if they weren’t — maybe one was driven by the Federal Reserve, the other by debt-laden balance sheets and financial collapse — does that make a difference in the depth and strength of the subsequent recovery?
For instance, economists Carmen Reinhart and Kenneth Rogoff find “the aftermath of the US financial crisis has been quite typical of post-war systemic financial crises around the globe.” Or maybe downturns after financial shocks in advanced economies are “on average only moderate, and often temporary,” as Christina and David Romer argue. Hmm. Then again, Michael Bordo finds it was less the financial crisis than the housing collapse that accompanied the banking shock. Along the same lines, Atif Mian and Amir Sufi argue a “debt-fueled housing boom artificially boosted household spending from 2000 to 2006, and then the collapse in house prices forced a sharp pull-back because indebted households bore the brunt of the shock.”
But maybe the real problem is less the nature of the downturns than the nature of government responses—or perhaps both share the blame. Perhaps the Great Depression, Really Bad Recession, and Great Recession were all just different flavors of downturn caused by Fed tightening (with the two Greats a case of the Fed unintentionally taking an existing downturn and making it much, much worse.) On the fiscal side, Romer and Romer theorize that the “tighter fiscal policy that began in … the United States in 2011 cannot explain the severity of the downturn, but … may have been important to the slow recovery.” Indeed, as Michael Darda has repeatedly pointed out, we’ve seen “the most intense fiscal consolidation since the Korean War demobilization,” including tax hikes. Sufi and Mann say their research suggests $700 billion in principal forgiveness of underwater mortgage debt in 2009 would have produced a $126 billion spending boost and “also have had the indirect positive effect of drastically reducing foreclosures and the associated negative effects of foreclosures on the economy.” Similary, Rogoff recently wrote, “Policymakers should have more vigorously pursued debt write-downs (e.g. subprime debt in the US and periphery-country debt in Europe), accompanied by bank restructuring and recapitalisation.” A more aggressive Fed would have been helpful, too, he adds. Casey Mulligan makes the case that it is government programs — such as food stamps and extended unemployment benefits — which are to blame by “reducing incentives for people to work and for businesses to hire.” Few would argue that policy responses have been optimal.
As for the 1980s, you had the Reagan tax cuts, of course. But also monetary easing starting in 1982. At the same time, the economy was shifting from one of high inflation to low inflation. And Corporate America was undergoing sweeping restructuring as it finally responded to increased global competition.
Finally, you have the various “secular stagnation” arguments, where the slow recovery is part of a longer-term downshift in growth. Maybe that’s because of a chronic lack of demand, maybe that reflects supply-side constraints including demographics and innovation. It’s worth noting that from the end of World War II through the 1980s, it took an average of only 6 months to return to pre-recession job levels. But normalization took 15 months after the 1990–91 recession and 39 months after the 2001 recession. And we know how the job market has slowly recovered this time around. Are trade and automation affecting labor markets in a way they weren’t in the 1980s?
So, yeah, a complicated macroeconomic picture with lots of moving policy pieces. Comparing GDP and jobs gains during the “Reagan Recovery” and the “Obama Recovery” can start an interesting economic conversation — but not much more than that. Then the real data-driven analysis can begin.