Ezra Klein on the policy response to the recession

Ezra Klein has the best piece yet on the policy response to the recession, and why it wasn’t enough.  He  highlights the way that  bad data led to bad policy mistakes.

To understand how the administration got it so wrong, we need to look at the data it was looking at.

The Bureau of Economic Analysis, the agency charged with measuring the size and growth of the U.S. economy, initially projected that the economy shrank at an annual rate of 3.8 percent in the last quarter of 2008. Months later, the bureau almost doubled that estimate, saying the number was 6.2 percent. Then it was revised to 6.3 percent. But it wasn’t until this year that the actual number was revealed: 8.9 percent. That makes it one of the worst quarters in American history. Bernstein and Romer knew in 2008 that the economy had sustained a tough blow; they didn’t know that it had been run over by a truck.

Ezra then goes on to discuss in great detail the choices and constraints of the Obama Administration, and comes to a fascinating conclusion.

Yet the Obama administration did too little. Its team of interventionist Keynesians immersed in the lessons of the Depression and Japan did too little. Everyone does too little, even when they think they’re erring on the side of doing too much. That’s one reason “this time” is almost never different.

The tendency thus far has been to look at these crises in terms of the identifiable economic factors that make them different from typical recessions. But perhaps the better approach is to look at the political factors that make them turn out the same, that stop governments from doing enough even when they have sworn to err on the side of doing too much.

The political crisis–here, in Europe, and in Japan in the 1990s–is not separate from the economic crisis, but lies at its heart.

Comments

  1. It is a very human failing. Hofstadter wrote at length about why, for instance, everything takes longer than we think it will, even when we know that everything takes longer than we think it will (Hofstadter’s Law). We might say, in this case, that the fix has been in play since before the crisis broke, because, of all possible replacements for Alan Greenspan, one was mysteriously chosen whose career focus was how The Great Depression could have been prevented by Federal Reserve action. This alone could easily have contributed to self deception on the part of observers. The feedback systems are becoming ever more convoluted, particularly under the influence of dysfunctional politics. One example among many is the loud echo chamber that wails about the raging inflation that the Fed’s actions will deliver, yet those parties still are not buying in anticipation of their own projections.

  2. I see, so if the data had just been better, we could have wasted more money on more Solyndras and all the other pork in the “stimulus” bills. Thank goodness the data isn’t better, but the real fix is getting these Keynesian dimwits out of govt- pretty much a lock in the next election, the only question is how big the Republican and Tea party majority will be in Congress- and passing a balanced budget amendment to the Constitution to take such power to shoot us in the foot away from these chuckleheads, which the Tea party will hopefully finally pass.

  3. The deficit has been around 10% of GDP since the beginning of this crisis: is that not enough? if not, what level of deficit would have done the trick? 15%? 20%?

    Keynesians tell us that is does not matter what we spend the stimulus money on as long as we spend it. Like Ajay, I think this is plain wrong.

    • I have yet to encounter a Keynesian theorist who addresses the stimulus of an economy that sends a significant portion of its income to China and other foreign nations. Ironically, in order for stimulus to deliver a sufficient kick, an opposing theory that claims that a rising tide raises all boats would have to be true, but it is apparently not true. In fact, I am not aware of any other credible theory that addresses times like these.

  4. the only problem with the administration’s policies is that they massively underestimated how much damage the republican polices of the previous eight years had done to the system.

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