Subject: Obama was too cautious in fearful times -Wolf - FT
From: "Michael Andrews" <[email-masked]>
To: "Thad Brown" <[email-masked]>, <[email-masked]>, <[email-masked]>, "Hunter Biden" <[email-masked]>, "Eric Schwerin" <[email-masked]>, "Neil Callahan" <[email-masked]>
Date: Wed, 1 Sep 2010 08:21:40 -0400

I agreed with Martin Wolf in late 2008 and early 2009 and agree with  
him today. The stimulus package was too small — really only $537  
billion with a less productive $250 billion tax cut added on to  
comfort the few Republicans who supported the package. Michael

Obama was too cautious in fearful times
By Martin Wolf
Published: August 31 2010 22:48 | Last updated: August 31 2010 22:48

Suppose that the US presidential election of 1932 had, in fact, taken  
place in 1930, at an early stage in the Great Depression. Suppose,  
too, that Franklin Delano Roosevelt had won then, though not by the  
landslide of 1932. How different subsequent events might have been.  
The president might have watched helplessly as output and employment  
collapsed. The decades of Democratic dominance might not have happened.

EDITOR’S CHOICE
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Obama struggles to convince voters - Aug-30

Obama: Popularity peaks and troughs - Aug-26

Opinion: Obama is right on China - Aug-30

View from DC videos - Nov-11

In depth: The Obama presidency - Aug-06

On such chances the wheel of history turns. But this time was  
different: the crisis brought Barack Obama to power close to the  
beginning of the economic collapse. I (among others) then argued that  
policy needed to be hugely aggressive. Alas, it was not. I noted on  
February 4 2009, at the beginning of the new presidency: “Instead of  
an overwhelming fiscal stimulus, what is emerging is too small, too  
wasteful and too ill-focused.” A week later, I asked: “Has Barack  
Obama’s presidency already failed? In normal times, this would be a  
ludicrous question. But these are not normal times. They are times of  
great danger. Today, the new US administration can disown  
responsibility for its inheritance; tomorrow, it will own it. Today,  
it can offer solutions; tomorrow it will have become the problem.  
Today, it is in control of events; tomorrow, events will take control  
of it. Doing too little is now far riskier than doing too much.” This  
was right.

The direction of policy was not wrong: policymakers – though not all  
economists – had learnt a great deal from the 1930s. Sensible people  
knew that aggressive monetary and fiscal expansion was needed,  
together with reconstruction of the financial sector.

But, as Larry Summers, Mr Obama’s chief economic adviser, had said:  
“When markets overshoot, policymakers must overshoot too”.  
Unfortunately, the administration failed to follow his excellent  
advice. This has allowed opponents to claim that policy has been  
ineffective when it has merely been inadequate.

Martin Wolf’s Exchange

Martin Wolf elicits readers’ views on current economic issues

In consequence, the administration has lost credibility with the  
public and the chances of a renewed fiscal expansion have disappeared.  
With the Federal Reserve cautious, too, the likelihood of a lengthy  
period of weak growth and heavy joblessness is high. So, too, are the  
chances of domestic and global political friction.

True, the idea that the policies adopted in the last few months of the  
Bush administration and the first months of this one were far better  
than nothing is weirdly controversial in the US. A recent paper by  
Alan Blinder, former vice-chairman of the Fed, and Mark Zandi of  
Moody’s argues that such critics are wrong. They use a standard macro- 
economic model to assess what would have happened without any  
intervention, without the financial interventions (including monetary  
policy) and without the fiscal action. They conclude that the peak to  
trough decline in gross domestic product would have been close to 12  
per cent with no policy response, compared to an actual decline of  
just 4 per cent (see chart). Similarly, the unemployment rate would  
have peaked at 16.5 per cent, instead of the actual 10 per cent. The  
bigger collapse would also have meant a fiscal deficit of $2,600bn in  
fiscal year 2011. The outcome is also disastrous with the modest  
fiscal response but no financial policy response. It is a little  
better the other way round.

The implication that the modest stimulus package of February 2009 – a  
mere 5.7 per cent of 2009 GDP, spread over several years – made a  
positive contribution is supported by the analysis of the  
Congressional Budget Office: it argues that in 2010, US GDP will be  
between 1.5 per cent and 4.1 per cent higher and the unemployment rate  
between 0.7 and 1.8 percentage points lower, as a result of the package.

Panglossians who believe the private economy is always in equilibrium,  
unless governments intervene, disagree. I wish there were some way to  
run this experiment without hurting hundreds of millions of people.  
But I find the idea that allowing the collapse of much of the  
financial system, avoiding unconventional monetary policy and  
struggling to close the fiscal deficit would have been consistent with  
a more rapid and sustained recovery quite bizarre.

A fascinating perspective does come, however, from comparisons with  
what happened in other advanced countries. The recession in US output  
(and so demand) has been relatively small, but the decline in  
employment has been exceptionally large, as a result of an  
extraordinary surge in US productivity (see charts). This contrast  
between what would happen to output and what would happen to  
employment was missed in the initial Congressional Budget Office  
analysis of the stimulus.

Since the US was the epicentre of the financial crisis, the relatively  
small decline in output is remarkable. Moreover, since fiscal and  
monetary stimuli bear directly on demand and output, not jobs, this is  
a policy success. At the same time, the enthusiasm with which US  
managers laid off workers is also extraordinary. No doubt, some of  
this is due to the collapse in construction. But some of it must be  
due to the ease with which US companies can lay off workers and the  
incentives for managers to maintain profits in a downturn at the  
expense of jobs.

Debate is emerging on how much of the surge in unemployment is  
structural. My answer, from European experience, is that one way to  
ensure it becomes structural is to let it linger. In the short run,  
the simplest way to prevent that from happening is to expand demand  
and so output. Since there is huge slack in the labour market, not the  
slightest threat of inflation – far more a risk of deflation – and no  
constraint from bond or foreign exchange markets on further monetary  
and fiscal stimulus, these are the policies that have to be pursued.  
Yet, alas, the Fed seems to have decided to fall asleep and the  
administration has lost the initiative.

So what is going to happen? I assume that, after the midterm  
elections, resurgent Republicans will offer new tax cuts and ignore  
the fiscal deficits. They will pretend that this has nothing to do  
with any reviled stimulus, though it is much the same thing –  
increasing fiscal deficits, thereby offsetting private frugality. That  
would put the administration on the spot. It would have to choose  
between vetoing the tax cuts and accepting them, so allowing the  
Republicans to get the credit for their “yacht and mansion-led”  
recovery. Any recovery is better than none. But it could have been  
much better than this. Those who were cautious when they should have  
been bold will pay a big price.

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