America’s Sluggish Recovery

In the wake of an analysis from the Tax Policy Center illustrating that Mitt Romney’s tax reform ideas would lead to higher taxes on families with incomes below $200,000 a year, the Romney campaign is out with a hot new white paper from Glenn Hubbard, Greg Mankiw, John Taylor, and Kevin Hassett touting the job-creating effects of the plan. Since Romney still won’t say what’s in the plan, exactly, I applaud the authors for their ability to score the unscorable.

They also open up a new front in an important conceptual debate about the sluggishness of the recovery:

The Obama administration says that the economy’s awful performance reflects the reality of the aftermath of a financial crisis and that the administration’s policies generated what little recovery we have seen from the severe 2007-2009 recession – Americans should stay the course. But the historical record is clear: Our economy usually recovers quickly from recessions, and the more severe the recession, the faster the subsequent catch-up growth.

An interesting piece of background here is that back in March 2009 it was the Obama administration saying we should expect rapid catch-up growth, and Mankiw arguing that this is an unfounded assumption. The Obama administration really has changed its tune on this “unit root” controversy, and it’s interesting that Mankiw has also changed his mind. Normally the problem in intellectual life is that people hesitate to confess to error even when refuted by events. Changing your mind after having been apparently vindicated by events requires a staggering level of open-mindedness.

At any rate, thus far there have been two main takes on the sluggishness of the growth. One is the Reinhart/Rogoff hypothesis, since embraced by the president, that recoveries from financial crises are simply long and painful compared to “ordinary” recessions. Indeed, the empirical evidence that R&R marshall that this is the case seems overwhelming. But not everyone is persuaded by their causal argument. The alternative view—which I hold to—is simply that the policy response to financial crisis tends to be bungled since the simple mechanism of interest-rate targeting doesn’t work. So one view is that we’ve done about as well as we could have, and another view is that we didn’t have appropriately stimulative monetary and fiscal policies. The white paper’s four authors seem to be trying to put a third hypothesis on the table, namely that as a giant cosmic coincidence the Obama administration put in policies that so severely crippled America’s long-term growth potential as to prevent even short-term catch-up growth despite the presence of appropriately stimulative policies.

This is a conjecture I first heard from Robert Lucas in spring 2011.

The real challenge for people who believe it is Lyndon Johnson. Does anyone seriously believe the Obama administration’s policies have represented a more substantial expansion of the welfare state than LBJ’s? I think this no more passes the laugh test than does Mankiw’s flip-flip on the unit root controversy.