There are two fair conclusions to draw from the recent run of middling economic data, culminating with Friday’s disappointing GDP number. First, contra Mitt Romney, this is not an administration with a failed economic record, at least not as we sit here today. In almost every way—job growth, housing, GDP—Obama has presided over a vast improvement in the economic situation he inherited. Second, having said that, the administration clearly undershot in a variety of ways, and that undershooting has left the economy dismayingly vulnerable three years after the recession officially ended.
At heart, the administration’s economic strategy was based on a $1 trillion gamble back in late 2008 and early 2009. As I describe in my recent book, Christina Romer, who Obama tapped to be his chief White House economist, concluded that nursing the economy back to health by 2011 would require a $1.7 to $1.8 trillion worth of stimulus. The actual amount the administration proposed was under $800 billion (which was roughly what passed).
Partly this was for tactical political reasons: Larry Summers, Obama’s top economic adviser, thought the president and his top political aides would laugh him out of the room if he and Romer even discussed more than $1 trillion internally (to say nothing of how Congress would react). But the undershooting also had an economic logic to it: Summers believed in a concept called “escape velocity,” which held that you didn’t need the full amount of stimulus your calculations suggested you did. If you just stopped the economy from shrinking and gave it a nudge in the right direction, it might be able to do the rest on its own. Falling unemployment would boost consumer spending, higher spending would boost GDP, and rising GDP would further reduce unemployment. Better still, consumers and businesses would become progressively more confident as this process unfolded, which would accelerate the virtuous cycle until—boom!—the economy shifted into warp speed and shot out those light rays that tell you it’s business-time on Star Trek.
Which is to say, Team Obama’s trillion dollar bet was fundamentally a bet on psychology. The only way you could get away with spending so much less than Romer advised was if what you did spend was enough to briefly create the impression of a sharp rebound, at which point people would start to act as though it were the case, and, before long, the economy really would rebound sharply.
Suffice it to say, things didn’t entirely work out that way. Just as Team Obama hoped/predicted, the stimulus ended the recession in mid-2009, and the economy began to grow pretty quickly by late that year. But then the mood began to darken in the spring of 2010—partly because of the financial turmoil in Europe—slowing the economy along with it. We got close to escape velocity, but not quite there, as several Obama economic wonks have conceded to me. And the next 15 months or so were pretty disappointing.
Then, this past winter the situation began to improve again. Job growth picked up and the fourth-quarter GDP number was encouraging. It looked like we had another crack at those fancy light-rays. The problem is that we were still essentially relying on a psychological improvement more than a serious improvement in economic fundamentals—consumers still had a lot of debt that could drag down spending while (not unrelatedly) the housing market was still pretty ugly. Alas, when you’re mostly banking on psychology, it can reverse itself pretty quickly, and with a lot of force.
Which brings me back to the present: It’s possible that the last few weeks of rising jobless claims, flat industrial production, and now this disconcerting GDP number are just a blip. There’s always a lot of noise in economic data, and especially so in recent years, when the volatility of the crisis has made things like seasonal adjustment a lot harder to pull off. But in a way it doesn’t entirely matter. When you’ve placed a bet on psychology, and people suddenly have reason to be anxious, it’s neither here nor there whether their reasons are justified in some objective sense. It just matters how they react.
Fortunately for Obama—and for all of us who depend on, you know, a growing economy—I don’t think the recent data has quite penetrated the popular psyche yet. Let’s hope it turns around before it ever has a chance. Still, there’s certainly rising anxiety among economists and corporate types. (The basic story from today’s GDP report was that consumer spending was pretty strong, even though incomes aren’t really rising, while businesses cut back on their spending.) And if we get another disappointing job number next Friday to match last month’s heartbreaker, that anxiety will go mainstream, prompting another round of national bed-wetting. This could, in turn, reinforce the slight deterioration the data are picking up, in the same way rising confidence once reinforced the early signs of improvement. As I say, when you live by the mental state of the average American, you also die by it.
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