Arnold Kling  

The Best of Times, the Worst of Times

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The Washington Post reports


The number of jobs in the nation increased by about 2 percent during Bush's tenure, the most tepid growth over any eight-year span since data collection began seven decades ago. Gross domestic product, a broad measure of economic output, grew at the slowest pace for a period of that length since the Truman administration.

I decided to look up productivity growth figures at the BLS. In Q4 of 1992, the nonfarm business sector productivity index stood at 101.265. In Q4 of 2000, it was 116.824. In Q3 of 2008, it was 141.207. That means that under President Clinton, productivity rose a total of 15 percent. Under President Bush, productivity rose a total of 21 percent.

I think it is wrong to associate economic performance of any kind with Presidents, but if you are going to play that game, you should mention productivity as well as employment.

On the other hand, Kevin Hassett points out ways in which things definitely got worse.


How could the deficit increase so much [in 2009], so fast? Part of the story is the decline in revenue, which the CBO forecasts will be $166 billion less than it was in 2008, a 6.6 percent decline. But relative to 2000, revenue has actually increased from $2 trillion to a scheduled $2.4 trillion in 2009.

The deficit has skyrocketed because spending has grown from $1.8 trillion in 2000 to a projected $3.5 trillion in 2009, fully 95 percent higher. Of course, all that happened mostly on a Republican watch.

Hassett figures that once the stimulus is thrown in the deficit next year will be $1.7 trillion. Have a nice day.


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CATEGORIES: Fiscal Policy



COMMENTS (12 to date)
Steve Roth writes:

Comparing two eight-year administrations--no matter how many criteria are used in that comparison--is kind of a fool's errand.

Comparing all Democratic and Republican administrations since WWII, however, might yield insight that's more convincing and credible--given that I think we'll all agree that there has been a quite systematic (though not nearly uniform) set of differences between the two parties' policies.

That comparison shows that by virtually every economic indicator, the economy has done better under democrats. And not just a little better.

And, in keeping with the theories of pro-growth progressives, that greater prosperity has been pareto-optimal: the poor people did far better, but the rich people did better too.

Ryan writes:

Basing it off the last data point for nominal GDP at FRED, 13.8075 trillion, the US deficit will be about 12.3% of GDP. That is probably a high estimate, as bad as 2008 was total nominal GDP was probably higher than 2007, but wow...that's an incredibly large number. I can't imagine how people will continue to purchase US debt without demanding more in return. Interesting times...

RJ writes:

Kling, you have turned into such a partisan hack! I used to love this blog, and a big shout out to Bryan for his excellent book, but honestly, it is beyond me how little thought and how much rancor is now in these posts! Apparently Austrians haven't learned how to accept defeat.

First of all, a good portion of the Deficit this year will be assets puchased under the TARP and obligations we have entered into with various financial firms. But those assets can be sold, and those loans will be repaid. If our debt costs us 3% a year in interest, but the shares we have bought in Goldman Sachs pay 5% a year, we are making some money. and keep in mind that the shares we bought in GS are likely to appreciate as the stock market rebounds, increasing the base value of our investment an the money we earn from dividends. Same as loans made to the Big Three, assuming they ultimately survive and can repay us. Nor does guaranteeing AIG cost us money unless they actually go under, because they will eventually repay us.

It's like getting mad at a bank for lending more than its capital base. Every bank does it, because it's unlikely that there will be a bank run.

And it's generally accepted that productivity grows in a recession as firms cut the least productive people first. The fact the Clinton managed nearly as large productivity growth over 8 years of expansion is amazing, considering Bush has had 2 recession to cut out the least productive people. Does that make recessions a good thing Prof. Kling? I'm glad we've increased our productivity, but I am a little worried about stagnant or negative wage growth for the bottom 80% and the inexplicably large deficit Bush managed to accrue. I love how up in arms Conservatives are now that a Democrat is deficit spending while trying to bring us out of a recession, but there were no questions when Bush was running a 500 billion a year deficit for God-knows-what.

Oh, and its wrong to associate Economic Performance with Presidents? What should we associate it with? Congress? The latest academic fad? Should we post date it by a year, maybe 2? How about positing an alternate explanation rather than just trying to discredit those who disagree with you.

Have a nice day!

Jayson Virissimo writes:

"I think we'll all agree that there has been a quite systematic (though not nearly uniform) set of differences between the two parties' policies" -Steve Roth

You assume too much.

Jim Glass writes:

"The number of jobs in the nation increased by about 2 percent during Bush's tenure, the most tepid growth over any eight-year span since data collection began seven decades ago.

"Gross domestic product, a broad measure of economic output, grew at the slowest pace for a period of that length since the Truman administration."
~~~~~~~

These are the same old bogus numbers that get repeated over and over in the "Democratic presidents create stronger economies" claim heard every election year from Kinsley, Krugman, etc, etc.

Now it is arithmetically true that counting from the very first day of each president's term until its last day, Democratic presidents have had stronger GDP and employment growth than Republicans.

There've been 14 full presidential terms from 1948 to 2004, 6 Democratic and 8 Republican. All 6 of the Democratic presidents ranked in the 7 highest-GDP growth terms ... and average GDP growth per term was 17.95% for Democrats to only 11.75% for Republicans. That looks pretty impressive to Democrats!

But it is only because Republicans have repeatedly at the very start of their terms inherited economies in the process of busting:

* Reagan inherited double-digit inflation from Carter that immediately caused the real worst recession since the Great Depression, as engineered by the Fed to bust it, with double-digit unemployment. The bad guy there, the presidential failure, was Carter the Democrat. But Reagan and the Republicans lose in this counting.

* Bush II inherited the bust of the Clinton bubble immediately upon taking office. (The WaPo doesn't mention that it is measures Dubya's job growth from an historic high bubble-peak level when criticizing it.)

* Nixon inherited an immediate bust of the Johnson "guns & butter" bubble.

Now, if one recognizes that a new president's economic policies take time to be enacted and have an effect, and one lags GDP and employment growth by a standard textbook amount -- 18 months after the start of each president's terms -- guess what happens to the relationship.

It totally disappears (and rather reverses.) Now of the 7 terms with the highest GDP growth, 5 belong to Republicans -- and average GDP growth per term is 14.7% for Republicans versus 13.9% for Democrats.

Presidents don't control the business cycle. Hoover didn't cause the Great Depression. This is just the business cycle in action, with a "small sample size" number of presidents landing in it here and there.

Anyhow, if Obama inherits the next-worst recession since the Great Depression from the very start of his term, it'll ruin the Democrats' numbers so we won't see Kinsley & Co. making this argument again for a while.

Jacob Oost writes:

RJ, I can't tell if you're kidding or not, but I think the Federal Reserve's rates, tax rates, and spending rates tell us much more about an economy than the name on the plaque at the Oval Office. Most presidents are mixed bags of policies, few presidents are ideologically "narrow," for lack of a better word.

So, yes, Congress is probably more important than the Prez, since they handle the dough and the tax rates. The Prez, of course, balances this power out with his veto power, and he appoints the Fed big wigs, but he's a smaller piece of the puzzle than the Fed or Congress.

And while I'm at it, all mayors and governors combined hold more sway over the economy combined than any single president. Think I'm wrong? Go look at the incredible variance in economic performances of various states and cities, with various tax and spending rates, various programs, etc. Merely deciding whether or not to be a right-to-work state can have HUGE effects on an economy, all under the same Prez.

RJ writes:

I wasn't making any assertion about how we should attribute economic growth. I was merely pointing out that if Kling is going to disagree, I'd like to know why and if he had an alternative explanation.

Besides, its ridiculous to assume that there is no connection between the two. Obviously Presidents have a large effect on economic policy and growth. So do Congresses, so do the reigning economic orthodoxy, and so does the Fed. I think it is more appropriate to look at the general set of policies in effect during each period and draw a conclusion on that basis.

tc writes:

"First of all, a good portion of the Deficit this year will be assets puchased under the TARP and obligations we have entered into with various financial firms. But those assets can be sold, and those loans will be repaid. If our debt costs us 3% a year in interest, but the shares we have bought in Goldman Sachs pay 5% a year, we are making some money. and keep in mind that the shares we bought in GS are likely to appreciate as the stock market rebounds, increasing the base value of our investment an the money we earn from dividends. Same as loans made to the Big Three, assuming they ultimately survive and can repay us. Nor does guaranteeing AIG cost us money unless they actually go under, because they will eventually repay us."

So basically what your saying is that since we bought a bunch of debt from, and equity into, firms that were the verge of bankruptcy we should assume that those debts, and that equity is good?

There is a reason that commercial paper was trading at 18 cents on the dollar, foreclosed homes (for one example) usually sell for 70% of their previous sale price (numbers of the top of my head, don't take as literal) during standard times. This number becomes dramatically worse during falling house prices. First you get much larger inventories that take longer to clear, which is terrible for uninhabited homes. Secondly banks don't have the personal to monitor their properties, if normal default rates are 3% then they have staff that can handle looking out for that 3% while they unload it on the market. If default rates double then your staff is going to be woefully under equipped to protect what value is left in those homes. And then of course our bank is having problems and laying people of, not hiring them.
Long story short there is a nasty chain of events building up that makes the banks, commercial paper, auto industries ect all very vulnerable. Simply assuming that AIG survives is terrible considering how they were on the verge of collapsing and had to get an 80 billion dollar loan, and then had to come back for an additional 40 billion- just to keep operating.

RJ writes:

How is it a terrible assumption that firms we have already decided will survive, will survive? No more financial firms are in true danger of collapsing, unless some outside event causes another dive in asset values.

The recession was caused by a bubble in housing. The pop of that bubble revealed massive over-investment by financial firms, which revealed unsound lending practices and risky financial "innovations"which deepened the firm's financial trouble. But there are no bubbles left. We've already discovered the large majority of bad financial practices, especially the widespread ones. There are no more large shocks waiting, only recovery.

You say there is a nasty chain building up. NOT TRUE. We have seen the worst, the second worst, and the third worst. We are through the storm, and now we are waiting for everyone to recover. AIG is not going to collapse, nor is GS. I was never in favor of the auto-bailout, and I hope that Chrysler declares bankruptcy. I think it was the height of stupidity to prop up GM and Chrysler. But the fact is, we are not running a 1.7 trillion dollar deficit next year based on Expenditures-Income. We are buying up assets that will almost certainly appreciate in value, and honestly, if they don't we've already entered into an incredibly deep world-wide depression and it's the least of our worries. Kling knows this, yet chooses to represent this in a false manner. It's pure partisan hackery at its worst.

tc writes:

"How is it a terrible assumption that firms we have already decided will survive, will survive?"

Simply assuring they survive doesn't ensure that they can pay of their debts in any form of timely manner. GMs market cap is 2.5 billion, the loans they asked for - 16 billion (that s just for the next few months). AIG got 120 billion in loans, that more than their total annual revenue for either 2007 or 2006. Their profit margin in 2007 was less than 7%. Even if they somehow got back to 2007 levels of profitability sometime soon the interest on a 5% loan would take virtually 100% of their profits. How can they ever pay that loan back in reality considering much of their business was geared toward CDS type vehicles which will virtually disappear in the future.

Promising that companies wont go bankrupt is meaningless when they are just flushing money to keep them afloat.

"The recession was caused by a bubble in housing. The pop of that bubble revealed massive over-investment by financial firms, which revealed unsound lending practices and risky financial "innovations"which deepened the firm's financial trouble. But there are no bubbles left. We've already discovered the large majority of bad financial practices, especially the widespread ones. There are no more large shocks waiting, only recovery."

Wow your an optimist. ARM reset rates are still lurking out there. Credit card defaults are still lurking out there. Housing prices have yet to bottom.

"if they don't we've already entered into an incredibly deep world-wide depression and it's the least of our worries."

No. You couldn't be more wrong. If we enter a depression the resources we have squandered will bit us in the ass and prolong it. Destroying capital stock is a sure fire way to drag out the recovery.

"But the fact is, we are not running a 1.7 trillion dollar deficit next year based on Expenditures-Income. We are buying up assets that will almost certainly appreciate in value"

So why were these companies in trouble again? Their assets will appreciate in value despite the market pricing them at a fraction of their value? Blind, unwarrented optimism. The assets teh Fed is taking back for loans are the worst assets that banks have. Simply surviving a 'liquidity' crisis is meaningless when the core of your business model has to change.

RJ writes:

TC, your argument is basically that we're all F-ed. THe economy will not recover, neither will housing prices, neither will the assets of companies. As long as the economy recovers, I am right. None of these companies are going to default, outside of the auto companies, so they will eventually pay back loans. And you missed the whole point that our deficit includes the "obligations" we have made to various companies in the way the FDIC will pay up to 100,000 thousand of every bank account. Unless the banks actually default, we will never have to pay that money. At least a third of our "deficit" isn't even money being spent. It's money promised to others in case of wide spread bank defaults. And like I said, if that ahppens, the whole world is in melt down anyways, and we can pursue drastic courses of action not available right now.

Just yelling OPTIMISTIC over and over again doesn't make you right. I think I am entirely realistic in believing that the recession will end by the end of 2009 (not optimistic assumption), and sometime after that we will be paid back on our loans and will no longer have to insure financial institutions to the degree we do. But the point is, as long as we are not spending the money, it really isn't a technical deficit. And money we loan will, if the economy recovers, be repaid. Not to mention selling the stock the government now owns in various banks, which pay hefty dividends and are convertible to common stock at any point, which can then be sold.

Where am I overly optimistic?

tc writes:

"TC, your argument is basically that we're all F-ed. THe economy will not recover"

No its not, at all.

"As long as the economy recovers, I am right. None of these companies are going to default, outside of the auto companies, so they will eventually pay back loans."

You say this, and its incredible. You do realize that AIG's entire business model has to change without CDSs or CDOs to write? Just because the economy recovers doesn't mean that all the players within the economy will recover. Look at the last 20 years in Japan, their banking industry has limped along and has slowly been nationalized. Some sectors of their economy have grown, others contracted (on the whole very minimal growth), but their experience certainly shows warnings signs for us.

"Just yelling OPTIMISTIC over and over again doesn't make you right."

~40% of ARMs have yet to reset that were made during the bubble. There is also very high levels of credit card debt which is very high up on the likely to default scale during periods of high UE. And then there is Medicare and SS. These programs were expected to be underfunded sometime in the next decade under the assumption of growth. A long recession will smash those expectations and we could see them in the red much sooner pushing hard on the recovery. These are just foreseeable shocks, massive storms, terroism, and other unexpected events could also contribute. Having a high debt load magnifies events like these.

"But the point is, as long as we are not spending the money, it really isn't a technical deficit."

The problem with your position is that it ignores the worst. Even if you estimated an 80% chance of things going well (recession ending in 2009, interest rates staying low, inflation staying low, not having to spend all of the money promised) that doesn't get you off the hook for the other 20%. This is in fact the type of ignorance of risk management that got many companies in this mess in the first place, by ignoring the "unlikely" events they improperly evaluated the true cost of their risk. When those events went from unlikely to certainties the companies were screwed. They had two options, bankruptcy or a massive subsidy from the government. At the government level though its endgame. If we get into a position where the government has to go bankrupt there is no larger entity to bail them out. Then you are talking about real world worst case scenario for a period. Banks are not to big to fail, police agencies, water sanitation, trash collection- these things actually are. Without them we have to brace for riots and disease.

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