In January 2009 the new Obama Administration issued its now-infamous report titled “The Job Impact of the American Recovery and Reinvestment Plan,” more commonly known as the “Romer/Bernstein Report” after the President and Vice President’s economists who authored it.  This report included estimates of what would  happen if the Administration’s stimulus plan was enacted, and what would happen if it wasn’t – presumably casting the U.S. into “another Great Depression.”  This chart displays the unemployment rates the Administration forecast in that January 2009 report if their stimulus plan passed (the “with stimulus” line), if their stimulus plan didn’t pass (the “without stimulus” line), and what actually happened:

Notice something important?  The unemployment rate the Administration in January 2009 predicted the U.S. would have now without their “yank(ing) the economy out of another Great Depression” (about 8 percent in the “without stimulus” line) is less than the current official U.S. unemployment rate (9.1 percent in May 2011).  Clearly, this data doesn’t support the President’s claim that the Administration “yanked the economy out of another Great Depression.”

But maybe the Administration didn’t know the true severity of the situation in January 2009, and only realized how bad things might get after releasing their January 2009 report.  That argument doesn’t hold water, either.  Senior Administration officials – including the President and his chief economists – knew how serious the U.S. economic situation was the month before the Administration’s January 2009 report.  According to the Wall Street Journal, on December 16, 2008 “the economic team and Mr. Obama met in the Chicago transition offices to grapple with an economic crisis that was spiraling downward. Christina Romer, who would become the chairman of the Council of Economic Advisers, was chipper, but her message was dark: The U.S. recession was the worst since the Great Depression.”

The President can’t have it both ways.  He and his Administration said without their stimulus plan unemployment would be 8 percent by now – bad, but hardly a Depression level.  Now that their plan passed and unemployment turned out to be even worse, they can’t plausibly say they succeeded in “yank(ing) the economy out of another Great Depression.”  They didn’t, and the President’s claim that they did shouldn’t be allowed to stand.

The Economic Policy Institute (EPI), a union-funded organization, has estimated that the cuts contained in the CR would result in a loss of 994,000 jobs. This analysis is based on a highly simplified economic analysis that has repeatedly been demonstrated to be wildly inaccurate.

EPI’s Jobs Analysis – Even the White House Thinks It Is Wrong

• EPI’s track record on forecasting the impact of policies on job creation is even rejected by the White House.
  • For example, EPI estimates that the U.S.-Korea Trade Promotion Agreement would result in a loss of 159,000 jobs.
  • In contrast, the President has said repeatedly that this trade agreement will create 70,000 jobs.

Romer/Bernstein Analytical Methods – Wrong Before, Wrong Now

• EPI’s analysis uses the same analytical methods applied by the Administration in its infamous Romer/Bernstein report to help sell the flawed 2009 stimulus bill. The Administration and EPI apply a simple multiplier to estimate the impact of changes in government spending on GDP and job growth.
  • This is the same analysis that the Administration used to project that as a result of the stimulus plan payroll employment would be 137.6 million at the end of 2010. As payroll employment at the end of 2010 was 130.2 million, the analysis was off by “only” 7.4 million jobs.
  • This is the same analytical method that EPI used to claim that stimulus would create up to 5 million jobs over the two years of 2009 and 2010.
  • EPI’s analysis couldn’t have been more wrong. Instead of adding up to 5 million jobs in 2009 and 2010, the economy actually lost 3.3 million jobs.

THEN (April 4, 2010):
Administration officials say growing labor force is “a great sign”

Behind the high unemployment rate, “there’s just been a tremendous increase in the labor force,” Christina Romer, chairman of the president’s Council of Economic Advisers, said on NBC’s ‘Meet the Press.’  “Over the last three months, we’ve added more than a million people to the labor force. And that’s actually, that’s a great sign,” Romer added. “That’s a sign that people that might have been discouraged dropped out because of the terrible recession, have started to have some hope again and are looking for work again.”

NOW (February 4, 2011):
What will the Administration say now that the labor force is shrinking?

Facts reveal sharp declines in the labor force since the March 2010 data Romer described above, with especially steep drops in the last two months.  According to the Bureau of Labor Statistics, the labor force has shrunk by 709,000 since March 2010.  Given this reality, will the Administration now say this trend is a “not great sign” indicating people have “lost hope again”?

Doubtful.

In January of 2009, Christina Romer and Jared Bernstein, then President Obama’s chief economic advisors, put together an analysis predicting that the Democrats’ stimulus package would “save or create” at least 3 million jobs by the end of 2010. Similarly, Romer and Bernstein claimed that passage of the stimulus package would keep the unemployment rate under 8 percent, falling to 7 percent by the end of 2010. But since that time, the unemployment rate has remained above 9 percent for 20 consecutive months, and there are 6.8 million fewer jobs than Romer and Bernstein predicted in their now-infamous report.

The arrival of 2011 has ended the era of the failed economic policies embraced by the Democratic Administration and advanced by unchecked Democratic Congressional Leaders. Instead, in the 112th Congress, the new Republican House Majority will pursue a contrasting agenda that creates the climate of certainty necessary to usher in a new era of private sector job creation. Congress sent a strong signal of that commitment in December by extending the current tax rates and preventing a massive tax hike on Americans and small businesses. If there is any hope of getting Americans back to work, Washington must get out of the way and let employers do what they do best and what America needs most – create jobs.

Stimulus_Final_Report_Jan_2011_final

The economists who study recessions tend to think about them in turns of the business cycle – and rightly so, for in most cases it is the business cycle that produces the downturn. In the course of such a cycle, boom builds upon boom and bust upon bust. It is a bit like a game of crack the whip. Downturns occasioned by the business cycle are caused by overproduction. When businesses have more stock than they can sell, they stop producing and lay off workers. The workers laid off and no longer getting paychecks cut back on their consumption, and this in turn reduces the demand for goods and services and causes other businesses, which find their products and services no longer as much in demand, to curtail their efforts and lay off another set of workers. And so the recession grows, building on itself, until some businesses find that they have underproduced or underprovided for the services in demand. Then, the same process takes place in reverse with stepped-up production and a stepped-up provision of services requiring stepped-up employment, which occasions more consumption requiring another round of stepped-up production and provision of services and a further increase in employment and so forth – until production and provision once more overshoot demand. In the absence of perfect knowledge, human beings living in commercial societies are fated to suffer from an oscillation of this sort – between boom and bust.

When Barack Obama became President, his economic advisors appear to have been on automatic pilot and to have taken it for granted that this was the sort of recession that they were up against. And so they opted for a remedy that – if applied in the proper fashion, at the proper time, and  in the proper amount – might serve to hasten an economy’s recovery from a recession occasioned by the business cycle. That is, they sought to prime the pump – to increase consumption by artificial means, to borrow money from the future, put it in the pockets of certain citizens, and hope that they would spend it right away and thereby put others back to work.

Such was, at least, their pretense. In practice, of course, the so-called “stimulus bill” was a targeted measure – a massive pay-off designed to reward the public-sector employees and unionized workers involved in infrastructure construction who make up core constituencies within the Democratic Party and to do so at the expense of those whose taxes the Democrats intended in the future to raise. Obama’s advisors did not worry much about the manner in which the “stimulus” was to be applied, its timing, and amount, however. For they took it for granted that the expenditures would do no immediate damage to anyone and that the economy would bounce back quickly in any case, as it always does when the downturn is caused solely (or at least primarily) by the business cycle.

But, of course, this did not happen. The economy did not bounce back. On 10 January 2009, Christina Romer – Chairman of President Obama’s Council of Economic Advisors – predicted that, if the so-called “stimulus bill” were passed, it would save 3.5 million jobs, that unemployment would stay below 8%, and that joblessness would quickly decline from that level. In the twenty-three months that have passed since Romer made this prediction, we have lost something like 3.5 million jobs, unemployment has climbed to about 10%, and it has not appreciably declined from that level. The chart posted below, which first appeared on Business Insider and on Calculated Risk, illustrates nicely the difference between the ordinary course of a recession and the course taken by our most recent downturn.

The only defect of this chart is that it fails to capture the full level of distress. To the 15.1 million Americans seeking employment (the basis for putting it at 9.8%), one has to add, as Irving Stelzer recently pointed out, the 2.1 million who have given up looking for work and the 9 million who have been kept on but only part-time. What the chart does show, however, is that we are not experiencing an ordinary downturn.

There is, as it happens, another type of recession not rooted so firmly in the business cycle, which you might call it a fiscal recession. The last one we experienced in the United States began in 1929, and it was a doozy. Fiscal recessions are a function of the level of indebtedness. The one in 1929 was preceded by an extended period in which the Federal Reserve Board, supported by the Secretary of the Treasury, followed an easy-money policy. Interest was low; money was lent to all and sundry on easy terms; home-buyers and consumers took out loans they could not manage; and investors with borrowed money took great risks in attempts to make a quick buck. Bubbles appeared; and when the stock market finally crashed and the unemployment rate went up, the number of bankruptcies was legion. Those able to manage their debts concentrated on paying them down; and, for a good long time thereafter, Americans were very, very reluctant to take on debt.

This is not the whole story, to be sure. After the crash in 1929, the Federal Reserve Board kept interest rates high; Herbert Hoover and the Republican Congress increased taxes and tariffs; and Franklin Delano Roosevelt and the Democrats compounded thereafter the damage that their predecessors had done by sustaining their policies and by raising taxes further. In all other respects, however, the current downturn is more like the Great Depression than it is like any recession subsequent to World War II.

One other qualification deserves mention. No recession is ever purely fiscal, and even in recessions produced by the business cycle, those who have taken on excessive debt or who have lent foolishly go bankrupt. I have been speaking in terms of ideal types. What one needs to focus on right now, however, is the fact that policies which might help to turn around an economy suffering a downturn rooted primarily in the business cycle will backfire if that downturn is chiefly caused by an excess of indebtedness – which is precisely what is happening right now.

Between them, Alan Greenspan and his successor Ben Bernanke – with the support of two Presidents from different parties and a series of Secretaries of the Treasury appointed by both Presidents – ran an easy-money policy for something like two decades. In the process, home-owners, consumers, investors, states, and municipalities ran up massive debts that they had little hope of paying off.  Under George W. Bush, the federal government did so, on a lesser scale, as well; and then, under Barack Obama, the federal government did so on a scale unprecedented in peacetime.

We have now been left holding the bag. Something like 2.1 million houses are in foreclosure. States like Illinois, New York, and California are insolvent. And the powers that be have colluded in delaying the day of reckoning. The banks have not yet fully recognized their losses; the real estate market has not cleared; and nothing has been done to balance the budgets of some of our largest and most important states. In the meantime, Barack Obama and his party have lead the federal government into what economists call a fiscal trap.

In the next couple of years, the banks will have to face the music, and those houses will be dumped on the market – which will drive housing values down further and encourage those who find that they owe more than their houses are worth to join the millions who have stopped paying their mortgages and, in effect, abandon ship.

In the next couple of years, as Walter Dean Burnham has recently argued, Illinois, New York, and California are going to have to declare bankruptcy, give their bondholders a haircut, cut salaries and benefits, and let go a great many public-sector workers.

Moreover, in the near future, as Lawrence Lindsey has recently pointed out, interests rates are going to rise, and the federal government is going to find the cost of servicing its debt harder and harder to sustain.

These are separate matters,  but the odds are good that the second housing crash, the recognition of state insolvency, and the fiscal crisis of the federal government will coincide. To date, everything that the Obama administration has done has served only to delay the arrival of our day of reckoning and deepen the fiscal crisis on the horizon. If the unemployment rate is not coming down, it is because employers see through the charade and are intent on not getting caught short when the entire structure comes tumbling down.

The next few years are going to be grim, and those in charge do not inspire confidence. Would you entrust your welfare to Jerry Brown, Andrew Cuomo, Pat Quinn, and Barack Obama? We have to hope, however, that these men wake up, swallow their preconceptions, and without delay move decisively in the direction of balancing the budgets of California, New York, Illinois, and the United States.

I myself very much doubt that they will do so. Unless these men – our President above all – demonstrate qualities that they have never before evidenced, we are in for a truly terrible ride. There is only one silver lining; and welcome though it might be in ordinary circumstances, it is hardly worth the cost. Politically, this means that Barack Obama is likely to be remembered for having done to the Democratic Party what Herbert Hoover did to the Republicans.

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Related Links:

TNL: Barack Obama is Losing Time
Romer: My Plan Failed
The Hill: White House Rules Out Stimulus Sequel
TNL: The Troubles Rich People Have
TNL: Critiquing Newt Gingrich’s Economic Policy

In that post, I predicted that Geithner, a young man whose time had come, would suffer, at least for a while, in silence, and I suggested that self-respect would cause Summers to bolt. “Within the world of economics,” I wrote, “his is a name to be conjured with; and, unlike Paul Krugman, he has not in public prostituted himself for partisan advantage. It must be excruciating to watch while Obama’s wrecking crew destroys the foundations for American prosperity.”

As I predicted, Geithner is still there and is still willing to parrot the administration line regarding matters such as marginal tax rates. But Summers has not yet bolted – perhaps because he has nowhere to go. He rose to become Treasury Secretary under Bill Clinton, and he failed ignominiously as President of Harvard. Where, he has no doubt asked himself, do I go from here?

However this may be, my general point was correct – as has become evident in the last few weeks. Not to put a fine point on it, the rats have begun leaving Obama’s ship. The first to announce his departure was our current President’s Director of the Office of Management and Budget Peter Orszag, who had been a budget hawk when – as head of the Congressional Budget Office in 2007 and 2008 – he scored the various budget proposals submitted by President George W. Bush. Last Thursday, Christina Romer , Chairman of the Council of Economic Advisers, announced that she would soon follow Orszag’s example.

Neither Orszag nor Romer is a fool. They were party to a con, and they surely knew it.

They presumed that the economy would bounce back as it usually does after a recession, and they went along with Rahm Emanuel’s strategy of exploiting the crisis lest it “go to waste.” In the process, they did what they were told and said what they had to. They endorsed and defended policies that, as economists, they knew were unsustainable; and they have left us holding the bag. The recovery has stalled; unemployment is at least 35% higher than Romer predicted it would be at this stage; and the deficits stemming from the so-called “stimulus bill” that these two piously praised as necessary for the recovery now threaten its continuance.

I doubt that Barack Obama cares one whit. His aim was the transformation of a country that he sincerely hates, and Orszag and Romer have loyally served his purpose – as Geithner and Summers still do. There will, I suspect, be a political reckoning for all of this profligacy, and its first harbinger will present itself on the first Tuesday in November. You can fool Americans for a time – but not for long.