Saturday, May 21, 2016

William Galston on President Obama's Choice of Reform over Recovery

In a superb op-ed in the Wall Street Journal, entitled "[h]ow Obama's Economy Spawned Trump," William Galston of the Brookings Institution contends that the weak economic recovery that began in 2009 fueled the popular discontent that begat the presumptive Republican nominee. While Galston gives the President credit for securing passage of the 2009 "stimulus package" and formulating the "bailout" of General Motors and Chrysler, he also contends that the President had no follow up plan for bolstering the recovery which, as previously explained on this blog (see also here), has been exceedingly slow. Instead, Galston says, the President chose to spend his scarce political capital on securing passage of the so-called "Affordable Care Act" and regulatory efforts to combat "Global Climate Change."  Had the President remained focused on nurturing the recovery, Galston says, he could have expended his political capital on advocating and securing additional deficit spending on various infrastructure projects, such as highways, thereby further stimulating the economy and bolstering the recovery.

Galston's trenchant analysis bolsters the adage that those who ignore the lessons of history are doomed to repeat it. This is not the first time that a President facing a deep recession has chosen reform over recovery.  In 1933, Franklin Delano Roosevelt secured passage of the National Industrial Recovery Act, his administration's central economic recovery plan.   Among other things the NIRA imposed so-called "codes of fair competition," along with above-market minimum wages and requirements that firms recognize and negotiate with labor cartels also known as unions.  As John Maynard Keynes explained in a letter to the New York Times, the NIRA's wage and price fixing provisions were tools of "Reform and probably impeded recovery."  Subsequent analysis has verified Keynes' prediction, finding that the NIRA's wage-fixing provisions in particular, while furthering what Keynes called "redistribution," also helped deepen and lengthen the Great Depression by several years.  (See here and  here)  If Galston is correct, then President Obama, too, chose reform over recovery, with negative consequences for the nation's overall economic well-being.

At the same time, Galston overstates his case in a couple of ways. First, he likely overstates the impact of the initial stimulus package. For one thing, the $800 Billion package was spread over several years, thus constituting a very small share of overall GDP each year. Indeed, in 2009, Galston himself opined that some of the package's proposed projects would "take effect slowly over many years, muting their stimulative consequences." Like Martin Feldstein, Galston proposed allocating stimulus funds to immediate military spending (see also here discussing Feldstein's proposal.). Moreover, as this blog explained at the time, the net impact of the 2009 package was likely smaller than its nominal price tag, insofar as some such deficit spending simply displaced debt and resulting spending that states would have incurred anyway.  (See this testimony by John Taylor at Stanford, who summarizes research finding such a displacement effect.)  Second, as previously explained on this blog, any claim that the auto bailout was worth the cost does not survive scrutiny.  All in all, however, Galston makes a powerful point.  It would be ironic indeed if the President choice of reform over recovery leads to the election of a President hostile to those reforms.