The Recovery is Slow by Historical Standards. What's to Blame? UPDATED: Should We Blame Tight Monetary Policy?

John Merline at Investors Business writes up the sluggish recovery and its explainerers:

The 1957-58, 1973-74 and 1981-82 recessions were the sharpest post-war slumps until the Great Recession. From those lows, the economy rose 15%, 18.5% and 19.6% over the next 11 quarters, respectively, vs. just 6.8% for the Obama recovery....

Some on the left blame the lack of adequate stimulus for the recovery's tepid pace. Former Obama economic adviser Larry Summers this week called for still more borrowing.

Those on the right blame Obama's own policies for slowing the recovery down, pointing to the substantial increase in the national debt, the growth of costly new regulations, the threat of new taxes, the impending ObamaCare mandates, and a general sense of uncertainty in the business community.

More here.

Gentle reader, do you think lack of counter-cyclical spending is mostly to blame for the slow recovery? Or is that very spending (read: borrowing), compounded by regulatory and political uncertainty ushered in by a "transformative" health plan, a massive financial-regulation bill, the inability to pass a budget and create a clear path on tax rates a larger cause here?

Update (1.15 pm): Over at Forbes.com, Tim Lee suggests that the real cause of the slow recovery is tight monetary policy. From his post, which you should definitely check out:

Standard economic theory says that if inflation is projected to be below the Fed’s 2 percent target and unemployment is way above the economy’s natural rate of 4 or 5 percent, that’s a sign monetary policy is too tight.

Too-tight monetary policy would produce exactly the kind of slow recovery we’re currently experiencing. But a lot of people have fallen into the trap Milton Friedman warned us about: of taking low interest rates as a sign of loose money. In reality, low interest rates can be a sign of extremely tight money, as with Japan over the last two decades....

The market monetarist position doesn’t fit neatly in either of these conventional narratives. Because we see the recession as primarily a monetary phenomenon, most of us aren’t enthusiastic about fiscal stimulus beloved by many on the left. But our view also isn’t intuitively appealing to conservatives who tend to see “too much” government as the cause of all economic problems.

More here.

I agree with Lee, who chides me for falling into a framework that supports Dem/Rep bashing, that monetary policy is a huge part of recovery economics (that's one of the reasons I didn't say above that there's only two possible causes). And recession economics, too!

From a Friedmanite monetarist POV, we're in exactly the sort of situation in which you'd want the Fed to be opening up the money supply even more than it's been trying to for what seems like forever anyway (hello, Greenspan!). The Fed hasn't been particularly tight-fisted for a very long time (though the few-years-old turn to paying interest on reserves, which gives banks a reason to on money, seems even more stupid with every passing day). I agree with the general historical argument (made by Friedman and Christina Romer, among others) that monetary stimulus was responsible for countering the effects of the Depression in the mid-'30s (itself a result in part from a post-Crash tightening) and that re-tightening the supply back then was a mistake. Lee suggests that the effective money supply remains tight based on the lack of economic growth both here and in Japan. That presumes that the right monetary theory is the solution and that the Fed just hasn't gone big enough yet. (Which many are predicting it will do eventually.) How much bigger does it have to go, though? What if it's true that the "Fed has run out of viable policy options," as Lee's Cato colleague Gerald O'Driscoll contends?

I think Lee is right to insist that monetary policy be included in all discussions of economic cycles (especially from a libertarian perspective). And I agree that looser money, in concert with other policies, is part of the sort of austerity that has worked to reduce debt-to-GDP ratios in the past and help economies gear up.

But here's something else worth thinking about as we await word of whether Helicopter Ben Bernanke will drop yet another "big money bomb": Even if you believe in Keynesian policy (and I don't), fiscal stimulus isn't really going to work if the government persistently runs debts and targets generally useless aspects of the economy. That is, the government can't jumpstart the economy if it's already worn out the starter over years of over-grinding it. I think something similar might be true with monetarist policy. What if the past couple of decades of relatively loose money has made it virtually impossible for monetarist moves to work?

Arguably the single-greatest conceit in economic thinking is its monomania, the idea that a single factor explains everything (I'm not saying Lee believes that, by the way). Clearly, whatever Treasury and the Fed and other parts of the government are doing ain't working (again, I come back to the humongous amount of uncertainty regarding tax, regulatory, and economic policy - that's gotta freeze up loads of activity; and don't get me started on debt overhangs, either). The non-responsiveness of the economy might be because the various policies are at cross-purposes at one another or that all the policies are in error, or some mix. And it might because the economy is screwed for reasons that we don't even recognize currently. But it's almost certainly more than one thing, which suggests strongly too that the solution will involve lots of other factors, too.

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  • Daniel Bier||

    Double use of verb in the last sentence. Otherwise very good.

  • Palin's Buttplug||

    None of the above.

    2008 brought on a deflationary depression and credit contraction. 1981-82 was nothing like this.

  • Fatty Bolger||

    1981-82 was nothing like this

    ...because a Republican President was in office then. We get it.

  • Mr. FIFY||

    And after shrike casts his vote for Obama, he'll get on here again and bleat about how rosy our future will be.

  • ||

    Pretty sure after he votes for Obama again he will be crying into his hat as state after state turns red on his screen.

  • VG Zaytsev||

    Yeah those 20% interest rates in 81-82 didn't contract credit at all.

    Idiot.

  • The Hammer||

    I see this has already been well covered. You're a moron, BP.

  • Mike M.||

    Gentle reader, do you think lack of counter-cyclical spending is mostly to blame for the slow recovery?

    Japan's two lost decades say "I don't think so, Mr. Roboto."

  • gaijin||

    It is the fault of...Boooosshh...or congress...or europe...

  • LTC John||

    ATMs, and Fat Cats and private jet owners and Some on Wall Street and...

  • SIV||

    Hoarders and Wreckers

  • The Hammer||

    And Clingers. Bitter ones.

  • Almanian...still||

    And the Masons

  • Spiny Norman||

    I blame unspecified foreigners, with their strange food and shifty ways.

  • ||

    Don't forget smelly armpits.

  • Pi Guy||

    I like strange food and shifty ways!

  • Palin's Buttplug||

    And GDP went -8.9% in q4 of 2008. The IBD graph is wrong.

  • BarryD||

    US GDP growth in 2008 was .52% for the year. The graph is for year-to-year numbers, not quarterly oscillations, if you look at it.

    You are wrong, which comes as no surprise.

  • Palin's Buttplug||

    The graph shows -6% at the bottom. You are wrong.

  • Towelie||

    You're a towel.

  • Almanian...still||

    You're the worst character EVER!

    Next to Shriek

  • Trespassers W||

    This graph shows cumulative change in GDP from a specific point in time, not year to year changes, nor quarterly changes. Quarterly changes would be the first-differenced data.

  • Trespassers W||

    Show your work. As far as I can tell from FRED, GDP dropped 2.2% from 2008Q3 to 2008Q4. Are you annualizing? Why?

  • R C Dean||

    Let's see: on the one hand, that "countercyclical spending" was financed by (a) currency issuance, meaning it devalued the currency and raised input prices, and (b) new debt, which is another form of currency issuance that also cannibalizes the capital markets.

    Gosh, I can't imagine why countercyclical spending might not result in a rapid recovery. Especially when paired with increases in deadweight costs in the form of new regulations and mandates.

    Your fixed costs go up. Your input costs go up. Your sales are flat to down. Why aren't you hiring?

    Its a mystery. The only thing I can think of is a massive conspiracy to make Barack look bad.

  • NeonCat||

    Obviously the economy is racist. It'd rather stay in the red than go black.

  • Lord Humungus||

    I see what you did there.

  • ||

    Those big meanie faces, trying to make the greatest president ever look imperfect!

  • ||

    Nope, couldn't possibly be any of those things. And it's not even a conspiracy to make Obama look bad. It's all an evil plot by that dastardly devil Bush. Everyone thinks he and Laura just live in a nice house in Preston Hollow. What they don't know is that underneath that house is a lair the likes of which Dr. Evil himself would be envious of.

    I hear he even has sharks with lasers.

  • Pi Guy||

    I hear he even has sharks with lasers.

    That's the only reaon I'd ever run for public office. Lasers and sharks are cool.

  • ||

    Let's see: on the one hand, that "countercyclical spending" was financed by (a) currency issuance, meaning it devalued the currency and raised input prices, and (b) new debt, which is another form of currency issuance that also cannibalizes the capital markets.

    Who did what how? Speak English.

    Fucking worse then the idiot talking heads.

  • Ken Shultz||

    I think there are two big factors.

    One is Wall Street regulation. Rather than slashing regulation, we've heaped a ton of it on, especially, Wall Street's heads.

    The '80s were known as the era of the corporate raider, and that's exactly the kind of creative destruction we need right now.

    Right now, JP Morgan can't lose a $2 billion investment without triggering a congressional investigation. Where having a wild and free Wall Street once gave us a huge advantage coming out of a recession, now Wall Street's fighting with both hands tied behind its back.

    Just because our last two idiot presidents used taxpayer money to bail out Wall Street is no reason to kill the goose that lays the golden eggs. If we wanted a regulatory response to our politicians bailing out Wall Street, then maybe we should have put regulations in place that would prohibit politicians from ever using our tax money that way again.

    ...what we didn't need was more regulation that prohibited Wall Street from taking risks. Wall Street taking risks is the very stuff that creative destruction is made of, and we need more of that.

    Wall Street taking risks is another way of saying it's making loans, providing equity, financing MA and IPOs. We need more of that. Right now we got a president who's doing everything he can to make sure as little of that happens as possible.

  • tarran||

    Poor Barry! He keeps doing all the right things, but his bad luck just won't let up! ;@

  • Pi Guy||

    He keeps doing all the right things...

    And we know this because he keeps telling us!

  • Ken Shultz||

    The second thing we needed was deep tax cuts.

    We should be slashing the corporate tax rate, the income tax rate, and we should be eliminating the capital gains tax completely.

    Companies are more likely to expand as their after tax profits grow. We can grow their after tax profits with the stroke of a pen.

    Income taxes artificially inflate the cost of hiring unemployed people; not slashing income taxes when the unemployment rate was as high as 10% in 2009 and hasn't dropped below 8% since? Was profoundly stupid.

    Investment is one of the things that generates economic growth, and having raised a lot of investment money over the years, I can tell you that I haven't yet met an investor who wasn't interested in what his after tax return was likely to be--before he or she committed to making the investment.

    Talk about profoundly stupid, as the following chart from the Washington Post shows, the capital gains tax is set to increase from 15% to 25% come 2013.

    http://tinyurl.com/cft6u2g

    Part of that is due to a provision in ObamaCare--all of it is due to the Obama Administration being so profoundly stupid, that instead of slashing capital gains taxes coming out of a recession, he's actually fought to raise them.

    Because in his weird world, the problem is that we had too much investment during the recession, I guess?!

  • ||

    Can we swap presidents with Estonia? Puh-leeease!

  • Rasilio||

    Neither.

    Sure the increase in the federal debt isn't helping matters however this recession is different from all recessions since the Great Depression in that households are tapped out.

    Basically from the 1940's through about 1990 Americans maintained a net positive savings rate, therefore after a recession there was a reserve of capital that people could use to create new economic activity as the markets readjusted.

    However as a result of several factors by the late 80's that ceased to be the case and during the recession of the early 90's the household wealth to stimulate the next wave of growth was no longer there so the government started on a path of inflationary credit cycles dropping interest to less than half the long term average and establishing a "new normal" at that level.

    This had several effects, first it caused wages to stagnate by wealth concentrating in stock and real estate markets and away from wages, second it even further depressed the savings rate, and most importantly it created a series of asset bubbles.

    Now we have reached a point where the total debt in the country (Government at all levels, household, corporate, financial, etc.) is very near equal to the total wealth of the country and there is no store of wealth from which to draw to stimulate the economy. Essentially we have created a short term near 0 sum economic situation and this will not change until massive deleveraging occurs and a new reserve of wealth is built up.

  • mustard||

    "Now we have reached a point where the total debt in the country (Government at all levels, household, corporate, financial, etc.) is very near equal to the total wealth of the country and there is no store of wealth from which to draw to stimulate the economy. "

    People with $5,000 in assets get $100,000 mortgages and pay them off with no problems (until the Bush blowup). Debt doesn't matter when you have a GPD like ours.

  • ||

    $

  • Trespassers W||

    Grand Poobah of Democrats?

  • Trespassers W||

    People with $5,000 in assets get $100,000 mortgages and pay them off with no problems

    As long as their income exceeds their expenses, yes.

  • R C Dean||

    Debt doesn't matter when you have a GPD like ours.

    So, we could just run up quadrillions more in debt, because of our GDP?

  • Rasilio||

    Yes but people with incomes of $160,000 and a total debt approaching $600,000 tend to have a hard time making their monthly bills forget boosting spending.

    That is Roughly the situation America currently finds itself in, We have a GDP of around 16 Trillion with a total debt (not including unfunded liabilities) of ~$59 Trillion. This is not the Federal Debt, that is just one small component of it, this is all forms of debt in the country which are openly tracked (in otherwords it is probably worse than this) it includes Federal Debt, State Debt, Local government debt, Household debt, Corporate debt, and Finance debt. You can see the breakdown with sourced numbers here...

    http://grandfather-economic-re.....-table.htm

    Now, can you pay down $59 trillion in debt with $16 trillion in income? Sure given time, however debt servicing costs are going to make it essentially impossible to increase spending.

  • Rasilio||

    To expand on this somewhat here is the situation.

    If there was some sector of the US economy which was sitting on an unused store of wealth or even the ability to absorb additional debt and not leveraged to the hilt then it might be possible for the government or the Fed to craft a stimulus policy that drew that wealth out into the economy now and create additional new spending that would serve as the basis of an economic stimulus.

    However with ALL sectors overleveraged and having difficulty simply servicing the debts they currently have we are in a catch 22 whereby any stimulus action the government might try (whether fiscal or monetary) is doomed to fail because there is no new source of wealth or credit being tapped, effectivly it has become a 0 sum game whereby attempts to create new spending merely divert money from one part of the economy to another.

  • Pro Libertate||

    Ah, I see that you're familiar with the Urkobold's Infinite Borrowing Plan. It really does lack any flaw whatsoever.

  • Pi Guy||

  • Pro Libertate||

    The beauty of infinite money is that people infinitely support it.

  • Pro Libertate||

    The beauty of infinite money is that people infinitely support it.

    I think your link goes to infinite locations.

  • Pro Libertate||

    Well, that's interesting.

  • Mike M.||

    Yep, and instead of allowing the pain of the needed deleveraging to take place, Bernanke (the worst Fed chairman ever), has printed and injected trillions of dollars into the system in a misguided effort to keep the credit bubble expanding.

    As a result, we now have the most wildly distorted markets we've ever had in American history. What's going on is a true nightmare.

  • ||

    What comes after that bubble burst is going to make this look like a My Little Pony dream.

  • VG Zaytsev||

    Bernanke (the worst Fed chairman ever)

    That depends on your perspective.

    From the perspective of the financial industry that Bernanke actually serves, he is fabulous. He's hidden the failure of that sector and protected the individuals involved from insolvency. Which is the real job of the FED.

  • The Hammer||

    Misguided? You seem to be ignoring the Patronage factor, here. Because of his Patron's timeline, Bernanke is forced to work on a 4- to 8-year timeline. Despite the constant bleating from left and right about how "businesses act in the short term, only the wise and omnipotent Government can act in the long term," the government is completely beholden to scumbag politicians whose only goal is to kick the can down the road past their next re-election, and then when the people catch on and they get beat they get the satisfaction of saying "you don't want me? Well, Fuck you, proles, have fun with all that debt!"

  • Pi Guy||

    I was just demonstrating how the dollar's lost its value in just 3 or 4 years. Arby's is now offering a "3 roast beef sammiches for $5" special. My coworkers and I used to go to split the "5 for $5" deal.

    Since I have to imagine that making said sammich is cheaper than it's ever been, I conclude that the dollar's lost 40% in a very short time.

  • Emmerson Biggins||

    +1.

    Bubbles were built. Liquidations were called for. But they were prevented and/or made to occur in super slow mo.

    Oh ya, all the above was accomplished by or accompanied by an increase in the dead weight loss of government spending.

  • Tulpa the White||

    I guess we should have a stimulus just as big as the ones they had in 1958 and 1982 if we want to get out of this, right?

  • Scarecrow Repair||

    Or the 1920 expansion of government which cured the 1920 recession in 18 months.

  • ||

    the 1992 expansion was pretty big...

    But the expansion after the complete collapse of the internet bubble along with Enron and that lot was Godzilla mammoth.

    Glad that Keynesian spending was able to get us out of that recession so quick.

  • VG Zaytsev||

    Gentle reader, do you think lack of counter-cyclical spending is mostly to blame for the slow recovery?

    Anyone with the analytic ability of a middle school student can see that this is not the case.

    This depression has seen much higher stimulus than the three previously mentioned downturns in the form of higher deficit spending as a percent of gdp and larger growth in government as a percent of gdp.

    The narrative doesn't even make sense in a neo-Keynesian paradigm.

  • Apostate Jew||

    I don't buy the taxes argument. Not to pick nits, but aren't income and capital gains tax rates the lowest they've been in decades? Aren't corporate taxes as a percentage of GDP at postwar lows? (I'll admit that payroll taxes as a percentage of GDP are at postwar highs but aren't they really income taxes as well?)

    As for regulatory uncertainty, there's an entire branch of government that is responsible, directly or indirectly, for every regulation and it's not the executive branch. Just because they won't stand up on their hind legs and rein in the executive - as they should have done long ago - doesn't absolve them of the responsibility.

    Hence, I expect that when the Republicans hold both the executive and the legislative branch that they will solve all of these problems. Just like they did last decade.

  • Emmerson Biggins||

    I don't buy the taxes argument. Not to pick nits, but aren't income and capital gains tax rates the lowest they've been in decades?

    You have consider inflation too. And that isn't the same as CPI.

    How much of the capital gains taxes are taxes on real increases in value? vs wealth confiscation thanks to mr helicopter?

    Also: bracket creep.

  • Apostate Jew||

    Bracket creep and inflation?

    Try that on someone who hasn't paid income taxes for the last 40 years and doesn't understand the difference between "nominal" and "real".

    The only people I know who paid lower federal taxes on comparable income than I do now did so before the war. And most of them are dead.

  • Red Rocks Rockin||

    You still have to take the impact of inflation into account, though--not to mention the huge amounts of debt that households are carrying now in comparison to their income, which didn't exist 40-50 years ago.

    Comparably speaking, yes, the tax rates are lower, even on an inflation-adjusted basis. But how much more do things like transportation, food, healthcare, and cumulative debt burdens weigh on current incomes than they did when you began paying income taxes?

    What's essentially happened in the last 30-40 years is that tax rates have dropped and remained relatively low while credit availability and household debt has exponentially grown. Inflation-adjusted, I'd be paying a 34% marginal tax rate on my current income in 1976, as opposed to the 25% rate I am now. If that rate goes back up to 34%, what impact do you think that would have on my spending habits in the current economic environment, especially if I'm paying off student loans, a car, credit cards, maybe even a mortgage?

    The problem is that the economic environment is VERY different from the one that existed 40 years ago, and one can't simply presume that tax increases will solve the problem just because things were okay with those higher rates in the past.

  • Emmerson Biggins||

    Also property taxes. They've gone up faster than my income. And my wallet doesn't care if it's a federal or a local tax.

  • Rasilio||

    Marginal tax rates are historically low, however effective tax rates are not. This is one of the great lies of the left in America, they conflate marginal rates with the actual taxes paid. Further, while it is true that Federal marginal rates at historically low State and Local tax rates have increased even further.

    You can see this here...
    http://www.usgovernmentrevenue.com/revenue_history

    The first chart shows total government revenue as a percentage of GDP across all levels of government. We're not quite at the peak we were back at the peaks of the Dot Com and Housing Bubbles however we are not far off of it and even in the depth of the recession in 2009 it was still only down to the late 60's level.

    The second chart shows you pretty clearly that over the last 40 years or so Federal revenues as a percent of GDP has been essentially flat, however State and to a lesser extent local revenues have continued to accelerate as the Feds started laying more spending mandates on them.

  • Emmerson Biggins||

    excellent link

  • Almanian...still||

    What's to Blame?

    Shorter: Bush

  • 16th amendment||

    Friedman is confusing to me. Why is he a figure of the right? I think he was a socialist because he never advocated abolishing the fed.

    Anyway, the article referenced in the quote titled "Milton Friedman Would Be Pushing For Easy Money Today" at http://www.forbes.com/sites/ti.....ney-today/ advocates quantitative easing to help the economy. I think we're at QE3, and it hasn't worked yet. There was a slight boost in the stock market after each QE. The fed is out of options.

  • Invisible Finger||

    That's only have half of Freidman's argument.

    Friedman would be in favor of printing.... as long as you are printing in order to make the depositors whole when you CLOSE THE INSOLVENT BANKS AND LET THE BONDHOLDERS TAKE THEIR LOSSES.

  • ||

    Gentle reader, do you think lack of counter-cyclical spending is mostly to blame for the slow recovery? Or is that very spending (read: borrowing), compounded by regulatory and political uncertainty ushered in by a "transformative" health plan, a massive financial-regulation bill, the inability to pass a budget and create a clear path on tax rates a larger cause here?

    I think this question misses the point.

    The exact mechanism of why government spending hurts the economy can be theorized in any number of ways...

    But what is at issue is that regardless of the mechanism the negative effects of government overspending on the economy are well documented and proven as a fact.

    Cut spending or the economy will suffer.

    http://www.cato-at-liberty.org.....rosperity/

  • Invisible Finger||

    The slow recovery has everything to do with allowing zombie financial institutions to exist and NOTHING to do with "tight money".

    Interest rates are basically a price. And prices are determined by supply... AND DEMAND. Do you know of any businesses seeing any great reason to borrow for the purpose of expanding? Of course not. How about people wanting to buy a (or another) house? Even if you can easily afford another house, why burden yourself with another property tax bill that can reasonably be expected to balloon? House priced haven't bottomed yet, so save for another year or two and then put down an even larger down payment to take an even smaller loan (thus further reducing the demand for credit).

    Low interest rates are the result of deleveraging and purging of malinvestment. We're keeping zombie banks alive so we can bailout their bondholders - a large portion of which are pension funds.

    Loose monetary policy rewards malinvestment at the expense of prudent investment. This is the #1 reason there is no recovery, here and in Japan. Tim Lee's prescription is to accelerate the disease. If Tim Lee and The Jacket want to blow bubbles again, I'll send them a candygram starring Bubbles The Keynesian Clown.

  • Invisible Finger||

    John Hussman puts it much better:

    At present yields, a further round of QE would essentially amount to FISCAL policy, subsidizing bond market speculators and banks, and ultimately producing near-certain losses for the Fed, after interest, and at public expense.

    http://www.hussmanfunds.com/wmc/wmc120604.htm

  • Bill Woolsey||

    Nick:

    I happened on Lee's criticism based upon "Market Monetarism." When I came to call your attention to it, I saw that you already discussed it. Well, not one mention of "market monetarism."

    Where is the Reason article on Market Monetarism? Just about all the market monetarists are moderate libertarians. We get more attention from Krugman and Christana Romer!

    Keeping spending on output growing at a slow steady rate is a good idea. It is the replacement for keeping the quantity of money growing at a slow steady rate.

    Check out Sumner at The Money Illusion.

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