They Gave a Recovery and Nobody Came

Some things even the Obama brain trust doesn't want credit for.


As President Barack Obama's $447 billion American Jobs Act of 2011 fails to win public support, some are saying the bill is doomed by the failure of the president's $787 billion American Recovery and Reinvestment Act of 2009 (ARRA). But what if the Obama fiscal stimulus, and the much broader and deeper monetary stimulus that the Federal Reserve has been providing, actually succeeded? 

There aren't too many takers for that claim. In a Bloomberg poll, only 36 percent of Americans approve of Obama's efforts to create jobs. New York Times reporter Jennifer Steinhauer claims without providing any examples that some congressional Democrats "oppose the bill simply for its mental connection to the stimulus bill." Also in America's newspaper of record, Nobel Laureate Paul Krugman, a prominent voice in favor of Keynesian economic intervention, argues that the ARRA stimulus failed because it was not large enough to close a gap in aggregate demand brought on by a spike in the personal savings rate. 

But one key goal of the stimulus was achieved almost a year ago. 

That's the provocative but apparently accurate claim of Robert Higgs in a recent post. Rebuking the mainstream economic belief that unemployment is high and growth stagnant because consumers are not spending, Higgs demonstrates that personal consumption expenditures in fact recovered to their pre-recession levels by the last quarter of 2010. Higgs, the Independent Institute's senior fellow in political economy and editor of The Independent Review, writes:

According to [table 2.3.3 in this Department of Commerce database], real personal consumption expenditure recovered from its recession decline by the fourth quarter of 2010. Continuing to grow, it now stands (as of the most recent data, for the second quarter of 2011) even farther above its pre-recession peak.

Real government expenditure for consumption and investment (this concept does not include the government's transfer spending, such as unemployment insurance benefits and social security benefits) is also running higher than its pre-recession level. In the second quarter of 2011, it was running more than 2 percent higher (recall that this is "real," or inflation-adjusted spending; nominal spending has grown substantially more).

How can an economy continue to stagnate after the gap in aggregate demand has been closed? Taking up the slack in demand is supposed to be the heavy lifting of an economic recovery, the part of the job so big only the government can do it. 

Krugman even got the show wrong: The alien hoax plot comes from the Outer Limits, not the Twilight Zone.

Demand-deslackification is considered so central to a recovery that it can justify drafting the young to fight in horrible wars, just to reduce the surplus labor supply. Despite important work by former Obama brain trustee Christina Romer and others, the myth that World War II ended the Great Depression persists. Recently, in the process of losing a CNN exchange with economist Kenneth Rogoff, Krugman did himself no credit by arguing that if the public could be hoodwinked into increasing inflation and deficit spending to prepare for a hoax invasion by space aliens, "this slump would be over in 18 months." 

With or without E.T.'s help, the recession ended more than 18 months ago. According to National Bureau of Economic Research, the trough occurred in June 2009. More important, Keynesian "equilibrium" was achieved last Christmas.

Yet month after month the Bureau of Labor Statistics reports unemployment above 9 percent, higher than it was when the ARRA stimulus became law. 

Even allowing for a conventional lag in post-recession job growth, the jobs recovery is by far the most anemic since the end of World War II. At the Calculated Risk blog, Bill McBride maintains a handy chart comparing peak-trough-peak employment drops and recoveries for every recession since 1948. The pace of hiring that has held for the last two years would not mitigate job losses from the current recession until around 2018: 

Recoveries are getting slower and slower.

This grim trend helps explain the rage and frustration of Krugman and other Keynesians who blame even ARRA for being too small and promote the concept of the "liquidity trap" to explain why expanding the money supply has not had the effect of creating a new economic bubble. Don't be fooled by their irreducible uncertainty. From the Keynesian perspective, all the problems have been solved. Demand has been restored. A strong dollar and a threatened increase in the net savings rate have been, with vast and concerted public effort, averted. Interest rates are low or effectively negative. Deficit spending has more than doubled. And yet the economy stays narcotized. 

"There's really nothing in Keynesian theory that encompasses indebtedness—consumer indebtedness and corporate indebtedness," Higgs said in a phone interview. "That's why these guys are at sea. This boom was built on heavy leverage. People are looking back, and they're saying, 'We were crazy to go that deeply into debt. We have to change that.'" 

(Article continues after video.)

In Higgs' view, the trillions of new dollars that have been created are being absorbed into critically ill balance sheets. "Firms, if they have cash flow, are repaying debt," he said. "If they increase output they're doing it with their existing workforce, maybe augmented by new equipment or software."

There is evidence for that view in BEA statistics on gross savings, but Higgs cautions against over-reliance on central databases. "You can't look at things sensibly at the macro level," he says. "You have to look at things in different sectors and regions." 

The Federal Reserve is expected to consider another blunt weapon of macroeconomics—more quantitative easing—at next week's Open Market Committee confab. The Fed may try to mitigate QE3 by selling short-term debt while buying long-term debt. That stunt carries risks of its own. Combined with the Fed's "interest on reserves" program and other innovations, it also renders Fed strategy far more opaque than it was even in the Greenspan era, when you could get by just keeping track of the Fed Funds rate. 

Opacity is a genuine problem for people who need to know what their money will be worth but are too busy making payroll or avoiding insolvency to devote hours to studious Bernankeology. Not to mention employers who, through the scrim of "stimulative" finagling with tax rates and lack of clarity around costs from the Patient Protection and Affordable Care Act, don't know how much any new employee is going to cost. 

You can't really solve these problems, but there is one simple method that works whether you're selling a house, an idea, or your own skills: Lower your asking price. Wages and prices need to fall. Unfortunately, Keynesians only know how to prevent that from happening. 

Tim Cavanaugh is a senior editor at Reason magazine.

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  1. regardless, i wouldnt describe the tax cutz (~40% of the ARR) as failurez

    1. “cutz”

      Meanwhile, in teh rael o2’s basement……..-and-super cute-cats

      1. As long they’re not being circumcised.

    2. This grim trend helps explain the rage and frustration of Krugman and other Keynesians who blame even ARRA for being too small and promote the concept of the “liquidity trap” to explain why expanding the money supply has not had the effect of creating a new economic bubble.

  2. I’m sorry, I thought the American Jobs Act of 2011 was Louis Gohmert’s bill to cut the corporate income tax rate. Was I misinformed?

  3. I had a thought concerning stimulus spending. If the idea is that government spending, *ANY* government spending, stimulates the economy; and since 2000 we’ve double the federal budget, wouldn’t that mean we’ve been engaged in an 11-year, multi-trillion dollar stimulus project? So why is our economy worse in any way than it was in 2000? Shouldn’t it be twice as good as it was then?

    1. It’s teh externalities!

    2. The rich aren’t paying their fair share.

      1. You can tell! They still have money.

      2. The savers, who caused all this mess, haven’t been punished enough.

    3. Good point. It would suggest, under the government spending theory, that Iraq & Afghanistan were particularly brilliant because the spending then involves the quick destruction of much which has been produced requiring more government spending to produce sufficient to maintain the wars.

  4. just an anecdote – I work for a mid-sized industrial company. We dabble in many things – heavy truck, wind power, automotive parts, etc etc.

    We have done some minimal hiring – temporary workers for the shop floor, but ever since 2008 when we had big layoffs, we’ve pretty much have been stuck with the same workforce. We are buying computers, servers and new software but not one of our divisions is expanding their number of employees. The IT department where I work has only had one hire in the past 3 years and that’s just to pick up a programmer we were paying as a (more expensive) contractor.

  5. I’m now working a day job 3 days per week (24 hours) making computer practice tests for state standardized tests. If the job lasts all year, my projected income will be slightly more than what I earned as a 1st year teacher right out of college a decade ago when I was working 6 days per week (50 to 60 hours). Horray for modern efficiencies that reduce employment. Now I’ve got a 2 day weekend and 2 spare work days to be a writer each week.

    1. But if prices were half what they are, would you be more satisfied with both your net disposable income and what you could purchase in addition to 4 extra days a week to pursue additional economic empowerment or leisure activities? Our economy was inflated way too much and growing too fast based on credit not real growth. Deflation needs to occur.

  6. The Economist says:

    The [$2B] loss at UBS is another example of why taxpayers shouldn’t be responsible for investment banking losses…

    1. And they’re right.

    2. Ironically, the Economist also says that the solution to the Euro crisis is to Bail, Bail, Bail.

      Europe’s government simply isn’t big enough in it’s current state to effectively transfer wealth from taxpayers to bankers…

      1. Sounds about par for the course. The euro ain’t gonna last though!

  7. But you would still vote him again, right Tim?

    1. My guess is, they all would. Legalizing dope and homosexuals is most important. Think of the Constitution!

  8. Nobel LaureateFurry little idiot and enabler of corrupt politicians Paul Krugman, a prominent voice in favor of Keynesian knee jerk foolish economic intervention, argues that the ARRA stimulus failed because it was not large enough to close a gap in aggregate demand brought on by a spike in the personal savings rate 6 years of fraud in the real estate and financial services sectors. These bubbles that at the conclusion of the dotcom bust were indeed endorse by Krugman as replacements for said internet bubble.


    1. Hoist by his own retard! Again!

      1. At what point does smug condescenion stop being sufficient to allow someone to pontifcate on economics?

        1. Ain’t NOBODY doin’ no fuckin’ petardin’ without OUR fuckin’ say-so.

    2. He’s a complete nut since he’s against austerity. Just looking for an excuse to continue spending-like an addict. Everyone knows that in tough times, you MUST stop spending. Then, the job-creators will feel more confidentthan about society and begin to hire people again. Buy, we have to impress them first.

  9. In Higgs’ view, the trillions of new dollars that have been created are being absorbed into critically ill balance sheets. “Firms, if they have cash flow, are repaying debt,” he said. “If they increase output they’re doing it with their existing workforce, maybe augmented by new equipment or software.”

    Generally, what everyone has been calling the great recession, I’ve been calling “The Great Hunkering Down”, and the statement above echoes my feelings on the whole situation.

    Despite the Keynsian/Lefty mantra that government budgets aren’t like household budgets, we keep seeing that when you get down to brass tacks, they are.

    When you’re mired in debt, the only real way out is to pull your spending back and pay down debt.

    This economy will recover, but only when a large enough portion of the American people– governments, corporations, small business and individual Americans– pay off enough of their collective debts and can get back to the business of spending. After all, I’m already beginning to miss the left’s handwringing about ‘overcomsumption’. Because frankly, I find the articles about ‘underconsumption’ even more tiresome.

    1. The solution to any recession isn’t necessarily to increase spending or to cut debt. A recession is just a national state of mind. So the solution is doing that which will restore the public’s and the business community’s confidences in the economy.

      In this case, I think the solution is nearly impossible because the public now has fractured ideas of what that solution should be. You lot clearly think the solution is to cut spending, while traditional Keynesians in the middle and left think the solution is to increase spending. Given this problem, I think the government is doing the best it can: cutting non-essential wealth-transfers and, with ARRA, looking to stimulate the areas which can lead to the most tangible job creation.

      That process is made more difficult in a global economy – interdependence makes it necessary to restore every G8 country’s confidence at the same time. Just you try herding those well-larded cats.

  10. To me, it’s not even that complex. In a country with a level of public debt that is almost beyond comprehension (try visualizing $14 trillion), the advice to do another stimulus round amounts to saying “we’re in a hole; so keep digging.”

    Ultimately, these chuckleheads know full well that they are going to try and devalue their way out of this mess. We’ll all be paid lots and lots of Monopoly money, and they’ll explain away the high cost of everything as externalities etc.

    1. the advice to do another stimulus round amounts to saying “we’re in a hole; so keep digging.”

      If you’re working on the premise that you’re eventually going to hit a pot of gold, you can see why some people (Krugman) keep advising just that.

      1. “If you’re working on the premise that you’re eventually going to hit a pot of gold, you can see why some people (Krugman) keep advising just that.”

        Or hitting the lotto! Why, let’s just buy lotto tickets!

        1. Govt spending should be criminalized unless it’s to help the job-creators do their thing. Right now, they are the only ones that matter. When will Krugman and other liberals just shut up and learn how business works. If job creators aren’t happy, nobody will be happy. The constitution is all about this notion.

      2. I thought the premise was that we would eventually end up at China?

        1. We’re well on our way. Krugman doesn’t think we are digging fast enough.

      3. I’m working on the premise that the more liberal tinkerers try to “help” the economy, the more damage they will do. We deserve some pain, for our excesses; let it begin, and market forces, born from the individual transactions of millions of people, will sort it out. Obama’s answer is Solyndra and class warfare rhetoric. He is beyond a bad joke at this point.

  11. How can you suggest that ARRA worked? Only a socialist would agree that there is anything good about gov’t spending. If there is slack demand, that is always fixed by making the job creators happy. Eliminate their taxes and end all regulation. Then, they will be more than happy to hire everyone. When will everyone learn that “demand” is a myth?

    1. Yes. Trying the same thing over and over again even though it fails is the definition of insanity. We need to try something we know works -supply side economics. Give the ppl who know how to handle money the money and keep it from those who just waste it on drugs.

  12. What good is an economic recovery act that fails to take into account impact upon non-affluent. The economic robbery act took into account only affluent. Remember money among the affluent is an addiction by_and_large. They need to learn from the model examples of decent non_aff people on how to be objective and honest with regards to what quality of life issues are genuine versus their resources they currently poses. For example, it’s insane to ‘create’ dull and meaningless ‘jobs’ just to spend money mindlessly on junk that only encourages you to be lazy and stupid. Instead, you should be considering how to work toward developing yourself into being self_sufficient so you don’t have to depend upon your addiction being fed by more jobs for money. That’s what humans who understand freedom v. bondage are meant to strive towards.

    1. Uh, self-sufficiency is nice and all, but I’d rather the job the government makes for me not be too demanding.

      1. With lots of paid time off! Wheeling-Pittsburgh Steel workers could accrue 16 weeks of vacation per year. What could go wrong with that?

  13. …devote hours to studious Bernankeology

    As we can see by this old photo, significant power shifts have taken place in the FReBlin since last August. Elizabeth Duke and Daniel Tarullo, are apparently subjugated in this picture (they are on either side, kneeling before the Bernank). However, one year on, they remain members of the board, while the two sitting men (and most of those in the second row) have disappeared, no doubt liquidated in a ploy to increase liquidity.

  14. All economists should adopt a uniform; a long robe and a pointy hat, covered with suns, moons and stars. ( Sans Thomas Sowell.)

    1. Or a pointy hat and stool in the corner of the class room.

    2. “All facts begin as dreams, dreamt by a wizard. If the wizard crosses the path of a scorned widow, then he shares it at the town council. Now it is a hypothesis, and it is time to drown the wizard. If he floats, he is an evil wizard and must be burned alive. If he drowns then the hypothesis is true. The King is told, and he consults with his menagerie of birds. If the King is satisfied then it becomes an Old Wives Tale and science is once more advanced.” — Paul Krugman

  15. Sell, sell sell! What? Everyone’s selling? Then buy, buy, buy!

  16. Paul Krugman can feel it damn it.

    Obama visits 57th state: Wonders why nobody speaks English…

  18. The Article is spot on. This is all so OBVIOUS that it should go without saying, except that most with a loud microphone are paid to defend whatever conspiracy of vested interest groups they belong to or work for. The graph however was quite informative. I bet high and persistent unemployment is much related to prolonged Democratic tenure in control of government, or to the aftereffects of it, or to the fear of more of it, most likely to all three. There are some things Democrats are very good at that I am very grateful for…the extension of human rights throughout my lifetime being the first that comes to mind, with maybe the cultivation of the middle class, infrastructure, research, education, and exploration that we saw 1946-1968 being second. But jobs and economic growth are just not important to any significant Democratic constituency; don’t expect either with any of them in charge.

  19. You don’t create jobs by redistributing private wealth; you have to fix the sick economy. Obama is a one-trick pony.

  20. Hmmmm. What happened to Obama’s :Brain Trust”. How could they let things get so out of control?
    Hmmm. I’m gonna say that it’s because his Brain Trust consists of all Communists, Marxists, Socialists, Maoists, Statists, and Progressives.
    Do I Win?
    No. I lose.
    We ALL lose.

  21. “[The General Theory’s] success is still a puzzle to me, because it reverted to a very primative idea which had been clearly refuted in the 19th century, that there is a single relation between aggregate demand for final products and employment.”

  22. democrats are beyond clueless when it comes to economies, currency, all fiscal matters. most of my lib friends have not taken a single econ class, they have no idea about even the simplest things, supply and demand, tax rates vs tax revenues, et al. All they can muster is the lame class warfare rhetoric of their “leader”, without even knowing that you could take every cent “the rich” have and not even come close to addressing the underfunded entitlements tidal wave, coming right at us. Obama is a bad joke, and that’s what happens when stupid people vote, on the basis of who’s “cool” and “young.” Pathetic doesn’t begin to cover it…..

  23. blah blah blah
    There are two basic problems in our society right now. Number one we can’t do much about. The economy is becoming more and more globlal, therefore making it harder and harder to pay Americans 40 50 and 80 dollars an hour to make a product Chinese workers make for 4 or 5 dollars an hour. If that. Secondly, we have a government that burdens every business with a plethora of paperwork and nonsense regulations that further increase the cost of doing business. One of the few discretionary expenditures of a business is its workforce. You have to pay for your raw materials, you have to pay your mortgage, you have to pay your utilities. The only place you can cut when all other costs have been minimized is labor. If our economy is going to get better, we need to look to localizing production. We need to look to goods and services that can be produced as close a possible to point of purchase, as shipping and handling is one of the few places left a business can hope to recover profit.

  24. Obama’s destruction of American economy is INTENTIONAL.

    His current proposal is nothing but a re-election plan:
    If Congress passes his bill, then more money for the crony capitalism (more Solyndras), and bankrolling public unions for Democrats’ get-out-the-vote efforts.
    If, as expected, the bill fails to materialize, then blame the Republicans and blood-gen them in 2012.

    My opinion?
    A Stimulus even FIVE times larger is not going to work.
    Looming Obamacare costs on employers as well as employees.
    Loose cannons at EPA, NLRP, Energy, and DOJ.
    People who pocketed TARP, Bailouts and Stimulus I are attending Obama’s $38500 a plate fundraisers.

    The RICH will remain rich or become Richer.
    The POOR will remain poor and dependent on the “Federal Family”.
    The middle-class will pay the price.
    The so called Independents will have to gravitate towards Left or Right depending on their skills set and financial well being, as the growing disparity between the Haves’ and Have-nots’ will not allow them to stay in the shrinking middle ground for very long.

  25. There is a reason why it’s called Capitalism; it’s because Capital is what fuels the economy.
    When $6 Trillion has been sucked out of the fuel tank of available job creating investment capital, the economy has no fuel left to grow.
    The regulations, tax and health care uncertainties don’t help either.
    We didn’t get out of Great Depression 1.0 until after WWII when the government was quickly paying off the Debt, and filling the fuel tank of job creating investment capital.
    Between 1929 and 1933 Hoover borrowed 25% of GDP which sucked the fuel tank dry and gave us Great Depression 1.0, Obama and the Democrats have now borrowed 40% (and counting) of GDP and given us Great Depression 2.0.
    We won’t get out of the depression until we start paying off the debt, and refilling the fuel tank as we did after WWII.

  26. This article is an excellent testament to Keynesian economic theory redux II. Failed in early 1900’s and performed as expected since 2009.

    The President’s brain trust performed as taught in America’s halls of higher education (also a failure) per an article by Economist on 9/19/11.

    Expected outcome, failure II. Easy.

    Keynesian economics has a fundamental flaw. Its premise is a command economy a la early 1900’s. It fails to recognize US’s capitalist economics and complexities (maybe too much for a Keynesian follower to comprehend).

    Ergo, an Administration, Wall Street, Federal Reserve and Congress all flailing about for that template, allowing for simple minds to apply simple solutions.

    Lacking a simple solution, next best thing is to tinker around the edges because the USA is in “uncharted territory.”

    Cut, Cap and Balance, anyone?

  27. Demand-deslackification is considered so central to a recovery

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