The economy. No miracle cure

The economy

No miracle cure

Bucking up this recovery is harder than it was in the past

  WASHINGTON, DC

IF THERE is a theme to the American presidential campaign, it may be: “Imagine the alternative”. President Barack Obama’s campaign will argue that his actions prevented an economic catastrophe. Mitt Romney, by contrast, will claim that Mr Obama’s missteps frustrated the strong recovery that should have followed so deep a downturn. America, Mr Romney recently claimed, “should be seeing 200-, 300-, 400,000 jobs [added] a month to regain much of what has been lost. That is what normally happens after a recession, but under this president we have not seen that kind of pattern.”

Growth has clearly been tepid. The American economy managed just 1.5% annualised GDP growth in the second quarter, down from 2% growth at the start of the year. Hiring is merely creeping along. On August 3rd the Labour Department estimated that American employers added 163,000 jobs in July, better than the 73,000 monthly average in the second quarter but slower than the promising pace earlier in the year, when firms added more than 225,000 jobs a month.

How does this compare with other recoveries of recent decades? Output has grown 6.7% since the recession’s official end in June 2009, and employment is up 2.1%. That is a shadow of the rebound of the early 1980s, when real output grew 18.5% in the first three years of recovery and employment soared by 11.1% (see chart). But no recovery since has been anything like as strong as that. On employment, Mr Obama’s recovery is more robust than his predecessor’s, though there are many more jobless workers now to soak up.
Whether a better performance might reasonably have been expected is a topic for debate. Three years ago a newly installed Obama administration argued as Mr Romney does now—that deep recessions lead to zippy recoveries—to justify its rosy budget forecasts. Team Obama has since adjusted its view, and now cites research showing that sluggish recoveries typically follow financial crises. Meanwhile Gregory Mankiw, an economist from Harvard who criticised the administration’s forecasting in 2009, has signed on as a Romney adviser. A new white paper co-authored by Mr Mankiw takes the position he once attacked, suggesting that a few small presidential policy changes—tax reform, entitlement reform, spending cuts and deregulation—could effect a repeat of Ronald Reagan’s “Morning in America” of 1984.
Lost in the conversation are the conditions that made that strong rebound possible. Government spending and investment added strongly to output in the early 1980s. Large cuts to state and local government budgets have not helped at all this time round. And no rebound in spending is in prospect under a Romney presidency. The recent white paper makes a cut in federal spending to under 20% of GDP (from an estimated 23% in 2012) its policy priority.
Perhaps more important is the difference in monetary policy. The deep downturns of the early 1980s were largely engineered by the Federal Reserve, which boosted short-term interest rates to near 20% to slow down galloping inflation. Once satisfied, it reversed course, reducing interest rates by nearly 12 percentage points from mid-1981 to late 1982 and setting off a roaring recovery. With interest rates near zero, no equivalent action is available to the Fed today. Instead, it may use its September meeting to announce another round of quantitative easing, or printing money to buy assets, in the hope of achieving a similar effect. A bad idea, Mr Romney suggested in an August 5th interview. He would prefer the president to be held responsible for the economy’s performance. That view might evolve, however, if Mr Romney wins the White House.