Could the U.S. Economy Be Doing Better?

The question of whether the economy should be growing at a faster pace is an inherently political one. If the recovery is slower than we'd expect, given the general underlying conditions of the economy, it follows that President Obama and his policies are likely to blame. Needless to say, for that reason Mitt Romney and company would like nothing better than to argue that a faster recovery was to be expected.

On the flip side, it serves Obama's purposes to claim that there are special circumstances, apart from his administration's actions, holding a more robust recovery back. The economists Kenneth Rogoff and Carmen Reinhart provided Obama's supporters with a very plausible narrative involving such circumstances in their book This Time Is Different. Namely, Reinhart and Rogoff argue that recessions that follow systemic banking crises are usually deeper and longer-lasting than other kinds of downturns.

Thanks to This Time Is Different, it became the conventional wisdom (and an excuse for the Obama administration) that recessions caused by financial crises last longer, including the current lingering slowdown. Recently, however, Rutgers economist Michael Bordo challenged that commonly-accepted belief, arguing that, in U.S. history, financial crises lead to steeper recessions but faster recoveries.

Reinhart and Rogoff struck back yesterday in Bloomberg View, stating that not only do U.S. banking crises lead to deeper recessions, but that this most recent recovery has been better than would be expected:

R&R also call out Bordo and other Republican-aligned economists for politicizing the issue. As their chart makes clear, if anything Obama's record is better than might be expected.

One of those Republican economists, Stanford's John Taylor, responded on his blog. "There is no disagreement that recessions associated with financial crises have tended to be deeper than those without financial crises," Taylor acknowledges. "The disagreement is over the recoveries. By mixing downturns with recoveries Reinhart and Rogoff get different results from Bordo and Haubrich [Bordo's coauthor].... But the question for policy now is whether the recovery has been unusually slow compared to earlier recoveries from recessions with financial crises, and the evidence is still clear that it has been."

According to Reinhart and Rogoff, then, the downturn following the '08 crisis wasn't as deep as we'd expect, and that it was possible the country could have slipped into another Depression: point Obama. By Taylor's estimation, however, the follow recovery hasn't been as rapid as we'd expect given the depth recession: point Republicans.

The entire debate, though, is kind of circular. The question is whether Obama's policies have held back a stronger recovery. The answer, so far, has been no, recessions like this one in 1907, 1929, etc., were just as bad or worse. But of course, the question then becomes whether the policymakers in charge in 1907 and 1929 held back faster growth with bad policies.

In other words, both sides are trying to separate Obama's performance from the underlying economic conditions, by...lumping past administrations' performances in with the economic conditions they faced.