Tuesday, August 6, 2013

The Economy Is Awful and Larry Summers Should Not Be Fed Chair

Dean Baker
Huffington Post

In his recent defense of Larry Summers, President Obama appeared to be badly confused about the state of the economy. This apparently leads him to believe that the country should be grateful to Larry Summers for his successes, as opposed to furious at him for his failures.

Obama's story is that the economy was in a free fall when he took office and the program that was in large part designed by Summers helped turn it around. While it is true that the economy was in free fall, there was no reason to expect that to continue regardless of what policies were pursued. Note that in every single wealthy country the sharp drop in output at the end of 2008 and the beginning of 2009 was stopped and reversed by the end of the year. Other countries were not able to rely on the genius of Larry Summers in setting their policies.

This doesn't mean that the stimulus package that President Obama pushed through did not help. According to the estimates of the Congressional Budget Office and a number of independent economists, the stimulus added between 2 to 3 million jobs. The problem is that the economy needed between 10 and 12 million jobs. The stimulus was far too small and did not last nearly long enough.

How much should we blame Larry Summers for an inadequate stimulus? That's hard to say. It's not clear that President Obama could have gotten a larger stimulus through Congress at the time, but it is clear that his team (presumably including Summers) badly underestimated the severity and the duration of the downturn.
As a result President Obama was celebrating the "green shoots of recovery" less than two months after the passage of the stimulus, at a time when the economy was still losing hundreds of thousands of jobs a month. Rather than trying to explain to the country that the hole created by the downturn was much bigger than they had recognized at the time they designed the stimulus package (which was true), President Obama talked about the need to pivot to deficit reduction.

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