Not running the table in January 2009 to make a V-shaped recovery all but inevitable, but instead trusting to good luck and the accuracy of the forecast. An obvious mistake then. An obvious mistake now. And I have never heard a good account of why it was made–other than that Obama, Emmanuel, Plouffe, and Axelrod bonded with Geithner, and that Geithner is always “let’s do less”, no matter how strong the arguments to do more are:
…The administration has chosen to deal with this by… condemning Republicans, rightly, for obstructionism, while at the same time claiming, falsely, that we’re still on the right track. How did things end up this way? We’ll never know whether the administration could have passed a bigger plan; we do know that it didn’t try…. It looks as if top advisers convinced themselves that even in the absence of stimulus the slump would be nasty, brutish, but not too long…. [But] even before the severity of the financial crisis was fully apparent, the recent history of recessions suggested that the jobs picture would continue to worsen long after the recession was technically over. And by the winter of 2008-2009, it was obvious that this was the Big One…. Those concerns were what had me fairly frantic….
And here we are. From a strictly economic point of view, we could still fix this: a second big stimulus, plus much more aggressive Fed policy. But politically, we’re stuck: even if the Democrats hold the House in November, they won’t have the votes to do anything major. I’d like to say something uplifting here; but right now I’m feeling pretty bleak.
…most of them would surely have predicted that by now we’d be talking about how the great slump ended, not why it still continues. So what went wrong?… Mainly, is the triumph of bad ideas…. Standard [textbook] economics offered good answers, but political leaders—and all too many economists—chose to forget or ignore what they should have known…. A smaller financial shock, like the dot-com bust at the end of the 1990s, can be met by cutting interest rates. But the crisis of 2008 was far bigger, and even cutting rates all the way to zero wasn’t nearly enough. At that point governments needed to step in, spending to support their economies while the private sector regained its balance. And to some extent that did happen: revenue dropped sharply in the slump, but spending actually rose as programs like unemployment insurance expanded and temporary economic stimulus went into effect. Budget deficits rose, but this was actually a good thing, probably the most important reason we didn’t have a full replay of the Great Depression.
But it all went wrong in 2010…. Greece was taken, wrongly, as a sign that all governments had better slash spending and deficits right away…. The warnings of some (but not enough) economists that austerity would derail recovery were ignored. For example, the president of the European Central Bank confidently asserted that “the idea that austerity measures could trigger stagnation is incorrect.” Well, someone was incorrect, all right…. Blanchard and… Leigh… not just that austerity has a depressing effect on weak economies, but that the adverse effect is much stronger than previously believed. The premature turn to austerity, it turns out, was a terrible mistake…. The fund was actually less enthusiastic about austerity than other major players. To the extent that it says it was wrong, it’s also saying that everyone else (except those skeptical economists) was even more wrong. And it deserves credit for being willing to rethink its position in the light of evidence. The really bad news is how few other players are doing the same…. The truth is that we’ve just experienced a colossal failure of economic policy—and far too many of those responsible for that failure both retain power and refuse to learn from experience.