Should-Read: Larry Summers: No, “Obamasclerosis” wasnt a real problem

Should-Read: I need to figure out why the usually-reliable Greg Ip has started giving more credence than he should to the claims of Trump hacks and flacks like Kevin Hassett, Larry Kudlow, Peter Navarro, and their ilk: Larry Summers: No, “Obamasclerosis” wasnt a real problem: “The Wall Street Journal’s Greg Ip… finds credible… claims that President Barack Obama’s policies… materially slowed economic growth…

… even though Ip acknowledges that the CEA’s assertions regarding magnitudes are likely exaggerated.

The CEA’s thesis is that a wave of tax and regulatory policies reduced both workers’ incentives to work and businesses’ incentives to invest, leading to slower economic growth than would otherwise have been achievable…. At least three broad features of the economic landscape make the CEA’s view an unlikely explanation for disappointing economic growth….

  1. The dominant reason for slow growth has been what economists label slow “total factor productivity” (TFP) growth…. There is no basis for supposing that levels of labor input or capital are less than one would expect given the magnitude of the Great Financial Crisis…. This suggests the lack of importance of the various factors adduced by the… [Trumpists’] report….

  2. The biggest surprise of the last few years has been the remarkably low rate of inflation even as the unemployment rate has reached 4 percent….. If, as the CEA believes, our slow economic growth is a result of too little supply of labor and capital, one would expect surprisingly high, rather than surprisingly low, inflation as demand growth collided with constricted supply…. The secular stagnation hypothesis that emphasizes issues on the demand side would predict exactly the combination of sluggish growth, low inflation and low capital costs that we observe….

  3. The… thesis… that capital has been greatly burdened in recent years by onerous regulation, high taxes and a lack of availability of labor… is belied by the behavior of the stock market and of corporate profits…. The observation that share buybacks appear to be the largest use of the proceeds from the Trump tax cuts points in the same direction. Costs of capital have not been responsible for holding back investment in the United States in recent years.

If the “Obamasclerosis” theory does not fit the facts of slow growth in recent years, what are its likely causes?… My guess is… hysteresis effects from the financial crisis and associated recession, reduced application of innovation in the economy in recent years, and possibly the adverse effects of rising monopoly power and diminishing competition…

It is puzzling. Kevin Hassett’s arguments seem transparently false—claims on the other of magnitude as “supply curves slope up” and “burdensome regulations raise stock prices”. They are not the type of thing that I would have expected anyone working for the Wall Street Journal news pages to validate.

It is the case that some Wall Street Journal insiders claim that editor Gerard Baker was a catastrophic choice: that he is a Trumpist true believer who has created a pre-1990 Eastern European atmosphere at the news pages of the Journal as he has decided to light the news pages’ credibility as an information intermediary on fire in an attempt to make Trump look less bad in relative perspective by making everybody else look as bad as possible.

Others say that the pressure is coming from Rupert, James, and Lachlan Murdoch and that Baker is trying hard to do as good a job as possible under the circumstances.

April 5, 2018


Brad DeLong
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