We knew that the Great Recession was bad. We didn’t appreciate just how bad.
When Obama administration’s economists put together its Recovery Act, it was working with a certain set of data and expectations, and envisioned what a worst-case scenario might look like. They were right about the need for action, but wrong about the scope of the disaster they’d inherited — the worst-case scenario was far too rosy and the stimulus response was overwhelmed by conditions that were more severe than officials even imagined.
Part of this was the result of faulty expectations. The notion of the U.S. unemployment rate going from under 5% to over 10% in just two years was so absurd, many just didn’t consider it possible. But it was — the mess the Bush administration left for Democrats to clean up really was that mind-boggling bad.
But part of this was also the result of faulty statistics. Ryan Avent had an important piece on this today, explaining that “the situation was far more dire than anyone in the administration or in Congress supposed.”
Output in the third and fourth quarters fell by 3.7% and 8.9%, respectively, not at 0.5% and 3.8% as believed at the time. Employment was also falling much faster than estimated. Some 820,000 jobs were lost in January, rather than the 598,000 then reported. In the three months prior to the passage of stimulus, the economy cut loose 2.2m workers, not 1.8m. In January, total employment was already 1m workers below the level shown in the official data.
We can’t know exactly how things would have played out in a world in which key policymakers had better data. If the true scope of the economic disaster in the fourth quarter had been clear, however, it seems certain that Ms Romer’s models would have shown a need for more stimulus, that the White House would have agreed to push for more (and perhaps a lot more), and that Congress would have been much more receptive to a bigger bill. A drop of 8.9% does seem much more terrifying, after all, than a 3.8% decline. Bigger stimulus would have reduced the economic deterioration in subsequent months. The Fed might also have been more aggressive.
It’s important to emphasize, in case this isn’t obvious, that the numbers officials were working with weren’t just off by a little. The Obama administration was told that in the quarter leading up to the president’s inauguration, the economy shrank by 3.8%. To be sure, that would be an wful number showing an economy in deep trouble.
But with the benefit of hindsight and revised data, we now know the economy actually shrank over those three months by 8.9%. If 3.8% contraction is a disaster, 8.9% is a catastrophe.
And all of this was occurring before President Obama even raised his hand to take the oath of office. This was the fire his Republican predecessor left for him to put out. This was, as Matt Yglesias noted today, an economic downturn Obama’s economists thought was “a mere serious recession,” when it was in fact “a cataclysmic collapse.”
From a political perspective, this is probably worth keeping in mind when Republicans whine incessantly about why the stimulus wasn’t more effective. The Recovery Act made a key difference and stopped the economic slide, but if it seems as if the effort was inadequate, it’s largely because the Obama administration didn’t — and couldn’t — fully understand just how catastrophic the mess they inherited from Bush/Cheney really was.
