Missing the Slow and Shallow Recovery

If Barack Obama seemed a bit reinvigorated during Tuesday’s State of the Union Address, one obvious reason is that he was able to do some unprecedented boasting about the performance of the economy after nearly six years of agonizingly delayed recovery from the recession of 2008-09. Now you can blame the Obama administration for not doing enough to goose the recovery (though obviously a Republican-controlled Congress was an obstacle to that after 2010), or wonder why it never seemed to grasp the depth and persistence of the slump in unemployment. But as Donald Kettl of the Brookings Institution and the University of Maryland explains in a web exclusive at Ten Miles Square today, a lot of the problem is that those doing the economic forecasting grossly underestimate the speed of the recovery:

As Obama took office in January 2009, there was a clear strategy: With the economy in free-fall, take his lumps early, and then move out briskly as the economy recovered. The plan was to pump money out fast, through the stimulus program, and then follow quickly with the administration’s policy agenda, especially health-care reform. Obama’s policy advisers believed they needed to get the stimulus spent fast, both to stop the economic contraction and to avoid fueling inflation if the money was flowing as the economy started to recover.

It was a classic strategy designed to produce unstoppable momentum going into the 2012 presidential campaign, and the economic forecasts gave policy advisers confidence it would work. As Obama was sworn in, economic forecasters expected a nasty but short recession. The 2009 report of his Council of Economic Advisers concluded, “The contraction will likely last into early- or mid-2009.” After that, the report saw “a recovery beginning in the second half of 2009 that will gain momentum in 2010 and beyond.” The National Bureau of Economic Research, which keeps score on recessions, declared the CEA right about the first part of the forecast when it announced that the recession ended in mid-2009. But the CEA got the second part badly wrong. The “jobless recovery,” as analysts christened it, plagued the Obama administration well into its second term.

The CEA certainly wasn’t alone, however. In fact, just about everyone got the end of the recession right and the jobless recovery wrong. In early 2009, the Office of Management and Budget projected an unemployment rate for the year at 8.1 percent. The nonpartisan Congressional Budget Office’s forecast was a bit stronger, at 8.3 percent.. They weren’t alone, though. The top 55 forecasters surveyed by the Wall Street Journal were even more optimistic—they thought unemployment would be 8.5 percent. In fact, unemployment for the year was 9.9 percent.

The longer-term forecasts also missed the mark. In early 2009, OMB estimated that unemployment would drop to 5.6 percent by 2012. CBO was more bearish, with an estimate of 6.8 percent. In fact, unemployment rate was 7.9 percent

The 2012 election might have been a less perilous exercise for Obama had unemployment been at 5.6%. And if the kind of numbers we are seeing now had rolled in, say, towards the end of 2013, the 2014 elections might have turned out a bit differently as well.

As Kettl notes, not every economist got the speed of job creation wrong: distinguished liberal economist James K. Galbraith of the University of Texas predicted an unusually slow and “jobless” recovery here at WaMo in the March/April 2009 issue, and talked about steps needed to address a recession that was worse than most people seemed to understand.

As it happened, Obama’s opportunity for taking some pride in his economic stewardship had to be put on hold for a long time.

Ed Kilgore

Ed Kilgore, a Monthly contributing editor, is a columnist for the Daily Intelligencer, New York magazine’s politics blog, and the managing editor for the Democratic Strategist.