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Christina Romer Was Right

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Now it’s official.  Christina Romer was right.  The signs that she was about to be proven correct had been turning up everywhere.  When Charles Kaldec of Forbes reminded us – yet again – of President Obama’s willful refusal to seriously consider the advice of the former Chair of his Council of Economic Advisers, it became apparent that something was about to happen  .  .  .

On Friday morning, the highly-anticipated non-farm payrolls report for April was released by the Department of Labor’s Bureau of Labor Statistics (BLS).  Although economists had been anticipating an increase of 165,000 jobs during the past month, the report disclosed that only 115,000 jobs were added.  In other words, the headline number was 50,000 less than the anticipated figure, missing economists’ expectations by a whopping 31 percent.  The weak 115,000 total failed to match the 120,000 jobs added in March.  Worse yet, even if payrolls were expanding at twice that rate, it would take more than five years to significantly reduce the jobs backlog and create new jobs to replace the 5.3 million lost during the recession.

Because this is an election year, Republicans are highlighting the ongoing unemployment crisis as a failure of the Obama Presidency.  On Friday evening’s CNN program, Anderson Cooper 360, economist Paul Krugman insisted that this crisis has resulted from Republican intransigence.  Bohemian Grove delegate David Gergen rebutted Krugman’s claim by emphasizing that Obama’s 2009 economic stimulus program was inadequate to address the task of bringing unemployment back to pre-crisis levels.  What annoyed me about Gergen’s response was his dishonest implication that President Obama’s semi-stimulus was Christina Romer’s brainchild.  Nothing could be further from the truth.  The stimulus program proposed by Romer would have involved a more significant, $1.8 trillion investment.  Beyond that, the fact that unemployment continues for so many millions of people who lost their jobs during the recession is precisely because of Barack Obama’s decision to ignore Christina Romer.  I have been groaning about that decision for a long time, as I discussed here and here.

My February 13 discussion of Noam Scheiber’s book, The Escape Artists, demonstrated how abso-fucking-lutely wrong David Gergen was when he tried to align Christina Romer with Obama’s stimulus:

The book tells the tale of a President in a struggle to create a centrist persona, with no roadmap of his own.  In fact, it was Obama’s decision to follow the advice of Peter Orszag, to the exclusion of the opinions offered by Christina Romer and Larry Summers – which prolonged the unemployment crisis.

*   *   *

The Escape Artists takes us back to the pivotal year of 2009 – Obama’s first year in the White House.  Noam Scheiber provided us with a taste of his new book by way of an article published in The New Republic entitled, “Obama’s Worst Year”.  Scheiber gave the reader an insider’s look at Obama’s clueless indecision at the fork in the road between deficit hawkishness vs. economic stimulus.  Ultimately, Obama decided to maintain the illusion of centrism by following the austerity program suggested by Peter Orszag:

BACK IN THE SUMMER of 2009, David Axelrod, the president’s top political aide, was peppering White House economist Christina Romer with questions in preparation for a talk-show appearance.  With unemployment nearing 10 percent, many commentators on the left were second-guessing the size of the original stimulus, and so Axelrod asked if it had been big enough.  “Abso-fucking-lutely not,” Romer responded.  She said it half-jokingly, but the joke was that she would use the line on television.  She was dead serious about the sentiment.  Axelrod did not seem amused.

For Romer, the crusade was a lonely one.  While she believed the economy needed another boost in order to recover, many in the administration were insisting on cuts.  The chief proponent of this view was budget director Peter Orszag.  Worried that the deficit was undermining the confidence of businessmen, Orszag lobbied to pare down the budget in August, six months ahead of the usual budget schedule.      .   .   .

The debate was not only a question of policy.  It was also about governing style – and, in a sense, about the very nature of the Obama presidency.  Pitching a deficit-reduction plan would be a concession to critics on the right, who argued that the original stimulus and the health care bill amounted to liberal overreach.  It would be premised on the notion that bipartisan compromise on a major issue was still possible.  A play for more stimulus, on the other hand, would be a defiant action, and Obama clearly recognized this.  When Romer later urged him to double-down, he groused, “The American people don’t think it worked, so I can’t do it.”

That’s a fine example of great leadership – isn’t it?  “The American people don’t think it worked, so I can’t do it.”  In 2009, the fierce urgency of the unemployment and economic crises demanded a leader who would not feel intimidated by the sheeple’s erroneous belief that the Economic Recovery Act had not “worked”.

Ron Suskind’s book, Confidence Men is another source which contradicts David Gergen’s attempt to characterize Obama’s stimulus as Romer’s baby.  Last fall, Berkeley economics professor, Brad DeLong had been posting and discussing excerpts from the book at his own website, Grasping Reality With Both Hands.  On September 19, Professor DeLong posted a passage from Suskind’s book, which revealed Obama’s expressed belief (in November of 2009) that high unemployment was a result of productivity gains in the economy.  Both Larry Summers (Chair of the National Economic Council) and Christina Romer (Chair of the Council of Economic Advisers) were shocked and puzzled by Obama’s ignorance on this subject:

“What was driving unemployment was clearly deficient aggregate demand,” Romer said.  “We wondered where this could be coming from.  We both tried to convince him otherwise.  He wouldn’t budge.”

Obama’s willful refusal to heed the advice of Cristina Romer has facilitated the persistence of our nation’s unemployment problem.  As Ron Suskind remarked in the previously-quoted passage:

The implications were significant.  If Obama felt that 10 percent unemployment was the product of sound, productivity-driven decisions by American business, then short-term government measures to spur hiring were not only futile but unwise.

There you have it.  Despite the efforts of Obama’s apologists to blame Larry Summers or others on the President’s economic team for persistent unemployment, it wasn’t simply a matter of “the buck stopping” on the President’s desk.  Obama himself  has been the villain, hypocritically advocating a strategy of “trickle-down economics” – in breach of  his campaign promise to do the exact opposite.

As Election Day approaches, it becomes increasingly obvious that the unemployment situation will persist through autumn – and it could get worse.  This is not Christina Romer’s fault.  It is President Obama’s legacy.  Christina Romer was right and President Obama was wrong.


 

Trouble Ahead

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I find it very amusing that we are being bombarded with so many absurd election year “talking points” and none of them concern the risk of a 2012 economic recession.  The entire world seems in denial about a global problem which is about to hit everyone over the head.  I’m reminded of the odd brainstorming session in September of 2008, when Presidential candidates Obama and McCain were seated at the same table with a number of econ-honchos, all of whom were scratching their heads in confusion about the financial crisis.  Something similar is about to happen again.  You might expect our leaders to be smart enough to avoid being blindsided by an adverse economic situation – again – but this is not a perfect world.  It’s not even a mediocre world.

After two rounds of quantitative easing, the Kool-Aid drinkers are sipping away, in anticipation of the “2012 bull market”.  Even the usually-bearish Doug Kass recently enumerated ten reasons why he expects the stock market to rally “in the near term”.  I was more impressed by the reaction posted by a commenter – identified as “Skateman” at the Pragmatic Capitalism blog.  Kass’ reason #4 is particularly questionable:

Mispaced preoccupation with Europe:  The European situation has improved.   .  .  .

Skateman’s reaction to Kass’ reason #4 makes more sense:

The Europe situation has not improved.  There is no escape from ultimate disaster here no matter how the deck chairs are rearranged.  Market’s just whistling past the graveyard.

Of particular importance was this recent posting by Mike Shedlock (a/k/a Mish), wherein he emphasized that “without a doubt Europe is already in recession.”  After presenting his readers with the most recent data supporting his claim, Mish concluded with these thoughts:

Telling banks to lend in the midst of a deepening recession with numerous austerity measures yet to kick in is simply absurd.  If banks did increase loans, it would add to bank losses.  The smart thing for banks to do is exactly what they are doing, parking cash at the ECB.

Austerity measures in Italy, Spain, Portugal, Greece, and France combined with escalating trade wars ensures the recession will be long and nasty.

*   *   *

Don’t expect the US to be immune from a Eurozone recession and a Chinese slowdown.  Unlike 2011, it will not happen again.

Back on October 8, Jeff Sommer wrote an article for The New York Times, discussing the Economic Cycle Research Institute’s forecast of another recession:

“If the United States isn’t already in a recession now it’s about to enter one,” says Lakshman Achuthan, the institute’s chief operations officer.  It’s just a forecast.  But if it’s borne out, the timing will be brutal, and not just for portfolio managers and incumbent politicians.  Millions of people who lost their jobs in the 2008-9 recession are still out of work.  And the unemployment rate in the United States remained at 9.1 percent in September.  More pain is coming, says Mr. Achuthan.  He thinks the unemployment rate will certainly go higher.  “I wouldn’t be surprised if it goes back up into double digits,” he says.

Mr. Achuthan’s outlook was echoed by economist John Hussman of the Hussman Funds, who pointed out in his latest Weekly Market Comment that investors have been too easily influenced by recent positive economic data such as payroll reports and Purchasing Managers Indices:

I can understand this view in the sense that the data points are correct – economic data has come in above expectations for several weeks, the Chinese, European and U.S. PMI’s have all ticked higher in the latest reports, new unemployment claims have declined, and December payrolls grew by 200,000.

Unfortunately, in all of these cases, the inference being drawn from these data points is not supported by the data set of economic evidence that is presently available, which is instead historically associated with a much more difficult outcome.  Specifically, the data set continues to imply a nearly immediate global economic downturn.  Lakshman Achuthan of the Economic Cycle Research Institute (ECRI) has noted if the U.S. gets through the second quarter of this year without falling into recession, “then, we’re wrong.”  Frankly, I’ll be surprised if the U.S. gets through the first quarter without a downturn.

At the annual strategy seminar held by Société Générale, their head of strategy – Albert Edwards – attracted quite a bit of attention with his grim prognostications.  The Economist summarized his remarks this way:

The surprise message for investors is that he feels the US is on the brink of another recession, despite the recent signs of optimism in the data (the non-farm payrolls, for example).  The recent temporary boost to consumption is down to a fall in the household savings ratio, which he thinks is not sustainable.

Larry Elliott of The Guardian focused on what Albert Edwards had to say about China and he provided more detail concerning Edwards’ remarks about the United States:

“There is a likelihood of a China hard landing this year.  It is hard to think 2013 and onwards will be any worse than this year if China hard-lands.”

*   *   *

He added that despite the recent run of more upbeat economic news from the United States, the risk of another recession in the world’s biggest economy was “very high”.  Growth had slowed to an annual rate of 1.5% in the second and third quarters of 2011, below the “stall speed” that historically led to recession.  It was unlikely that the economy would muddle through, Edwards said.

So there you have it.  The handwriting is on the wall.  Ignore it at your peril.


 

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