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January 25, 2010
Paul Krugman


Of Fate and Fumbles

It has not been a good year for Obama, or for the progressive agenda. But why? Ignore all the pontificating about how Obama needed to focus differently, seek bipartisanship with people who have no interest in making a deal, etc.. The primary factor in Obama’s troubles is, simply, the continuing weakness of the job market.

Which then raises the question, could anything have been done to improve the job picture?


What seems clear to me is that the economics were bound to be difficult. Long before the bad numbers started rolling in, there were strong reasons to believe that the economy was in for a prolonged jobless recovery. For one thing, that’s what had happened after recent US recessions, and this slump seemed to share the same characteristics; for another, prolonged periods of weak employment are normal in the aftermath of financial crises (pdf).

So one case you can make is that Obama was just fated to have a bad first year. FDR had the good luck not to take office until more or less everything that could go wrong, had; the bank runs had already happened, the big decline in GDP was already nearing its end. Obama, by contrast, came into office early enough to take the blame for the continuing slump.

But could more have been done to turn things around? The best chance of averting the normal, dismal aftermath of financial crisis was to respond very aggressively on multiple fronts: really big fiscal stimulus, massive recapitalization of the banks to get them lending again (which in turn would have meant temporary nationalization of the weakest players). And aggressive action at the Fed, including really big quantitative easing and a higher inflation target, could have helped.

In fact, the Obama administration didn’t do any of these things. Instead, it pursued meliorative policies: a stimulus that was huge by historical standards but inadequate to the size of the problem, and a bank policy aimed at restoring confidence rather than promoting a revival of lending.

It’s not clear whether they could have done more; it’s possible that the dysfunctional nature of the Senate, in particular, really made it politically impossible to follow the kind of policies that might have avoided the long post-crisis hangover. In that case, we were just fated to suffer what we’re suffering, but the fault lay not in our economic stars but in our Senate.

What is clear, however, is that the Obama economic team didn’t see themselves as being in that position. All indications are that the top people believed that the economy would start adding jobs and unemployment would start falling fairly quickly even without a big stimulus. I don’t know why they hadn’t taken on board the lessons of the past two recessions, plus that of financial crises elsewhere, but they clearly hadn’t.

Instead, the administration played it safe — or thought it was playing it safe. Moderate-sized stimulus, non-disruptive bank policy.

The trouble, of course, was that this was anything but safe. By the time it was clear that those measures had been inadequate, the political will to do more had evaporated; government intervention was seen as a failed policy. Betting that the economy would largely take care of itself was, it turned out, a deeply risky strategy — and the bet went bad.

Again, we don’t know either that more aggressive policies would have worked, or that they were politically possible. So maybe the fumbles didn’t matter; maybe Obamanomics was just fated to do badly, one way or another.

In any case, at this point I don’t see much hope of a policy turnaround. The best bet is to pass health care, so that Obama has something to show for his efforts (and also to provide health care!), and hope that the economy turns around in time to help Obama in 2012.

If all this sounds deeply discouraged, it’s because it is.