Later On

A blog written for those whose interests more or less match mine.

Very interest contrast: Reagan’s big recession vs. the more recent one

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Paul Krugman writes in his blog:

With job growth finally running at the pace we’d expect to see after a deep slump, we’re not hearing as much about how Obama’s anti-capitalist policies are the reason we’re not having a V-shaped recovery, the way we did under the Blessed Reagan. But it’s true that recovery was a long time coming. Why?

Well, the answer has long been obvious: constrained monetary policy thanks to the zero sort-of lower bound, constrained fiscal policy because of the combination of debt fears and Republican obstruction. But it might be useful to have a simple graphical demonstration; in any case, I was putting together some figures for class and thought they might be of use to others. In both cases I compare developments following the business cycle peak — July 1981 for Reagan (ignoring for this purpose the 79-80 recession, even though 79-82 is widely regarded as a single episode) and Dec. 2007 for Obama.

First, monetary policy:

Krugman1

The 81-2 recession and the 2007-9 recession had very different causes. The first was caused by tight money, imposed by the Fed to curb high inflation. As a result, there was plenty of room to cut rates (and also pent-up housing demand). The second was caused by private-sector overreach; we came into it with inflation and interest rates already low, so that there was much less room to cut, more or less guaranteeing a slow recovery. And yes, I predicted this in advance.

Second, fiscal policy:

Krugman2

This, I didn’t see coming. But the effect is clear: at a time when monetary policy was limited in its effectiveness, fiscal policy was perverse. In practice, Reaganomics was far more Keynesian while Boehnernomics — which is what it ended up being, in practice — was anti-Keynesian.

That’s the story of the delayed recovery.

Written by LeisureGuy

11 March 2015 at 10:55 am

Posted in Business, Government

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