10 MIN READ - The Cautious Optimism Correspondent for Economic Affairs and other Egghead
Stuff grades former President Obama’s economic recovery on a bell curve against
225 years of other financial crises. You’ll feel like you’ve moved up the bell
curve a little after enjoying this in-depth article.
Former President Barack Obama recently re-entered the
economic debate forum when he gave a speech taking credit for America’s greatly
improved GDP numbers and employment performance of the last 18 months.
Addressing the lackluster GDP and employment performance while he was in
office, Obama reminded listeners once again that he inherited an economy just
emerging from a financial crisis and in recession when he took office in 2009,
but that his economic policies produced a strong recovery given the
circumstances.
While there’s no question that Obama entered office right on
the heels of a major financial crisis and inherited an economy in sharp
recession, he wasn’t the first president to deal with such problems. The United
States has suffered approximately 19 financial crises since George Washington
assumed office in 1789, each followed by sharp recessions which were called
“depressions” before economists changed their language after the Great
Depression.
Previous presidents who have been forced to deal with depressed
post-crisis economies include George Washington (Panic of 1792), John Adams
(1797), James Monroe (1819), Martin van Buren (1837), James Buchanan (1857),
Ulysses Grant (1873), Grover Cleveland/William McKinley (1893), Theodore
Roosevelt/William Howard Taft (1907), Warren Harding (1921), Franklin Roosevelt
(1933) and George H.W. Bush/Bill Clinton (1990) to name some notable examples.
President Obama had a full eight years from 2009 to 2017 to
oversee a post-crisis economic reconstruction, and both he and his supporters
claim he took a difficult situation and engineered a miraculous recovery. But
given what we know historically about how the economy rebounded from other
financial crises, just how well does Obama’s miracle stack up?
Before we compare, it’s worth noting that defining a
financial crisis is somewhat subjective, but economists generally agree that a
crisis is characterized by widespread contraction of bank lending/credit, bank
failures, in the pre-Fed era by widespread suspension of banknote/deposit
redemption, and in the pre-WWII era by rapid price deflation.
By those criteria
the largest crises are typically viewed as the Panics of 1797, 1819, 1837,
1857, 1873, 1893, 1907, 1920-21, the four Great Depression panics in 1930,
1931, 1933, and 1937 (1933 being the greatest banking panic in U.S. history
where thousands of banks failed), the 1990 S&L Crisis, and 2008. There were
smaller “incipient” panics during the National Banking System era of 1862-1913
(1884, 1890, 1901) and one at the outbreak of the Civil War (1861) which I
ignore here.
I. UNEMPLOYMENT
If we measure the length of time required from the panic/crisis
itself to the point where “full employment” is re-established (defined by most
economists as a 5% unemployment rate or lower), the Obama recovery took exactly
seven years. The crisis itself struck in September of 2008 and in September of
2015 the Bureau of Labor Services reported America’s official unemployment rate
had finally fallen to 5.0%.
The longest recovery from a major crisis to full employment
is undoubtedly the Great Depression. Unemployment peaked in the same year as
the great 1933 crisis (at 25%) and full employment wasn’t reached until 1942
marking a nine year recovery. However in 1942 the military was in the process
of drafting 12 million men to fight overseas so many economists don’t view
voluntary full civilian employment materializing until 1946, thus concluding a
thirteen year recovery.
Unemployment statistics before 1929 are very hard to pin
down since the government didn’t begin collecting such data until the Great
Depression. However economic historians such as Stanley Lebergott and Christina
Romer have toiled for years trying to calculate estimates based on metrics like
bank deposit records, government budgets, and payrolls in industrial centers.
The data conclude that after the Great Depression, the
longest employment recoveries occurred during the depressions after the Panics
of 1837 and 1893.
The Depression of 1893 is itself considered the second-worst slump
in American history and was dubbed “The Great Depression” by Americans until
the real Great Depression struck in 1929. Hundreds of banks failed (an enormous
number for the 1890’s), foreign investors pulled their capital out of the
country, unemployment reached 12.4% (Romer) after a second, smaller crisis
struck in 1896, and the U.S. Treasury itself barely avoided bankruptcy with a bailout
loan from J.P. Morgan.
And both the Depressions of 1837 and 1893 are estimated to have
required seven years to restore full employment—the same as the Obama recovery.
The Panic of 1873 technically required only six years.
Therefore, Obama’s 2008-2015 jobs recovery, when measuring
time to full employment after a crisis, places in a three-way tie for second
slowest in American history alongside the 1837-1844 and 1893-1900 recoveries.
Economic historians generally consider full employment
recoveries to have been achieved in two to three years after most other
pre-1929 panics. For example the Depression of 1920-21, which James Grant has
appropriately dubbed “America’s last governmentally unmedicated depression,” is
considered the second-worst downturn of the 20th century. All economic
indicators fell faster in its first two quarters than in either 1929 or 2008,
wholesale prices fell by 36.8%, and hundreds of banks failed.
President Warren
Harding’s response was to do absolutely nothing aside from slash the federal
budget by one-third. And yet from 1921 to 1923 the unemployment rate fell from
a peak of 9% to 4.8% (Romer), full employment being achieved in just two years.
Keep in mind as well that in the modern era, unemployment
has been measured using increasingly lax methods designed to understate the
jobless rate by leaving out idle workers who have simply stopped filing claims
and given up looking for work. By contrast pre-1929 unemployment rate estimates
use positive statistics used to extrapolate numbers employed and considering
all other labor force members as jobless. If both periods were measured using
the same methodology, the Obama period would break out of its tie and claim
second place for slowest recovery to full employment all to itself.
II. GDP
What about post-crisis GDP growth? Again, the government
only began keeping records during the Great Depression, and again economists
have worked for decades to estimate GDP levels going back to the nation’s
founding. To properly correlate to Obama’s eight years in office we look here
at GDP growth for the eight years following other post-crisis troughs after the
Panics of 1797, 1819, 1837, 1873, 1893, 1907, 1920-21, 1990, and 2008. In every
case GDP bottoms out in the year of the panic itself or at most the following
year (1894, 1907, 2008). We only measure five years after the Panic of 1792 and
four years after the Panic of 1857 because the former was followed by the Panic
of 1797 and the latter was followed by the 1861 start of the Civil War.
We also include the post-1982 Volcker Recession which,
although technically not a banking panic, did shake up the financial system,
and also because the more recent 1982-1990 recovery during the Reagan era has
been widely contrasted to the 2009-2017 Obama recovery. We exclude the Great
Depression which is already acknowledged as the worst depression in American
history and which we know places worse than the Obama era.
Based on the compiled GDP figures from the BLS after 1929
and Johnston/Williamston before 1929 (St. Johns University, University of
Miami, Northwestern University) who gathered estimates from over a dozen
economists including Nobel Laureate Simon Kuznets, Christina Romer, Robert
Gordon, Charles Calomiris, et al. we calculate the following eight-year GDP
growth rates in constant 2012 dollars:
1792-1797: $5.2B - $7.1B, + 36.5% (five years)
1797-1805: $7.1B - $10.1B, + 42.2%
1819-1827: $15.7B - $21.9B, + 39.5%
1837-1845: $33.3B - $44.4B, +33.3%
1857-1861: $82.6B - $94.8B, +14.8% (four years)
1873-1881: $156.9B - $244.8B, +56.0%
1894-1902: $345.4B - $531.1B, +53.8%
1908-1916: $558.7B - $734.8B, +31.5%
1921-1929: $762.3B - $1.11T, +45.6%
1933-1941: $817.8B - $1.57T, + 92.0%
1982-1990: $6.81T - $9.37T, +37.6%
1991-1999: $9.36T - $12.61T, +34.7%
2009-2017: $15.21T - $18.05T, +18.7%
After extrapolating these four, five, and eight year growth
figures into average annualized GDP growth rates the final tally is:
1792-1797 GDP growth rate: +6.42%
1797-1805 GDP growth rate: +4.50%
1819-1827 GDP growth rate: +4.25%
1837-1845 GDP growth rate: +3.66%
1857-1861 GDP growth rate: +3.51%
1873-1881 GDP growth rate: +5.72%
1894-1902 GDP growth rate: +5.33%
1908-1916 GDP growth rate: +3.48%
1921-1929 GDP growth rate: +4.81%
1933-1941 GDP growth rate: +8.49%
1982-1990 GDP growth rate: +4.07%
1991-1999 GDP growth rate: +3.79%
2009-2017 GDP growth rate: +2.17%
Therefore the Obama recovery produced the worst
post-crisis GDP growth rate in American history, even worse than the Great Depression.
It’s the only recovery that doesn’t achieve annualized
growth rates in the mid-3% range or higher, and it even falls dramatically
below that standard at a lethargic 2.17%. In fact, the average GDP growth rate
of the eleven pre-2008 expansions is 4.50% or more than double that of the
2009-2017 recovery's 2.17%.
III. APPLES AND ORANGES?
Some critics may argue that there are far too many
differences between the 19th and early 21st centuries to compare GDP growth
between the two. Aside from the fact that the Obama recovery also lagged far
behind the very recent post-1982 and post-1991 recoveries, it is true that there
are many differences in how government responded to crisis and depression in
the pre-Great Depression era. Unfortunately they nearly all reflect even more
poorly on the Obama administration.
The most glaring difference between the 19th and early 21st
centuries is that before 1929 government countercyclical policies to “medicate”
panics and depressions simply didn’t exist. Presidents and Congresses were
virtually 100% laissez-faire in their approach when panics and depressions
struck. The lack of policy instruments included, but was not limited to:
-No central bank to push down interest rates and engage in
quantitative easing (exceptions: 1792 with Hamilton’s Bank of the United States
and the 1920-21 Fed)
-No central bank policy to counteract deflation. In fact,
pre-WWII crises typically produced rapid price deflation when banks failed or
contracted credit.
-No deposit insurance to induce depositors to leave their
money in the bank and minimize failures.
-The gold standard limited policymakers’ ability to
reinflate the money supply, not that anyone in government had yet thought of
reinflating the money supply until Irving Fisher’s work on debt deflation in
the 1930’s.
-No Federal Reserve discount (emergency lending) window.
-No unemployment insurance.
-No bank bailouts (TARP).
-No $9 trillion in Keynesian deficit spending. In fact, the
federal government typically slashed the budget in depressions to compensate
for falling tax revenues.
-No federal stimulus spending packages.
-Federal spending only 3-5% of GDP (versus 21-23% today).
-No “Cash for Clunkers.”
-No green energy subsidies.
-No bailouts for major auto companies or other industrials.
-No FOMC open market purchases of trillions of dollars in
lousy mortgage-backed securities.
According to Obama’s economic advisers such as Christina
Romer, Austin Goolsbee, Jared Bernstein, and Larry Summers, Democratic
congressional leaders like Nancy Pelosi and Harry Reid, virtually all the major
newspapers and their economic columnists like Paul Krugman and Matt O’Brien,
and Obama himself, depressions/recessions in the pre-1929 era should have been
worse—a lot worse—than the post-2008 recession.
Without all the stimulative
magic potions administered by the Obama White House and the Federal Reserve, not
only should pre-1929 depressions have taken much longer to reach full
employment, they should have produced vastly inferior GDP recoveries and quite
frankly each been a Great Depression in and of themselves. Instead they all
dramatically outperformed the Obama recovery.
In fact, the only worse recovery in American history was the
Great Depression, a slump where the Herbert Hoover and Franklin Roosevelt White
Houses applied even more federal stimulus than the Obama administration.
Interesting, the two longest post-crisis unemployment slumps
and the two worst GDP recoveries in American history also happened to be the
same two where government intervened the most to promote recovery. By contrast
every one of the over dozen pre-1929 post-crisis depressions received
absolutely no federal government “help” and the leave-it-alone policy produced
vastly superior recoveries.
Coincidence?
