The end of Repub­li­can ob­struc­tion

Financial Mirror (Cyprus) - - FRONT PAGE -

What a dif­fer­ence two months make. When the Repub­li­can Party scored strong gains in last Novem­ber’s US con­gres­sional elec­tions, the uni­ver­sally ac­cepted ex­pla­na­tion was that vot­ers were ex­press­ing their frus­tra­tion with dis­ap­point­ing eco­nomic per­for­mance. In­deed, when Americans went to the polls, a sub­stan­tial share thought that eco­nomic con­di­tions were de­te­ri­o­rat­ing; many held Pres­i­dent Barack Obama re­spon­si­ble and voted against his Demo­cratic Party.

Now, sud­denly, ev­ery­one has dis­cov­ered that the US econ­omy is do­ing well – so well that Se­nate Majority Leader Mitch McCon­nell has switched from blam­ing Obama for a bad econ­omy to de­mand­ing credit for a good one. Re­cent favourable eco­nomic data were, he claimed, the re­sult of “the ex­pec­ta­tion of a Repub­li­can Congress.”

But the im­prove­ment in US eco­nomic per­for­mance be­gan well be­fore the Novem­ber elec­tion. In­deed, it be­gan well be­fore Septem­ber, when polls started to in­di­cate that the Repub­li­cans were likely to do ex­cep­tion­ally well, tak­ing con­trol of the Se­nate and en­larg­ing their majority in the House of Rep­re­sen­ta­tives.

The fact is, job growth was vig­or­ous through­out 2014, av­er­ag­ing 246,000 per month – 3 mln for the year – bring­ing the un­em­ploy­ment rate down to 5.6% in De­cem­ber 2014 (from 6.7% a year ear­lier). This rep­re­sented an ac­cel­er­a­tion rel­a­tive to the monthly av­er­age of 185,000 in 2011-2013, and it looks even bet­ter com­pared to the pre­vi­ous eco­nomic ex­pan­sion of 2002-2007, when monthly job cre­ation stood at 102,000. In­deed, the re­cent num­bers re­call the hal­cyon days of Bill Clin­ton’s pres­i­dency.

Sim­i­larly, GDP growth be­gan to pick up in the spring of 2014, run­ning above the rate of the pre­ced­ing three years. Partly as a re­sult of in­come growth, the US bud­get deficit last year was lower than fore­cast, at about 2.8% of GDP. This rep­re­sents a record im­prove­ment rel­a­tive to 2009, when the bud­get deficit amounted to nearly 10% of GDP.

The mys­tery, un­til re­cently, was why eco­nomic per­for­mance had been so weak. There were four types of ex­pla­na­tions.

The first ac­count re­lied on the view, most closely as­so­ci­ated with the econ­o­mists Car­men Rein­hart and Ken­neth Ro­goff, that re­cov­ery from a re­ces­sion takes longer if the cause was a crash in hous­ing and fi­nan­cial mar­kets. But this his­tor­i­cal pat­tern is more a state­ment about the mag­ni­tude of the ini­tial de­cline and the time needed to re­cover fully than a pre­dic­tion about the an­nual rate of growth dur­ing the re­cov­ery phase.

The sec­ond ex­pla­na­tion was that the slow re­cov­ery was part of a longer-term trend, at­trib­ut­able to sec­u­lar stag­na­tion or a dearth of im­por­tant tech­no­log­i­cal in­no­va­tions. It is true that pro­duc­tiv­ity growth and labour-force growth have slowed since 1975. Still, the econ­omy should have been able to achieve a stronger re­cov­ery than growth rate recorded in 2011-2013.

The third in­ter­pre­ta­tion for slow growth dur­ing th­ese three years is that the de­pressed in­vest­ment and long-term un­em­ploy­ment caused by the deep re­ces­sion of 2008-2009 had taken a toll on the cap­i­tal stock and the size and skills of the labour force.

But the fourth ex­pla­na­tion seems the sim­plest: Amer­ica’s dys­func­tional fis­cal pol­i­tics in 2011-2013 – years that fea­tured the “fis­cal cliff,” debt-ceil­ing stand­offs, flir­ta­tion with fed­eral de­fault, a gov­ern­ment shut­down, and bud­get se­questers. One does not need to as­sume big Key­ne­sian “mul­ti­plier ef­fects” to con­clude that the com­bined im­pact of th­ese con­flicts shaved at least one per­cent­age point from growth each year, es­pe­cially if one be­lieves that the risk cre­ated by such be­hav­iour dis­cour­ages firms from hir­ing or in­vest­ing. (Ac­cord­ing to one mea­sure, the 2011 debt-ceil­ing cri­sis and the 2013 gov­ern­ment shut­down caused un­cer­tainty com­pa­ra­ble to that sparked by the Septem­ber 2001 ter­ror­ist at­tacks and the 2008 col­lapse of Lehman Brothers.)

This ex­pla­na­tion also ac­cords with stronger US eco­nomic per­for­mance in 2014, which was the first year since the

the 2.1% Repub­li­cans gained a House majority in Novem­ber 2010 that dys­func­tional fis­cal pol­icy did not ac­tively im­pede eco­nomic re­cov­ery. Hav­ing borne the brunt of the blame for the gov­ern­ment shut­down of Oc­to­ber 2013, Repub­li­can lead­ers de­cided to sti­fle their more rad­i­cal “Tea Party” mem­bers and re­frain from sim­i­lar dead-end show­downs in 2014.

If the new Congress in 2015 re­frains from stand­offs, se­questers, and shut­downs, there is no rea­son why the econ­omy can­not con­tinue to do well.

Of course, short­com­ings re­main. Wage growth con­tin­ues to be slow. Me­dian house­hold in­come has barely be­gun to re­cover, and is still well be­low its 2000 level. This is be­cause most of the gains from eco­nomic re­cov­ery have gone to peo­ple at the top of the in­come dis­tri­bu­tion.

In­deed, of the var­i­ous pos­si­ble rea­sons why the elec­torate in 2014 did not per­ceive the eco­nomic re­cov­ery that was un­der­way, the most plau­si­ble is that the typ­i­cal Amer­i­can had not ben­e­fited from it. The irony is that ris­ing in­equal­ity is usu­ally thought to play to the Democrats’ elec­toral ad­van­tage.

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