Ronald Reagan inherited a Long Recession. The economy declined 0.3 percent in 1980, grew at a subpar 2.5 percent in 1981, and then plunged 1.9 percent in 1982. The lengthy downturn was really the culmination of more than a decade of bad economic policy. But the Reagan Recovery was stunning. GDP rose 4.5 percent in 1983 and 7.2 percent in 1984. It was Morning in America, and Reagan won reelection by a landslide.
Barack Obama also inherited a Long Recession. According the National Bureau of Economic Research, the U.S. economy entered recession in 2007 and stayed there until June 2009. But the Obama Recovery has been terribly weak. The economy grew at a 2.8 percent pace in the second half of 2009, 3.0 percent in 2010, and—according to new Commerce Department data—1.7 percent in 2011. We’ll see what happens in the 2012 election, but Obama’s current approval rating is 43 percent, according to Gallup.
As economist Lawrence Kudlow of CNBC notes:
After 10 quarters of recovery, the Reagan growth rate was 6 percent. Compare that with Obama’s 2.4 percent. Or compare Obama’s 2.4 percent with the 4.6 percent post-World War II average recovery rate after 10 quarters.
But Obamacrats and other liberals say the Reagan-Obama comparison is unfair. After all, Reagan didn’t have to deal with a collapsed housing bubble. Obama, they contend, was dealt a near-impossible hand and played it about the best he could. Americans need to lower their expectations, and Reaganites need to quit making the comparison.
The reality: Housing is usually a key contributor to GDP growth during the early stages of a recovery. As a 2011 St. Louis Fed analysis points out, “Somewhat surprisingly, the housing component of GDP (more formally known as residential investment) tends to be a solid contributor to GDP growth during a recovery. Historically, residential investment has contributed only about 5 percent of GDP—a small share considering the consumption component is close to 70 percent. Nevertheless … it can contribute substantially to the GDP growth rate for short periods of time.”
According to Commerce Department data, residential investment added 1.33 percentage points to GDP in 1983 and 0.64 in 1984. By contrast, residential investment subtracted 0.11 percentage point in 2010 and 0.03 in 2011. (See chart below.)
But here’s the thing: Subtract the housing rebound from the Reagan Recovery and GDP still grows twice as fast as during the Obama Recovery. For example, the economy grew 7.2 percent in the second full year of the Reagan Recovery. Without residential investment, it would have grown 6.6 percent vs. 1.7 percent growth in 2011, Obama’ s second full year of recovery. Score one for the Gipper … and for supply-side/Schumpeterian economics over demand-side/Keynesian economics.
I also ran across an interesting bit of commentary from former Fed governor Kevin Warsh on this very issue (via International Economy magazine) of blaming housing for the weak recovery. It’s a bit long but worth reading:
Only by the standard of the deepest, darkest day of the crisis is this economic recovery even plausibly satisfactory. On a historical basis, the economic recovery is modest, and unacceptably so. Some describe this recovery as the “new normal” and suggest we should just get used to it. Others suggest that recoveries from global financial crises are inevitably weak, and so we should lower our standards. I call this the new malaise. Instead of lowering our standards, we should improve our policies and raise our expectations.
So why is the recovery weak? First, the symptoms have been confused with the disease. Some policymakers have tried to steer a housing recovery without an economic recovery. So there have been a dozen or so programs to “fix” the housing crisis on the theory that once that’s repaired, the broader economy will come roaring back. These housing programs, however well intended, have done little, in my view, to help the housing markets or the real economy. A housing recovery will begin when real household incomes improve, not before.
Second, intentions aside, the broad suite of macroeconomic policies has tended to favor the big over the small—big banks have been advantaged over small banks; big businesses have been favored versus small businesses; and those big multinationals with access to the global economy and global financial markets have benefited more than those on the front lines of job creation.
Third, macroeconomic policies, in my view, have been preoccupied with the here and now, not the long term. So going back several years, Washington has compensated for a faltering economy with temporary programs that plug quarterly GDP arithmetic, but do far less to support long run growth. Massive stimulus has proven not to be as efficacious as many academic models would suggest.
In short, better policies, a better economy. The current economic recovery could be a lot stronger.