Econ pundit Paul Krugman asks the question, “Why has the slump been so protracted?” He fully embraces the Reinhart-Rogoff analysis, which he summarizes thusly:
Why is recovery from a financial crisis slow? Financial crises are preceded by credit bubbles; when those bubbles burst, many families and/or companies are left with high levels of debt, which force them to slash their spending. This slashed spending, in turn, depresses the economy as a whole.
And the usual response to recession, cutting interest rates to encourage spending, isn’t adequate. Many families simply can’t spend more, and interest rates can be cut only so far — namely, to zero but not below.
There is another side to this trade. In a paper from the Cleveland Fed, Michael Bordo and Joseph Haubrich find that, in general, “recessions associated with financial crises are generally followed by rapid recoveries.” R&R disagree with how B&H define both financial crises and recoveries.
Now Krugman sides with R&R. Maybe because he agrees with their methodology, maybe because it kinda-sorta gets Obama off the hook for the weak recovery. Maybe both.
But also note that Krugman dismisses the idea that monetary policy has a role to play here, that it isn’t impotent just because interest rates are low. Maybe this is because Krugman disagree with market monetarism. Or maybe it’s because if he acknowledged the Fed could have done more with monetary policy, it would relieve fiscal policy of the stimulus burden — and eliminate the opportunity for politicians to “never let a crisis go to waste” in pursuing their political agenda.
One more thing: Krugman dismisses the role of confidence, or the lack thereof, in retarding the recovery:
Over the past few months advisers to the Romney campaign have mounted a furious assault on the notion that financial-crisis recessions are different. For example, in July former Senator Phil Gramm and Columbia’s R. Glenn Hubbard published an op-ed article claiming that we should be having a recovery comparable to the bounceback from the 1981-2 recession, while a white paper from Romney advisers argues that the only thing preventing a rip-roaring boom is the uncertainty created by President Obama.
The flip side of that analysis is a dismissal of the idea that a Romney election, by itself, could boost growth if it makes business and consumers more confident. A crazy idea, I know — except that former Obama economist Christy Romer argues that politicians can boost growth by boosting confidence. I blogged this earlier, but here’s the key bit from Romer in a New York Times op-ed yesterday:
Recovery measures work better when they raise confidence — as Franklin D. Roosevelt understood. His fireside chats, and his inaugural address proclaiming he would fight the Great Depression with the same resolve he would muster against a foreign foe, were aimed at reassuring Americans. Recent research suggests that New Deal programs may actually have had their primary impact on the economy by influencing consumer and business expectations of future growth and inflation.
Partly because of fierce political opposition, and partly because of ineffective communication and imperfect design, the Recovery Act generated little such rebound in confidence. As a result, it didn’t have that extra, Rooseveltian kick.
What about a Romneyian kick?