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August 03, 2011 4:40 PM So much worse than we realized

By Steve Benen

We knew that the Great Recession was bad. We didn’t appreciate just how bad.

When Obama administration’s economists put together its Recovery Act, it was working with a certain set of data and expectations, and envisioned what a worst-case scenario might look like. They were right about the need for action, but wrong about the scope of the disaster they’d inherited — the worst-case scenario was far too rosy and the stimulus response was overwhelmed by conditions that were more severe than officials even imagined.

Part of this was the result of faulty expectations. The notion of the U.S. unemployment rate going from under 5% to over 10% in just two years was so absurd, many just didn’t consider it possible. But it was — the mess the Bush administration left for Democrats to clean up really was that mind-boggling bad.

But part of this was also the result of faulty statistics. Ryan Avent had an important piece on this today, explaining that “the situation was far more dire than anyone in the administration or in Congress supposed.”

Output in the third and fourth quarters fell by 3.7% and 8.9%, respectively, not at 0.5% and 3.8% as believed at the time. Employment was also falling much faster than estimated. Some 820,000 jobs were lost in January, rather than the 598,000 then reported. In the three months prior to the passage of stimulus, the economy cut loose 2.2m workers, not 1.8m. In January, total employment was already 1m workers below the level shown in the official data.

We can’t know exactly how things would have played out in a world in which key policymakers had better data. If the true scope of the economic disaster in the fourth quarter had been clear, however, it seems certain that Ms Romer’s models would have shown a need for more stimulus, that the White House would have agreed to push for more (and perhaps a lot more), and that Congress would have been much more receptive to a bigger bill. A drop of 8.9% does seem much more terrifying, after all, than a 3.8% decline. Bigger stimulus would have reduced the economic deterioration in subsequent months. The Fed might also have been more aggressive.

It’s important to emphasize, in case this isn’t obvious, that the numbers officials were working with weren’t just off by a little. The Obama administration was told that in the quarter leading up to the president’s inauguration, the economy shrank by 3.8%. To be sure, that would be an wful number showing an economy in deep trouble.

But with the benefit of hindsight and revised data, we now know the economy actually shrank over those three months by 8.9%. If 3.8% contraction is a disaster, 8.9% is a catastrophe.

And all of this was occurring before President Obama even raised his hand to take the oath of office. This was the fire his Republican predecessor left for him to put out. This was, as Matt Yglesias noted today, an economic downturn Obama’s economists thought was “a mere serious recession,” when it was in fact “a cataclysmic collapse.”

From a political perspective, this is probably worth keeping in mind when Republicans whine incessantly about why the stimulus wasn’t more effective. The Recovery Act made a key difference and stopped the economic slide, but if it seems as if the effort was inadequate, it’s largely because the Obama administration didn’t — and couldn’t — fully understand just how catastrophic the mess they inherited from Bush/Cheney really was.

Steve Benen is a contributing writer to the Washington Monthly, joining the publication in August, 2008 as chief blogger for the Washington Monthly blog, Political Animal.

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  • Equal Opportunity Cynic on August 03, 2011 4:44 PM:

    Agreeing to a stimulus package that was predestined to be ineffective, hence to be branded a "failed stimulus", was not exactly a great strategic move either.

  • Bernard HP Gilroy on August 03, 2011 4:48 PM:

    To be pedantic, it sounds like the statistics were right but the data was incorrect. That is, the measures used to evaluate the economy were the right ones to use. But the information fed into the models -- the values of those statistics -- was wildly off.

    I predict boldly that this will not have any impact on the narrative that has already congealed in the public's mind.

    Captcha: lambda? Really? Twice -- as a capital and as a lower-case. This captcha has gone beyond bone-stupid annoying into actively malicious.

  • Bartender on August 03, 2011 4:49 PM:

    But Krugman knew.

  • Anonymous on August 03, 2011 4:54 PM:

    I have nothing to say:

    "Yesterday, Sperling faced a series of questions about the White House's concessions on the debt ceiling fight, and its inability to move in the directions of new taxes or revenues. Progressive consultant Mike Lux, the sources said, summed up the liberal concern, producing what a participant described as an "extremely defensive" response from Sperling.

    Sperling, a person involved said, pointed his finger back at liberal groups, which he said hadn't done enough to highlight what he saw as the positive side of the debt package -- a message that didn't go over well with participants"

    http://www.politico.com/blogs/bensmith/0811/Tense_moments_at_Common_Purpose_meet.html

  • Ron Byers on August 03, 2011 4:54 PM:

    My mother, who endured the great depression, talked about hunger stalking the land. Did anybody go hungry in the great recession? Serious question. I don't know the answer, but the numbers would indicate a real depression instead of a recession. Maybe that is why the recovery seems to mirror the recovery from the great depression.

  • CDW on August 03, 2011 4:58 PM:

    Obama has listened to the wrong people since he's been in office. Any number of people warned him, but he listened to the third wayers and political hacks who told him to stay to the right. That's where the votes are, they said. Stay to the right. We'll see how that works out for them.

  • beyond left on August 03, 2011 4:59 PM:

    Cutting Obama and his team waaay too much slack. In fact, many economists at the time including the krugmeister advocated for a much larger stimulus and said at the time that this was the only bite at the apple they would get. He was right and they were waaay wrong.

  • Danny Gail McElrath on August 03, 2011 4:59 PM:

    But we also know that even with the figures and projections that they had several economists and some in the administration were recommending a much strong stimulus package, but Obama chose not to go with that.

  • PTate in MN on August 03, 2011 5:02 PM:

    Yeah, Krugman knew. He was totally right.

    So when are we going to stop calling this the "Great Recession"? Recession is an ameliorating word, it suggests a dip in our growth, but, heavens! nothing to worry about, just part of the normal ups and downs of the business cycle. Sure, it is bad right now, but not as bad as The Great Depression.

    No, let us reclaim the name, Depression. This is the Greater of the Two Depressions, the New Great Depression, the Second Great Depression. Maybe then our political elite will start taking it seriously.

  • No Excuses on August 03, 2011 5:03 PM:

    Obama hasn't fought for jobs, or those suffering. He has continually bought into the Republican line on everything, and pre-emptively surrendered in every confrontation.

  • CDW on August 03, 2011 5:04 PM:

    @ronbyers

    If they didn't go hungry because of the great recession, it was probably because of food stamps. See the chart at Kos.

    http://www.dailykos.com/story/2011/08/03/1002681/-More-Americans-using-food-stamps-than-ever-before:-458-million

  • the fake fake al on August 03, 2011 5:08 PM:

    I dunno, I see the current deleveraging as setting the stage for a mild recovery. Its painful now, but does free capitol for future investment. Cutting the deficit is the last bullet the GOP has. If next year, things are a bit better, they will take credit, but so can Obama. Once Europe is solved, the markets will gain confidence.

    BTW, my company just said it wants to hire me from temp to perm. Been a perm for two years. Maybe things are turning round.

  • Gummo on August 03, 2011 5:10 PM:

    Add my voice to the chorus pointing out that there were plenty of reasonable, educated voices begging for a much larger government stimulus of the economy.

    But Obama's focus was, and always will be, protecting his friends and backers, the big banks. Nothing else mattered.

    In fact, high unemployment serves the plutocrats very well as cutthroat competition for few jobs keeps workers from organizing and demanding their rights. Instead, they turn against each other fighting for scraps from the lords' and ladies' table, while the plutocrats can just sit back and laugh and laugh....

  • An Economist on August 03, 2011 5:12 PM:

    Unfortunately, most people do not appreciate that economics is the attempt to hit a moving target blindfolded with a shaky hand while someone lies to you about it's actual position, and someone else tells you how they're wrong.

  • Keeping Track on August 03, 2011 5:17 PM:

    To what degree might the Bush administration in its waning days done what it could to manipulate data so as to reflect better on them, and worse on the next guy? They DO have a history of this. Why has it taken this long for these revisions to become known? Have such radical revisions ever taken place before? Far be it for me to suggest that the Bush administration misled the nation...

  • Danp on August 03, 2011 5:20 PM:

    economics is the attempt to hit a moving target blindfolded with a shaky hand while someone lies to you about it's actual position,

    ...which explains why most professional climate science deniers are actually economists.

  • Live Free or Die on August 03, 2011 5:21 PM:

    Why cant Obama talk like this? I hate this guy-he may be an asshole-but Democrats have to start talking like this, and stop running from their shadow.

    http://www.balloon-juice.com/2011/08/03/tired-of-the-crazies/

  • Ron on August 03, 2011 5:38 PM:

    Plenty of economists knew. Everyone knew this was a catastrophic meltdown. I dont buy the we didnt know how bad it was excuse. There was plenty of clamor by a number of noted economists that the stimulus was to small. Obama made two mistakes, 40% of the package included tax cuts to appease Republicans (none of which voted for it anyway) and it was way to small. At this point in time Obama could have pushed through a larger package, he had the votes, political capital and the debris from the crash was still smoldering and fresh in everyone's mind. It was the first sign of what we were going to have to endure throughout his presidency, weak and indecisive leadership.

  • Ron on August 03, 2011 5:39 PM:

    Plenty of economists knew. Everyone knew this was a catastrophic meltdown. I dont buy the we didnt know how bad it was excuse. There was plenty of clamor by a number of noted economists that the stimulus was to small. Obama made two mistakes, 40% of the package included tax cuts to appease Republicans (none of which voted for it anyway) and it was way to small. At this point in time Obama could have pushed through a larger package, he had the votes, political capital and the debris from the crash was still smoldering and fresh in everyone's mind. It was the first sign of what we were going to have to endure throughout his presidency, weak and indecisive leadership.

  • Ron Byers on August 03, 2011 5:48 PM:

    CDW you mean the safety net the Republicans are trying to dismantle probably kept people from going hungry? I guess next time people will just starve and we will be rid of the excess population.

  • Peter Pitchford on August 03, 2011 6:04 PM:

    Whenever you write about the Republicans you should refer to them as "job killing Republicans"

  • Woodrow L. Goode, IV on August 03, 2011 6:07 PM:

    Ifonlywednode-- the companion to Hoocoodanode.

    What would have happened, Steve, is that the Obama Administration would have immediately demanded cuts in Social Security and Medicare. There would have been quadrillions going to the bankers, not just trillions.

    Obama would have gone on the tube to make a national address demanding a Balanced Budget Amendment and a Flat Tax. That scenario is one hell of a lot more consistent with everything that has happened during this administration than anything you're implaying?

    Could you stop talking like these people care about anyone making less than seven figures or any agenda item other than getting re-elected? What does Obama have to do to make it clear to you that he is, economically, a right wing Republican from the 1970's and 1980's-- tear off his mask, shout "BWAHAHAHA!!!" and admit he's a Muslim from Kenya sent here to destroy the economic system of the White Devils?

    There were people who said the stimulus was too small and too weighted toward tax cuts-- they were ignored and shot down and marginalized. There was evidence that the stimulus wasn't working in 2010-- The Rahm-Obama-Lama-Ding-Dongs covered their ears and sang happy tunes and punched hippies.

    There is no example of this president or this administration fighting for working people-- or people who aren't working. None. Not one case where he fought tooth and nail, using every weapon at his disposal, leaving blood in the streets and corpses all over the battlefield and people feeling "Gee, there really wasn't anything else he could have done. God, we have to fix our political system, because there really isn't anything one committed individual can do."

    When you have a president who wouldn't even use recess appointments for the first year of his presidency-- who appeased terrorists-- and kept doing it every time they upped their demands, it's really hard to sell people on the notion that it's all the fault of Mitch McConnell and John Boehner.

    I understand if you don't want to advocate primarying the guy or tell every liberal "Call the White House and tell them you're sitting out this election until they get serious about pressing a liberal agenda." No reason to go do that at this point... Obama is toast and we just have to hope that Rick Perry (who at least doesn't seem to hear the same voices Michelle Bachmann does) has some interest in governing.

    But stop pretending that Obama is something more than a black Jimmy Carter, who lied to voters about what he really wanted to do, broke every promise he made and ran to the right every time he felt threatened.

    Maybe Harry Reid and Nancy Pelosi would have tried to do more, but let's not get those two decent, hard-working public servants confused with the guy who sees government as some abstract exercise in political science who's too invested in his self-image as high-minded savior to bother to do his job.

  • Texas Aggie on August 03, 2011 6:19 PM:

    There are two problems with this column.

    The first is that even given those numbers, Obama knew the stimulus was inadequate, but he didn't fight very hard to make it adequate.

    The second is that the republicans weren't about to go along with anything. Whosis from Maine picked a number out of the air and they went with that. It had no relation to the economy, it just sounded like a good number, and there is no reason to expect that knowing the real situation would have made a bit of difference.

  • bluestatedon on August 03, 2011 6:49 PM:

    "(who at least doesn't seem to hear the same voices Michelle Bachmann does)"

    Don't deceive yourself—Governor Goodhair may not hear the exact same voices as Michele, but the voices he hears are no less crazy.

  • Josef K on August 03, 2011 7:07 PM:

    I think the growing number of modern 'Hooverville' tent cities was another clue.

    Guess we'll have to wait until another Bonus Army marches on the Capitol (and gets tear-gassed and mowed down by machine gun fire on national television) before Congress takes notice.

    Interesting times, indeed.

  • Doug on August 03, 2011 8:05 PM:

    Some of the posters here are beyond pathetic!
    Let's see:
    1) President (-elect) Obama's advisors were given numbers that underestimated the fall in employment by roughly 25% and the contraction of the economy by over 50%. However,
    2) the measures taken by the Obama administration were based on those figures/estimates and
    3) those measures did STOP the collapse, but didn't turn the economy around.
    4) Why not? Because the measures proposed by the Obama administration, based on the data they had available to them, were designed to meet a less severe increase in unemployment and decrease in the economy.
    5) So, having made decisions based on the only evidence, however faulty, available, it's STILL all President Obama's fault? Do you think a President, upon taking the Oath of Office, immediately becomes omniscient or are you simply suffering that badly from ODS?
    Reality-based, my *ss...

  • Rick B on August 03, 2011 8:26 PM:

    @Equal Opportunity Cynic -- If the numbers handed to Obama as he took over were wrong there was no way the Obama people could know their stimulus package would be ineffective. Then too, remember the conservatDem Senators taking the already minimal stimulus and cutting it by $400 billion? Lieberman, Nelson, Snowe and other idiots from the rich man's club.

    -- Why were the numbers inadequate? My bet - they were minimizing the mess that Bush/Cheney had left behind. This was NO ACCIDENT! The Republicans were cleaning up their mess by shoving it into ratholes as they left so they wouldn't be recognized as being utter complete stupid incompetents acting in bad faith.

    -- Krugman had better data. He probably knew who to trust. Academics who falsify data tend to lose their jobs. Politicians get promoted. This was politician-originated data.

    @Ron Buyers -- we have had food stamps and unemployment benefits during the great recession. Neither existed during the Depression. And by the way, the food stamps are run by the Dept of Agriculture because they keep supermarkets from collapsing due to lack of customers. That was and remains the main reason for food stamps. The program supports Agribusiness.

    @CDW -- Obama got elected as a politician planning to pass health care. He staffed up to do that, and was light on economics talent. The surprise of the Wall Street collapse caught him flat-footed, so he hired Wall Street Bankers instead of economists and then he politically passed the ACA. Barely. It used up all his legitimacy won in 2008, and his too small inner circle of (political) advisers has never been expanded to include real economists Obama trusts. Remember, he is a lawyer and a politician with little knowledge of economics. He also though the Republicans could be dealth with as he did in the Senate.

    Without the Wall Street banks we'd all be living on streets somewhere if we were living anywhere at all. The money that kept the economy had frozen up solid, and no one but the banks could change that. He hired bankers to save the economy and the bankers seem to have prevented him from listening to real economists. No one Obama trusts is an economist and he doesn't seem to have the connections needed to hire one for his staff.

    I hope he has wised up some, but frankly I don't recall any President since Nixon who seemed to learn in office. Clinton had a much larger group of advisers and might have learned, but Obama?? He thought he was going to be God's gift to American politics and on that count the Republicans have handed him his head.

    @fake fake al -- without jobs and demand for consumer goods and services the businesses are not going to spend the $2 trillion they have sitting in cash to create more jobs. My bet is 90% or greater chance of second dip because the Republican leaders know that is the only way they can win the Presidency (with Romney and a social conservative - Perry?) and the followers live for the lies that make Obama look bad.

    @Woodrow L. Goode, IV

    An example of Obama going to the mat for working peole was his Christmas deal extending the tax cust for the wealthy IF the Republicans also extended long term unemployment benefits. Not much, but not "no example of this this president or this administration fighting for working people-- or people who aren't working."

  • Forrest Leeson on August 03, 2011 10:07 PM:

    "Because the measures proposed by the Obama administration, based on the data they had available to them, were designed to meet a less severe increase in unemployment and decrease in the economy."

    They weren't even designed to meet it; a big part of the Administration's plan was an assumption that public optimism would save the day.

    "The money that kept the economy had frozen up solid, and no one but the banks could change that."

    And did they lend it out, or did they buy Treasuries with it? Far better to have put the money to a public works program.

    "An example of Obama going to the mat for working peole was his Christmas deal extending the tax cust for the wealthy IF the Republicans also extended long term unemployment benefits."

    Had the Bush tax cuts been eliminated then there would have been far less deficit hype now. And probably better employment numbers.

  • Beetwasher on August 03, 2011 10:34 PM:

    I imagine Bushco. was less than forthcoming about the actual data, and I have to presuppose their "bookkeeping" was less than accurate.

    So it's quite likely that the Obama Admin. was working with some serious flawed, if not outright fraudulent data from the get go that they had to rely on Bushco. to provide. And boy did Bushco. provide it.

  • FoxyOldBroad on August 03, 2011 10:57 PM:

    Has everyone forgotten WHY the stimulus (Recovery Act) was not larger? Do we or do we not have a Congress. Did we or did we not have Repubs and BLUE DOGS who positively REFUSED to vote for a larger stimulus. So exactly how is this all President Obama's fault?

  • NealB on August 04, 2011 12:20 AM:

    Nonsense. The catastrophic facts were widely available. The Obama administration willfully chose to deny them. Krugman and others were reporting the "catastrophic" proportions of the economic collapse, on a daily basis during late 2008 and early 2009. The catastrophic numbers were widely known. Obama knew them too. Not saying he had a clue what the numbers meant, but they were widely reported, and widely understood. Then. Even if Obama's an economic idiot, which he clearly is, it's damnable that his economic team failed as well.

  • Yoni on August 04, 2011 12:29 AM:

    Usually the statistics are adjusted within one month. So this story is not convincing at all. Rather the truth is that even with perfect data economic models worth nothing.
    I am a theoretical physicist working on complex and chaotic systems. And I tell everyone who want to listen: Macro economics systems cannot be predicted. Period. Otherwise Bernanke would have known about the looming crisis a long time before it happened. Any Economist who tells you otherwise is misleading you (and protecting his discipline and job, of course).

  • A on August 04, 2011 1:29 AM:

    "an economic downturn Obama’s economists that was “a mere serious recession,” when it was in fact “a cataclysmic collapse.”

    So, not only were economists not able to predict it, they didn't know what was going on at the time or indeed after the fact. Why are we supposed to listen to them again about anything?

  • gone_west on August 04, 2011 1:50 AM:

    Faulty statistics as a reason for not sizing the stimulus properly is revisionist crap probably authored by the Friends of Larry Summers at Summer's suggestion.

    A New Yorker magazine article covered the modeling and planning about the stimulus and the decision to go with an amount that was inadequate. Romer wanted a much larger stimulus of at least $1.2 trillion. Summers did not. Summers won the debate, but was absolutely, postively wrong in a stupid assed, arrogant sort of way just as when he teamed with Greenspan and Geithner to lead the charge to prevent implementation to regulate derivatives.

    http://www.newyorker.com/reporting/2009/10/12/091012fa_fact_lizza

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