Who's Lying?

 "Who's lying?" is one of the stand-out themes of the Presidential race.  My view is that the most important lies can be found in the conventional stories to afix blame for the 2008-09 financial crisis/recession and for the post-recession anemic recovery.   Convention fixes the blame for 2008-09 on banks and for the anemic recovery on a natural consequence of a financial-induced recession.  The first story fails to take account of macroeconomic considerations as well as major policy mistakes.  The second story fails to take account of policy actions -- both by Democrats and Republicans -- that had the unintended consequence of hurting economic growth.  Wrong explanations lead to bad policy prescriptions.  Here are some reasons I believe help explain the anemic recovery since 2009 -- and provide hints on what policy actions could best remedy it:

At least some of the weakness in post-Great Recession GDP Growth can be attributed to 5 policy-related actions — and is not a natural consequence of a financial-induced recession:

1.  Actions to cut the Federal Deficit — a Republican concern but, in fact, a wrong target.  The decline in Real Federal Govt Purchases cut annual Real GDP Growth by 1% pt in each year between 2011 and 2013.

2.  Administrative and Executive actions aimed at targets that hurt GDP Growth.  The most important may have been clamping down on the financial sector.  But, there are other industries that were curtailed by these actions, as well — particularly in the energy sector.  While these targets might be desirable they nevertheless had anti-growth effects.

3.  Tighter lending standards by banks, as they were pressured or required by regulators to curtail risk taking. 

4.  Increased regulations and legislative-related increases in labor costs have impaired small business formation.

5.  Anti-business rhetoric by Obama in 2009-10.  This may have been important.  I was surprised to learn that FDR maintained anti-business rhetoric in his speeches throughout the 1930s.  This may help explain why the US economy did not recover more quickly from the 1931 depression than it did.  Its failure to do so has been a puzzle for economists.

Moreover, I think economists like Larry Summers are overselling the effectiveness of fiscal stimulus, like infrastructure building.  Fiscal stimulus will not be as powerful as it was years ago.   This is because the drain from imports will reduce the multiplier/accelerator effects of the stimulus.

       a.  Also, Summers’ claim that increased infrastructure building will lead to higher productivity growth is questionable.  Productivity has not been amenable to modeling in the past — its speedup/slowdown is not easily explainable.  My own hunch is twofold:  /1/ the clamping down of banking not only  held back a high-productivity industry but likely undercut productivity efforts in other industries, as well.  /2/ Almost all of the job growth has been in low-productive services -- which may have resulted in part from a surge in back-office health-care jobs related to insurance filings with ObamaCare and in part from not being capable of being outsourced abroad or eliminated by technology.

6.  Nevertheless, I think the “natural” window for the Fed to hike rates is when fiscal stimulus is implemented that will substitute for the easy monetary policy.   Assuming the new administration implements fiscal stimulus in H117, the window for Fed tightening would be H217.