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Slow recovery from recession has been par for the course
Many economists agree that despite some missteps, the measures the Federal Reserve and White House took early in Mr. Obama’s term to re-capitalize and stabilize failing banks, prevent the failure of two of Detroit’s three car companies, and stimulate growth with $800 billion in tax cuts and spending increases, helped to prop up the economy and prevent an even worse economic debacle.
The studies of private and public debts by Mr. Reinhart and his colleagues are widely respected within the economics profession and often cited by analysts and politicians alike. Many GOP candidates, while apparently shunning his conclusions about the depressing effects of the housing bust on U.S. growth, have cited his conclusion that mammoth government debts such as the ones the U.S. is accumulating threaten to hold back growth for years to come.
Russ Koesterich, analyst with iShares, cites the Reinhart studies in saying he expects the U.S. economy to be “stuck in the slow lane” for years.
“In the aftermath of credit bubbles, both housing and labor markets take a very long time to recover, and government debt typically skyrockets,” he said. “It could take five to 10 years for the housing market to recover — yet another sign of how the current economic recovery is likely to be anemic and uneven.”
Prominent economists on Mr. Romney’s team point to studies by economic gurus John F. Cogan and John B. Taylor of Stanford University that concluded Mr. Obama’s stimulus program failed to jump-start a more robust recovery because it did not address structural problems in the tax code, regulations and entitlement programs.
“We are stuck in a low-growth trap,” said Mr. Taylor in a paper co-written by R. Glenn Hubbard of Columbia University and N. Gregory Mankiw of Harvard University, because of “the administration’s economic errors and poor choices … [the] Obama administration chose to emphasize short-term fixes — ineffective stimulus, cash for clunkers, myriad housing programs that went nowhere, and a rush to invest in ‘green’ companies irrespective of cost — rather than restoring long-term growth and productive private-sector job creation.”
The Romney economists contend that, if the economy had been handled correctly by the White House, it would have surged back to life like it did after a deep, two-year recession during President Reagan’s first term.
But other economists point out that the 1981-82 recession was induced by the Federal Reserve, which hiked interest rates to double-digit level to fight raging inflation at the time. It did not result from a financial crisis like the Great Recession.
Harm Bandholz, economist at Unicredit Research, accuses the Romney economists of “ignoring economic reality — and the facts” while “playing politics” in a heated effort to clinch a victory in the close-fought race.
“Blame the president for many things — but not for the weak economy,” he said. “To be sure, there are a lot of things that the Obama administration could have done better over the last four years,” such as including fewer welfare payments for the unemployed in his stimulus bill and more traditional road-building projects that could have put to work millions of construction workers idled by the housing bust.
Mr. Obama has been pushing for an additional round of spending on infrastructure in his latest stimulus legislation, which has gone nowhere in Congress.
“There is probably not much that the administration could have done” beyond that, Mr. Bandholz said. “Many economists predicted an anemic recovery right from the start,” he said, citing the studies by the IMF, the Reinharts and Nomura Bank’s Richard Koo.
U.S. consumers, saddled with more debt than assets after the financial crisis, had to reduce their debts and rein in spending for a long period to regain financial health, he said. Since consumers are the main engine of growth driving the economy, that inevitably led to slower growth.
“The only way for the government to cushion the impact on total demand is deficit spending,” he said.
Now that consumers have reduced their debt loads significantly and home prices are starting to rise again, the economy is poised to start posting stronger growth next year — regardless of who is president, Mr. Bandholz said.
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