Can more government “heal the economy”?
posted at 1:21 pm on June 11, 2012 by Ed Morrissey
So says E. J. Dionne of the Washington Post, who wonders why more Democrats aren’t saying the same thing that Barack Obama did last Friday:
Why don’t Democrats just say it? They really believe in active government and think it does good and valuable things. One of those valuable things is that government creates jobs — yes, really — and also the conditions under which more jobs can be created.
You probably read that and thought: But don’t Democrats and liberals say this all the time? Actually, the answer is no. It’s Republicans and conservatives who usually say that Democrats and liberals believe in government. Progressive politicians often respond by apologizing for their view of government, or qualifying it, or shifting as fast as the speed of light from mumbled support for government to robust affirmations of their faith in the private sector.
Dionne makes almost no attempt to prove this idea, however. He offers unsubstantiated claims that Alexander Hamilton and Abraham Lincoln reads the interstate commerce clause in the same way FDR did, and wanted “creative” federal government (an argument which, to be fair, he makes at greater length in his book Our Divided Political Heart). He doesn’t mention any solid economic proof of his theory that more government produces better economic outcomes except a statement from CBO director Doug Elmendorf that economists believe joblessness would have been worse without the stimulus, which is not just damning with faint praise but also not quite the same argument.
Opposition to government isn’t the solution. Opposition to government was and remains the problem. It is past time that we affirm government’s ability to heal the economy, and its responsibility for doing so.
As it happens, we can test this theory. The Minneapolis Federal Reserve has a handy tool for comparing the trajectory of post-WWII recessions and recoveries in terms of GDP and job creation. We can all agree that Obama implemented the most aggressive strategy for doing what Dionne proposes in that period; in fact, government as a share of GDP is at a post-WWII high. That allows us to test the success of that strategy against those which focused on the private sector to see what succeeded more and faster. Let’s first compare from the point of recovery on jobs:
The red line is the Obama recovery, which started in June 2009, four months after the passage of the $800 billion stimulus bill. It’s the second-worst recovery in modern history in job growth, only ahead of the 2001 recovery where unemployment didn’t drop nearly as deeply. Next, let’s look at GDP growth:
The Obama recovery comes in dead last.
Note that I’ve left out the 1980 recession as it double-dipped into the 1981 recession, and which fully occurred in Ronald Reagan’s term. The recovery of jobs from the 1981 recession was in fact the third-fastest recovery since World War II; only 1948 and 1957 beat it. The recovery in GDP in 1981 was the second-fastest in that period. The 1981 recovery came from economic policies that focused on enabling the private sector, rather than assuming that government could “heal” an economy through central control.
The greatest lesson of the 20th century, at least in economics, was the triumph of F. A. Hayek and the exposure of the fallacy of central control of economies. The only people who still think that government can “heal” economies through central control and planning are the true believers, for whom evidence and experience means little or nothing.
Update: The proper argument here is the difference in opportunity between the two approaches. The US economy has added jobs in the past three years since the recovery, obviously — about 3.1 million of them. However, as I repeatedly point out, that averages out to 86,300 a month, far below the 125K-150K level needed to keep up with population growth. The opportunity cost between the Reagan and Obama approaches has been enormous, and represents a lost opportunity to avoid years of pain and social ills.