Why was Obama so wrongly optimistic on the economy?

July 1, 2009

So David Leonhardt of the NYT attempts to explain why the Obama administration was overly optimistic about the economy in its now-infamous “unemployment will not go above 8 percent” forecast:

Here are two possible explanations that the administration was so wrong. And sorting through them matters a great deal, because they point in opposite policy directions. The first explanation is that the economy has deteriorated because the stimulus package failed. Some critics say that stimulus just doesn’t work, while others argue that this particular package was too small or too badly constructed to make a difference. The second answer is that the economy has deteriorated in spite of the stimulus. In other words, the patient is not as sick as he would have been without the medicine he received. But he is a lot sicker than doctors realized when they prescribed it. To me, the evidence is fairly compelling that the second answer is the right one.

Henry Blodget sees it this way:

We suspect Obama, Summers, Geithner & Co. just decided that they had to issue rose-colored projections about the unemployment rate and recovery or they would never have a hope in hell of ramming such huge spending increases through.  And if the forecasts proved optimistic?  Well, by then, maybe everyone would have forgotten.

My spin:  It’s not so much that a more negative forecast would have prevented Obama from spending large amounts of money, it’s that he would have been forced to tilt the stimulus more in favor of tax cuts which work a lot of faster  than government spending (though both are pretty inefficient as “stimulus”).

And Obama wanted to spend billions on his “investment agenda (healthcare, education, infrastructure), not tax cuts.  (And if he had spent the $2 trillion that some liberals wanted on stimulus, it surely would have crowded out the rest of his agenda, plus rattled the bond markets.) So he gambled that monetary policy would keep the economy from getting as bad as it has. And he lost. Did Team Obama purposely give a bad forecast, or did its old fashioned Keynesian approach merely lead it astray? Good question. Either way, it’s the Obamacrats’ economy now.

22 comments

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The main problem is, that the stimulus is basically not a jobs bill. It pretends to be, but it is not. Most of the stimulus money, and the bailouts, have probably only helped retain some jobs, not create a net increase in employment.

The real locus of job loss, is most likely in the retail sector and other low-end positions. Yes, there are manufacturing and services losses, but the retail sector is the majority. This is because during the Clinton & Bush years, retail had a major expansion. It was very easy to find retail jobs. Now that the consumer is retrenching, and retailers failing, many of those jobs are now disappearing. But how valuable were they? They were mostly low wage subsistence positions. Basically ephemeral, and masked what was actually much higher unemployment/underemployment figures. Now that the retail veil has been lifted, we are seeing closer to actual numbers.

The jobs that the stimulus bill is creating will not help those laid off from the retail sector, or manufacturing and finance. It is very narrowly targeted to the engineering and construction sectors. Green energy will not help, because again it is directed towards eng. & const. Unless u retrain all those laid-off retail clerks to become engineers, then it will make no difference. Engineering companies will hire foreigners with eng. degrees to complete projects.

Stimulus bill or not, we are now facing a significant and painful correction. Moving away from a consumer based society will take time, and job losses will continue. It will take years to create the domestic workforce Obama envisions, and things will likely get worse before they get better.

Posted by greg | Report as abusive

Great post & spin. The administration did gamble that the Fed’s heavy lifting would carry the day and the Fed has been successful to a point, but it just keeps getting back to that ’09 Stimulus Plan. There is no way to mask it’s ineffiiciencies and misdirection. When Obama was asked about a second Stimulus and replied that we would have to wait and see how the first one goes (and the “first” one was actually a second infusion) — that was a completely illogical response. The purpose & effects of a Stimulus should be felt sooner rather than later. If there has been no or limited response, then the Obama Stimulus failed. Just compare the success of the first effort in November — it stopped the free fall, stabilized the banking & credit system, permiited somehing of a regrouping. The taxpayer is supposed to make money on that deal too. The ’09 Stimulus looks to be the exact polar opposite — it’s not targetted, timely or efficient and has yet to yield positive results.

They should be more proactive, evaluating & managing how it is going, announcing changes — moving up spending in “X” and revising funds to “Y”. The D.C. demeanor is oddly passive, like the Bill was written in stone and we just have to see how it goes.

Posted by Siobhan Sack | Report as abusive

Any honest appraisal of the “stimulus” has to admit first and foremost that it was nothing of the sort nor was it ever intended to be by Obama and Pelosi.

The “stimulus” bill which nobody read was simply the Democrats using the Emmanuel strategy of taking advantage of a crisis and the boobs which support the Democrats to funnel taxpayer money and borrowed money to their backers. Nearly all the money which was in the bill will be spent around 2010 and 2012 by groups who like ACORN whose primary functions are stealing taxpayer funds to get Democrats elected and providing places for Democrats to get lucrative pay for pushing the leftist agenda on an unsuspecting American populace.

Posted by LogicalUS | Report as abusive

[...] James Pethokoukis who writes for Reuters offers an interesting analysis on who gets credit or blame for the economy going forward, and why: It’s not so much that a more negative forecast would have prevented Obama from spending large amounts of money, it’s that he would have been forced to tilt the stimulus more in favor of tax cuts which work a lot of faster  than government spending (though both are pretty inefficient as “stimulus”). [...]

Economics are very simple, income has to equal or exceed expenses in order to stay in business. All the theories like Keynesian Economics are attempts at cheating the fundamental laws of economics and are doomed to failure. They are like searching for the perpetual motion machine, they have a lot of appeal and may prolong the day of reckoning, but that day will eventually come.
God Bless America

Posted by Tim | Report as abusive

Tim is obviously correct. To this point, neither the Bush nor the Obama administrations have done or allowed anything to be done that would in any way address the underlying problems in the economy. Paulson/Bernake/Bush created the TARP as an emergency measure to preclude catastrophic systemic failure of the global financial system. But their actions did not correct anything.

The crisis averted, a responsible government would ensure that unsustainable debt on bank balance sheets be either repaid or defaulted on. Debt can only be repaid or defaulted on. That’s it. There is no third option. Eventually one of the two will happen, and it seems clear that massive defaults are in the offing. This will cause pain and suffering, but the longer this process is prevented by govt. meddling, the worse things will become.

Posted by Froggy | Report as abusive

Why was he overly optimistic? False premise – he never was, he was simply lying, hehe.

Posted by Midas | Report as abusive

The bottom line is there are laws of economics. One of the things I keep telling my kids is when you mess with the laws of economics, the laws come back to bite you. This is what we are seeing now. This is what we will see as President Obama continues to mess with the laws of economics.

Posted by duggersd | Report as abusive

James, you seem to have omitted one even more likely explanation of why the economy underperformed Obama’s projections: The “stimulus” (as conceived by Obama) was the wrong thing to do, and it made things worse.

Even the *expectation* of what the stimulus is going to do to the economy is causing people to hoard cash and pay down credit instead of buying (so they aren’t holding debt as rates skyrocket), and put off moving into new houses (ditto). This is reinforced by the rational expectation that Obama’s erratic industrial policies are going to continue scaring away capital (the reason lenders aren’t rushing in to help TARP, despite the government making it essentially risk-free).

No, the stimulus was nothing but payola to the favored Democratic constituents. One could darkly surmise that the Administration doesn’t mind things getting worse; it makes an increasingly interventionist government role easier to sell.

Posted by Zumkopf | Report as abusive

The reason the “stimulus” did not work is because you cannot get yourself out of debt with more debt – it’s that simple.
Tax cuts would have helped but O and his Dem cronies can’t do that b/c that’s a Republican answer and if a Republican has a good idea, they will work against it (witness foreign policy).
Bottom line – O got his education from a system that is filled with risk averse people (educators, public employees and social service/non-profit workers) who live off other people’s money. He has zero education in basic economics. Along with living among the elitist who think Europe has all the answers, he’s never had experience with people who really work for a living; people who create jobs; and people who don’t rely on a government system to bail them out of whatever ails them.

He’s simply uneducated.

[...] Obama so wrongly optimistic on the economy? | Blogs | By: Pam On: Jul/1/09 – Leave Your Comment James Pethokoukis » Blog Archive » Why was Obama so wrongly optimistic on the economy? | Blogs |. My spin:  It’s not so much that a more negative forecast would have prevented Obama from [...]

As Janet was hinting at, perhaps the earliest projections – from the very beginning of the 07 race – that he was grossly inexperienced were correct. The Razor surely suggests it. And when you are surrounded by a bunch of (equally) inept yes-men, well…

Here is a scenario:
There are three car companies. Two of which received stimulus money, one did not. Can you guess which one is closer to recovering? If you can’t accept the truth you are a true believer and don’t care if the U.S. turns into a failed socialist country.

Posted by lw | Report as abusive

i find this blog post quite unfair. how is this obama’s economy now?—hes been in office for all of 6 months and inherited the worst recession since the depression for god’s sake! i also find that people who come from this viewpoint are quite hypocritical in that they get very incensed when you attempt to blame president Bush and his de-regulatory policies for the current state of the economy, even though the recession began under his watch. On the one hand we cannot blame Bush, but on the other we can now hoist all the blame upon Obama? Where is the consistency in that?

Finally, the stimulus is a big bill and it requires more than 4 months time to pass a final judgment on it. Those who want to pronounce it dead on arrival are hard to take seriously and clearly bring an agenda to the table.

Posted by ns | Report as abusive

Everyone knows that the way to bring an economy back is to have the federal government borrow massively on expanding itself while pushing through taxes and regulations.

EVERYONE!!

Posted by jukin | Report as abusive

Those monies were spent to the greater glory of Barack Obama. He’s the greatest one is why. It’s petty to judge your Barack Obama in economic terms because of he is so much more bigger than that. You people should be nice or you will be sorry.

Posted by happyfeet | Report as abusive

Interest rates are rising on loans even though we are in a deep recession where economic activity is still declining and unemployment rising. These rising rates discourage consumers and investors. So why are interest rates rising? The Fed is dumping money into the economy and there is a fear that the Government may monetize the huge debt it has run up by printing money.

The stimulus would have worked much better in the form of tax cuts for investors. Tax cuts that allow investors to expense capital projects leverages a lot of private sector money for each dollar of tax revenue reduction. Instead the government approach was an enormous spending on a bail out of state and local government employees, preserve uncompetitive car companies competitive disadvantages and unemployment recipients where there will be no long term return on the investment to help pay off the debt. Thus the fear that the government, lacking tax revenue from a still moribund economy, will have to print money to pay the interst on the enormous debt.

Fears of runaway inflation like the Wiemar Republic in Germany and today\\\’s Zimbabwe discourage investment and the economy will not get well until investment starts growing again.

If we can\\\’t cut taxes, can we at least allow more oil drilling and construction of nuclear power plants so the private sector has at least some incentive to invest the money that has been squirreled away?

Posted by KW64 | Report as abusive

There are three implacable ‘C’s’ that the media manipulation by Obama’s crew cannot touch, and they will prove to be the downfall of the lot, Capital, Climate, and China.
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Posted by kim | Report as abusive

[...] This is a more populist take on the latest boom bust cycle that echoes a post I wrote last year. "We became indebted, in large part, because of a structural imbalance in society, one that skewed incomes, redirected wealth, and encouraged companies and individuals to lever up instead of seeking out and earning higher incomes. At the same time, our unwillingness to say no to great society programs, without raising taxes to pay for them, meant that we became beholden to the bond market for funding ongoing operations, this creating an elevated base of required income to service our rising debt."Why was Obama so wrongly optimistic on the economy? – James Pethokoukis| [...]

The stimulus is not the question. Unemployment projections without the stimulus were below where they are now. The issue was that the CBO projected an end of the recession in Q3 without the stimulus before the bill was passed. The plan was simple; push through a hasty pudding of goodies to buy votes and when the economy turns anyway, take credit. The stimulus has not been spent because it was never intended to stimulate the economy in 2009. It was intended to buy votes in 2010 when the economy had changed on its own.
The only problem is that the CBO’s models were too simplistic. I spent a delightful flight delay on the tarmac with a Harvard economist. She was convinced that good times were right around the corner. However brilliant, she was hoplessly wrong. All mathematical models assume certain items and relationships are constant. That works in normal times pretty well but breaks down specifically when the projections are important. In the real economy when it is under stress the nominal demand for balances, savings rate, normative inventory levels and other critical aspects of behavior are not constant. It also seems that, even if generally correct, the models are out of date. Statistics on the American economy in isolation are less meaningful to making projections each year. The state of the art models are just so last century.

Finally, God bless them, the government in Washington is doing everything FDR did that prolonged the depression. No, wait, they have outdone FDR by an impressive margin. It is really a perfect storm; bad models being applied by corrupt politicians. I hope you brought your umbrella.

Posted by mark | Report as abusive

While it’s a proven fact that Keynesianism does not work — even J.M. Keynes obsessively tweaked his theories to “make them” work — I don’t buy any of the explanations offered by Mr. Pethokoukis on behalf of the Obama administration. I believe they do not understand free enterprise enough to respect its restorative effects on boom-and-bust cycles. True, the Obama stimulus has failed. As mentioned above, you cannot solve a debt crisis by opening the floodgates of debt. Basic economic science instructs (from experience) that the Keynesian multiplier becomes a two-edge sword: Its stimulus on the economy crowds out private investment. I believe two greater factors in the further erosion of the economy are the endless stream of daily White House orders and edicts and a mainstream media that refuse to hold bad policies and their enacters accountable.

Posted by myron monk | Report as abusive

[...] Pethokoukis: In a range of articles here, here and here, I point out where Obama went wrong on the [...]

The only thing the stimulus bill was written to do was to stimulate the federal government. Stimulate the private sector? Create real jobs? Get the economy going again? Please.

Posted by Serf-er Dude | Report as abusive

The answer is simple. Print more money, have a few more fake townhall meetings, promise more GIvernment, and lastly borrow more money. The stimulus package put together in a few days and never read was a payback to the folks who elected Obama. It was political payback put on the American Credit Card. It was not to create jobs it was to fill the pockets of the politcally connected. Follow the money!!

Posted by airandee | Report as abusive

[...] James Pethokoukis on “what happened to the 8% unemployment Obama promised us?”: “Did Team Obama purposely give a bad forecast, or did its old fashioned Keynesian approach merely lead it astray? Good question. Either way, it’s the Obamacrats’ economy now.” (h/t HotAir) [...]

To ns (at 11:42): You are right – the current economic situation is not all Obama’s fault. However, with each passing day and the excessive spending that is driving up our debt, driving down the dollar’s value, etc., we are quickly moving to the point where it will be Obama’s economy, and it’s not looking like a very pretty sight, unless you want to copy European-style socialism, and we all know how well that has worked out.

Posted by Steve from Wisconsin | Report as abusive

OMG did you really use Henry Blodget to back-up your point? Henry Blodget!?!?! That son-of-a-bitch lacky who has a life-time ban from the SEC for stock manipulation, mail-fraud, insider trading, and wire-fraud while a top director at a major (and now defunct) trading house? A guy who has such an enormous mouth and grating attitude that he makes Jim Cramer look like a Buddhist monk!! How can I take anything you say seriously again? Maybe you should join Rush Limbaugh’s radio show and be his side-kick…

Posted by the Shah | Report as abusive