Thursday, June 7, 2012

Why the Wall Street Journal's Op-Eds Suck

Some of you may know this already, but I have very little love in my heart for the Wall Street Journal nowadays. Especially the opinion pages. If you're ever looking to read something terrible, go there. What brought this tirade on, you might ask? Well, this piece (click here if the first link didn't work, go to the WSJ article at the top of the results) by Glenn Hubbard and Phil Gramm did. Let's take it apart, shall we?

First up:
"Twice in postwar America, deep recessions have driven the unemployment rate to 10%. In the 1981-82 recession, the unemployment rate soared to 10.8%. In the 2007-09 recession, it peaked at 10%."
Okay, that's a simple fact. But wait:
"Fifty-three months after the start of the 1981-82 recession, total employment in the U.S. was up 7.5 million, or almost 7.5% higher than when the recession began. The labor-force participation rate rose to 65% from 63.8%, as optimism about the future pulled potential workers into the job market. Real per capita gross domestic product increased by $2,870 and was 11% higher than when the recession started.
Fifty-three months after the start of the 2007-09 recession, however, total employment in the U.S. is still down four million jobs, or 2.7% lower than when the recession began. The labor-force participation rate has dropped to 63.8% from 66%, as discouraged workers have exited the labor market. Real per capita GDP has declined by $964 and is 2.2% lower today than when the recession began.
If the current economy had matched the job-creation rate of the recovery from the 1981-82 recession, there would be 15 million more Americans at work today, 8.3 million more Americans would be in the labor force, and per capita GDP would be $5,792 higher than it is today.
The superior job creation and income growth following the 1981-82 recession are all the more striking as they occurred against the backdrop of restrictive monetary policy. The Federal Reserve tried to beat back double-digit inflation in the early 1980s with tight money. Prime interest rates averaged 11.9%, and the three-year Treasury note rate averaged 11.2% during the recovery. By contrast, today's Fed has an expansive monetary policy with record low interest rates, a 3.2% prime rate and a 0.3% three-year Treasury note rate."
Okay now wait just a second. First of all, they're comparing two recessions that are fundamentally different. The recession of 1981-82 was brought on by the Fed raising interest rates to the stratosphere to fight inflation. The recession of 2007-09, by contrast, was not. Financial crisis, housing bubble, Fed didn't stabilize well enough--you know the drill.

I guess the thing that annoys me the most about this article is the paragraph where they say:  
"The superior job creation and income growth following the 1981-82 recession are all the more striking as they occurred against the backdrop of restrictive monetary policy."
This is highly misleading. They mention that yes, interest rates were relatively high (federal funds rate was 9% in late 1982), but they don't seem to mention that at their peak in 1981 they were at nearly 20%. That left a lot of room for the Fed to cut interest rates. That's a lot of monetary stimulus. By contrast, in 2008, interest rates were around 5%, which didn't leave a whole lot of room for the Fed to cut rates. So the superior job creation under Reagan is less impressive once you realize that interest rates were cut steadily throughout 1982. 

So, really, the job creation occurred in large part due to what happened with interest rates, not in spite of them. In other words, the economy started to rebound once Paul Volcker took his foot off the brakes. The Reagan tax cut surely helped, but to make it seem as if Reagan's policies were working in spite of such a tight monetary regime serves only to mislead people. The tax cut probably made the recovery faster, but to ignore the fact that rates were cut steadily throughout 1982 is to ignore a critical reason for why the recovery was so rapid. They also omit the fact that Reagan raised taxes consistently from 1982 to 1987.

They also seem to ignore the debt overhang in their comparison of the two recessions. In the early 1980s, private debt was not nearly as constraining as it is today. 

I know it may be slightly hard to see because of the scale, but you can make out how in the early 80s, household and business debts were all much lower than they are today as a percentage of GDP. In particular, take a look at the financial sector's debts. Simply put, debt wasn't nearly the constraint that it is today in the 1982 recovery.

Gramm and Hubbard also go on to claim that Romney, like Reagan, is a champion of lower deficits. Reagan the deficit-buster, eh?

Yes, deficits were large during the recession, just like they are now, but they didn't go back to pre-recession levels after it ended. In fact, this CBO report from 1983 shows that the structural deficit (that is, the deficit at full employment) dramatically increased during Reagan's term. I don't know where they get this whole idea that Reagan was a deficit-fighter during his term, because it sure doesn't look that way to me.

I guess my point in this post, besides showing you how crappy the WSJ's Opinion page has become, is that this particular article seems to ignore huge facts that differentiate the two recessions and subsequent recoveries. Do I think that the recovery under Obama has been lackluster? Yes, I really do. To some degree I think that's his fault for not always sticking to his guns. But this comparison by Hubbard and Gramm is just transparently misleading. It prescribes a cure for our current economic malaise that is based off of a demonstrably faulty comparison. Even Bruce Bartlett--one of the primary architects of of the 1981 Reagan tax cut--thinks that they're wrong! 

Wall Street Journal, you've done it again.