Politics and economic policy in the age of political science

Reading the London Review of Books, I came across this interesting essay by historian Adam Tooze about the transition of Paul Krugman from 1990s snobby center-left academic economist to 2000s angry left-wing pundit. This is something that’s puzzled me for awhile (see for example here and here), and Tooze give a plausible account of Krugman’s transformation as explainable by a combination of political and economic events.

There was one thing that Tooze didn’t get to, though. Part of his story is the disappointment of Krugman and others on the left because the Obama administration’s 2009 economic stimulus package wasn’t as big as they wanted it to be. It’s not clear how much Obama should be blamed for this, given the willingness of Senate conservatives to use the filibuster rule, but let me set that aside for a moment.

Right now I want to remind you of my theory of Obama’s motivation in 2009 to keep the stimulus from being too big. I suspect that Obama advisor Lawrence Summers, or some part of Summers, feared that a big stimulus at the beginning of Obama’s first term would work all too well, leading to a 1978-style economic expansion followed by a 1980-style dive. I’m sure that Summers’s preferred outcome was steady economic growth, but given all the uncertainty involved, I wouldn’t be surprised if he preferred to err on the side of a lower stimulus to avoid overheating the economy. Here’s what I wrote on the topic back in 2010:

Why didn’t the Democrats do more?

Why, in early 2009, seeing the economy sink, did Obama and congressional Democrats not do more? Why didn’t they follow the advice of Krugman and others and (a) vigorously blame the outgoing administration for their problems and (b) act more decisively to get Americans spending again? . . .

Several Democratic senators did not favor the big stimulus. Part of this can be attributed to ideology (or, to put it in a more positive way, conservative or free-market economic convictions) or maybe even to lobbyists etc. Beyond this, there was the feeling, somewhere around mid-2009, that government intervention wasn’t so popular—that, between TARP, the stimulus, and the auto bailout, voters were getting a bit wary of big government taking over the economy. . . .

On not wanting to repeat the mistakes of the past

But didn’t Obama do a better job of leveling with the American people? In his first months in office, why didn’t he anticipate the example of the incoming British government and warn people of economic blood, sweat, and tears? Why did his economic team release overly-optimistic graphs such as shown here? Wouldn’t it have been better to have set low expectations and then exceed them, rather than the reverse?

I don’t know, but here’s my theory. When Obama came into office, I imagine one of his major goals was to avoid repeating the experiences of Bill Clinton and Jimmy Carter in their first two years.

Clinton, you may recall, was elected with less then 50% of the vote, was never given the respect of a “mandate” by congressional Republicans, wasted political capital on peripheral issues such as gays in the military, spent much of his first two years on centrist, “responsible” politics (budgetary reform and NAFTA) which didn’t thrill his base, and then got rewarded with a smackdown on heath care and a Republican takeover of Congress. Clinton may have personally weathered the storm but he never had a chance to implement the liberal program.

Carter, of course, was the original Gloomy Gus, and his term saw the resurgence of the conservative movement in this country, with big tax revolts in 1978 and the Reagan landslide two years after that. It wasn’t all economics, of course: there were also the Russians, Iran, and Jerry Falwell pitching in.

Following Plan Reagan

From a political (but not a policy) perspective, my impression was that Obama’s model was not Bill Clinton or Jimmy Carter but Ronald Reagan. Like Obama in 2008, Reagan came into office in 1980 in a bad economy and inheriting a discredited foreign policy. The economy got steadily worse in the next two years, the opposition party gained seats in the midterm election, but Reagan weathered the storm and came out better than ever.

If the goal was to imitate Reagan, what might Obama have done?

– Stick with the optimism and leave the gloom-and-doom to the other party. Check. – Stand fast in the face of a recession. Take the hit in the midterms with the goal of bouncing back in year 4. Check. – Keep ideological purity. Maintain a contrast with the opposition party and pass whatever you can in Congress. Check.

The Democrats got hit harder in 2010 than the Republicans in 1982, but the Democrats had further to fall. Obama and his party in Congress can still hope to bounce back in two years.

Avoiding the curse of Bartels

Political scientist Larry Bartels wrote an influential paper, later incorporated into his book, Unequal Democracy, presenting evidence that for the past several decades, the economy generally has done better under Democratic than Republican presidents. Why then, Bartels asked, have Republicans done so well in presidential elections? Bartels gives several answers, including different patterns at the low and high end of the income spectrum, but a key part of his story is timing: Democratic presidents tend to boost the economy when the enter office and then are stuck watching it rebound against them in year 4 (think Jimmy Carter), whereas Republicans come into office with contract-the-economy policies which hurt at first but tend to yield positive trends in time for reelection (again, think Ronald Reagan).

Overall, according to Bartels, the economy does better under Democratic administrations, but at election time, Republicans are better situated. And there’s general agreement among political scientists that voters respond to recent economic conditions, not to the entire previous four years. Bartels and others argue that the systematic differences between the two parties connect naturally to their key constituencies, with new Democratic administrations being under pressure to heat up the economy and improve conditions for wage-earners and incoming Republicans wanting to keep inflation down.

Some people agree with Bartels’s analysis, some don’t. But, from the point of Obama’s strategy, all that matters is that he and his advisers were familiar with the argument that previous Democrats had failed by being too aggressive with economic expansion. Again, it’s the Carter/Reagan example. Under this story, Obama didn’t want to peak too early. So, sure, he wanted a stimulus–he didn’t want the economy to collapse, but he didn’t want to turn the stove on too high and spark an unsustainable bubble of a recovery. In saying this, I’m not attributing any malign motives (any more than I’m casting aspersions of conservatives’ skepticism of unsustainable government-financed recovery). Rather, I’m putting the economic arguments in a political context to give a possible answer to the question of why Obama and congressional Democrats didn’t do things differently in 2009.

Anyway, this is what I think Tooze is missing in his story. He talks about politics and he talks about economics. He recognizes that economic policy has a political element, but I don’t think he’s fully catching on that policies can be set based on anticipated political consequences of economic conditions—and, for that, I think political science research is relevant. Or, should I say, policymakers’ understanding of political science research is relevant. Sure, everybody knows about juicing the economy during an election year, but the idea of not going too fast because you want to rebound back in 4 years, I think that’s a real Carter vs. Reagan lesson, reinforced by research such as that of Bartels. The funny thing is that now it seems that even moderate Democrats want a big stimulus right away to avoid what they see as the negative political consequences deriving from Obama not going big in 2009. Always fighting the last war. Not that I have any policy recommendations of my own; here I’m just trying to trace some logical motivations.

P.S. Tooze is a professor at Columbia University but I’ve never met the guy. He’s in the history department. I guess Columbia’s a pretty big place, and there’s a lack of complete overlap among the historians who study American politics and the political scientists who study American politics. I’ve never met Eric Foner either. I looked up Tooze on Wikipedia and . . . his grandfather was one of those upper-class British communists! I wonder if he was the model for any of those John Le Carre characters. It also says that he (Tooze, not the grandfather) used to teach at Jesus College so maybe he knows Niall Ferguson. Given their much different politics, I imagine they don’t get along so well.