Two Kinds of Recessions

By Michael Barone
NationalReview.com

Heading into what appears to be a disastrous midterm election, the Obama Democrats profess to be puzzled. The president’s record, they insist, is moderate, accommodating — if anything, overcautious. So why do most American voters seem to be angrily rejecting it?

That’s one way of looking at it. Another way is to say that the Obama administration and the Democratic Congress have increased government’s share of Gross Domestic Product from 21 percent, where it’s hovered for the last several decades, to about 25 percent, and have put the national debt on a trajectory to increase from 40 to 90 percent of GDP.

But, say the Obama Democrats, shouldn’t ordinary people — in particular, shouldn’t the blue-collar working class — be grateful to a government that tries to “spread the wealth” (Obama’s words to Joe the Plumber) in difficult economic times?

They used to be, the argument would go. In post–World War II America, voters regularly moved toward the Democrats in recession years.

There’s a difference, however, that has escaped Obama Democrats but perhaps not ordinary voters.

In recessions caused by oscillations in the business cycle from the 1940s to 1970s, voters were confident that the private-sector economy could support the burden of countercyclical spending on things like unemployment insurance  and public-works projects.

That spending would stimulate consumer demand, the thinking went, and once inventories were drawn down, manufacturers would call workers back to the assembly line. The recession would be over.

But it’s been a long time since we’ve had a major business-cycle recession. The recession from which we’ve technically emerged, but which seems to most voters to be lingering on, is something different, the result of a financial crisis.

And financial-crisis recessions tend to be a lot deeper and more prolonged than business-cycle recessions, as economists Carmen Reinhart and Kenneth Rogoff argue in their 2009 book This Time is Different: Eight Centuries of Financial Folly. “The aftermath of systemic banking crises,” they write, “involves a protracted and pronounced contraction in economic activity and puts significant strains on government resources.”

The very able economists in the incoming Obama administration seem to have ignored the difference between these two kinds of recessions. Council of Economic Advisers head Christina Romer was surely sincere when she promised that passage of the stimulus package would hold unemployment under 8 percent.

Similarly, administration economists evidently thought the private-sector economy could bear the burden of a national debt that doubled over a decade. It would bounce back like it usually does in a business-cycle recession.

Tea partiers took a different view — and before long, so did most voters. They seem to believe that permanent increases in government’s share of GDP will inflict permanent damage on the private-sector economy — and won’t do much, if anything, to move us out of this prolonged financial-crisis recession. The evidence so far seems to support them.

In addition, they seem to have understood that the threat of higher tax rates and more onerous and intrusive regulation from this administration would deter business executives from expanding, entrepreneurs from creating jobs, investors from taking risks, and consumers from buying things.

The business leaders know that Summers has gone, while the voters know that Obama remains and will be in office two more years — but without a Democratic majority in the House of Representatives and, perhaps, a Democratic majority in the Senate, if the polls are right.