Scrambling for a macroeconomic message

Scrambling for a macroeconomic message

Provoked by the Vice President’s comment on Sunday that the Administration “misread the economy,” the Obama Administration is partway through an unplanned shift in their topline economic message. It is painful to see this transition play out in public as the Obama Administration and its allies try to find their footing on the most basic questions about the U.S. economy and their macroeconomic policy.


Last Thursday the President spoke in the Rose Garden after meeting with some alternative energy CEOs. His statement included only a placeholder about the jobs report:

And obviously, this is a timely discussion, on a day of sobering news. The job figures released this morning show that we lost 467,000 jobs last month. And while the average loss of about 400,000 jobs per month this quarter is less devastating than the 700,000 per month that we lost in the previous quarter, and while there are continuing signs that the recession is slowing, obviously this is little comfort to all those Americans who’ve lost their jobs.

There’s no real substance there, so last Thursday the Administration’s basic economic message appeared unchanged by the new jobs data.

Then on Sunday, when asked about why unemployment is now higher than the Administration predicted it would be, the Vice President said:

The truth is, we and everyone misread the economy. The figures we worked off of in January were the consensus figures and most of the blue chip indexes out there.

… And so the truth is, there was a misreading of just how bad an economy we inherited.

In Moscow yesterday, the President tried to correct the Vice President:

THE PRESIDENT (to NBC): No, no, no, no, no. Rather than say “misread,” we had incomplete information.

THE PRESIDENT (to ABC): There’s nothing that we would have done differently.

THE PRESIDENT (to Fox News): I think it’s important to understand that we’ve got a short-term challenge which, no matter how big our stimulus was, was going to be a challenge … partly because we’ve got fiscal constraints. … You just can’t push that out that quickly, partly, not just because the federal government has to process applications, but also because states and local governments have to gear up to get these projects going. … I don’t take anything off the table when unemployment is close to 10 percent and a lot of Americans are hurting out there.

NEC Director Dr. Larry Summers said Tuesday:

It is clear from the data that there needs to be more fiscal stimulus in the second half of the year than there was in the first half of the year. Fortunately, the stimulus program designed by the president and passed by Congress provides exactly that.

The Vice President’s economic advisor, Dr. Jared Bernstein, said:

It’s working, it’s demonstrably working. … There is no conceivable stimulus package on the face of this earth that would fully offset the deepest recession since the Great Depression.

White House Press Secretary Robert Gibbs said today in a press gaggle on Air Force One en route to Rome:

Q I know I might get crosswise with you on this, but is the White House considering a second stimulus?

MR. GIBBS: Well, I would say — I’ll repeat what I’ve said and I think the President and Vice President have said, and I think the President said this yesterday, he’s not ruling anything out, but at the same time he’s not ruling anything in. Obviously we passed a hefty recovery plan that implements over the course of about a two-year period of time, and we’re on track with that implementation.

The Gibbs statement was reinforced by an emailed statement from one of his deputies, Jen Psaki:

We remain focused on putting thousands of Americans back to work through the implementation of the recovery act and any discussion of a second stimulus is premature at this point.

These comments lead me to conclude that the Administration’s policy is unchanged: their answer on a second stimulus is “No for now,” while reserving the right to change their minds later as new data comes in.

This answer is, however, being lost on some of their friends and allies:

Dr. Laura Tyson, characterized as “an outside adviser to President Barack Obama” said:

The stimulus is performing close to expectations but not in timing. … The stimulus was a bit too small. (Source: Bloomberg)

and

We should be planning on a contingency basis for a second round of stimulus. (Source: NBC)

Here’s House Majority Leader Steny Hoyer:

We need to be open to whether or not we need additional action.

And here is Senate Majority Leader Harry Reid:

As far as I’m concerned, there’s no showing to me that another stimulus is needed. Things are … things, as Bernanke said, the crops have been planted, the shoots are now appearing above the ground. And that certainly is evident based on the fact that slightly over 10 percent of the dollars are out among the people.

It’s hard to reconcile a “stay the course” strategy with (a) new bad data, (b) “we misread the economy” and (c) “we had incomplete information.”


Last week’s jobs report provoked this chaos. For the first five months, the Administration’s macroeconomic message was simple and internally consistent:

  • We inherited huge problems. [set a low bar]
  • We took bold action to fix these problems, most prominently the stimulus law. [show leadership]
  • The stimulus law is working. [show specific examples which don't actually prove this in the aggregate, but which demonstrate action]
  • This is going to take a while. Be patient. But look, it’s working. Things are getting better bit by bit. GDP should start to grow by the end of the year, and job growth should resume early in 2010. [lower expectations]
  • Other stuff like our budget, health care reform, financial regulatory reform, and our climate change policies are good for the economy and should become law. [push the legislative agenda]

I disagree with several of these points, but this is/was their message.

Until last Thursday, the employment data was consistent with this message, and in particular with “Things are getting better bit by bit.” The economy lost fewer jobs in March than in February, fewer still in April, and even fewer in May. A topline message of “Things are still bad and we feel your pain, but they’re getting better” was consistent with the most fundamental monthly metric of the country’s economic health.

Last week’s employment report fouled up this message. June’s job losses were significantly worse than May’s.

This data point is significant and poses a challenge to the President and his team. If it is the beginning of a new downward trend, then both the Administration’s stimulus policy and their message about the economy and economic policy need to change. If, however, it is a random deviation from the previous trend, then the old policy and message still works, and they’ll just have to ride out the next few weeks until new data confirms that things are actually still on a gradual upward trend.

Monthly employment data has large “error bars.” For a while, the standard joke among our CEA economists was that the forecast for the upcoming monthly jobs report was +50,000 jobs, plus or minus 100,000. There’s a decent chance that the June employment report was just a bad luck data point (although the report was consistently bad throughout, which is scary).

Thus the President, aided by his advisors, has to make a macroeconomic judgment and a a policy decision: Does Thursday’s jobs report necessitate a change in policy now, or should we stick with our policy and wait for additional data to see if it confirms a new downward trend? This economic judgment and policy decision should then drive their public messages to the press, markets, and Congress. Within the White House, I imagine this judgment call is primarily a Summers/Romer responsibility, supplemented by views from Treasury Secretary Geithner, Budget Director Orszag, and Labor Secretary Solis.

For the time being, the Administration and its allies are implicitly wagering that the new jobs report is not an early warning sign of a new downward trend. They are sticking to their existing policy and message.

I see at least five challenges on the path they have chosen:

  1. It might be wrong. If the July employment report (to be released August 7th) is worse than the June report, the Obama team will look like they have missed a turning point. In their preemptive defense, it’s often quite difficult to identify turning points.
  2. The Vice President’s comment that “we misread the economy,” followed by the President’s comment that “we had incomplete information,” undermines confidence in the Administration’s ability to diagnose and address major macroeconomic trends. Sticking with the current path under potentially changed circumstances risks reinforcing this feeling.
  3. They have to rally nervous allies to echo their message that “the stimulus is working,” while the evidence to prove this is in question. Just as it’s impossible for opponents to prove that the stimulus did not “save or create” jobs, it’s impossible for the Administration to demonstrate that 467,000 lost jobs is better than it would have been without the stimulus. On a raw political level, how do you convince people that the stimulus is working when the economy is still in visible decline?
  4. They have to publish the Mid-Session Review of the President’s Budget this month, with a new updated economic forecast. That forecast was almost certainly locked down weeks ago. Do they revise it downward based on last week’s bad jobs data? Either choice has significant downsides.
  5. They have to combat a press trend for a “weakening U.S. economy” storyline to overwhelm their desire to move health care legislation through the Congress in July. This storyline has exploded today in the Washington-centric press.

I conclude with two quotes that crystallize the Administration’s current challenge. The first is from a good analysis by Dan Balz in today’s Washington Post:

It seems hard to square an assessment that the administration underestimated the severity of the recession and the assertion that the White House wouldn’t have done anything differently had it known how bad things really were.

And since this is a debate about Keynesian macroeconomic fiscal stimulus, here is how John Maynard Keynes replied to a criticism during the Great Depression of having changed his mind on monetary policy:

When the facts change, I change my mind. What do you do, sir?

(photo credit: humpty dumpty sat on a wall by paul peracchia)

9 responses

  1. Pingback: Many mixed signals | KeithHennessey.com

  2. Keith,

    Discussion of another stimulus will doubtless bring up the tax cut versus government spending “multiplier effect” debate. I believe Romer’s research has favored tax cuts while Summers has been an avid supporter of more and more stimulus. As an undergraduate economics student I would be interested in your take on this debate, and if the data is even relevant given the political pressure on economic decision making.

  3. OBAMA’S STIMULUS IS INCREASING PRIVATE SECTOR UNEMPLOYMENT

    Look at what Louis Woodhill said in his July 6th article in RealClearMarkets

    GET READY FOR 14% UNEMPLOYMENT

    While doing nothing to boost demand, Obama’s “stimulus” will depress PBI (Private Business Investment), and therefore employment. This is because the “stimulus” plan requires selling an additional $787 billion in government bonds. The money to buy these bonds will have to come from somewhere, and much of it will come from people who would otherwise invest in starting or expanding businesses. Indeed, the bonds will have to be priced so that this risk-free investment is more attractive to investors than their other alternatives.

    In the fourth quarter of 2008, the Federal government ran a deficit of $303 billion (and therefore had to sell $303 billion of new bonds) and business investment fell by 21.7%. In the first quarter of 2009, the Federal deficit was $650 billion and business investment fell by 37.3%. The economy is being forced to invest in Barack’s Bailout Bonds rather than in businesses that create jobs.

    Virtually everything the Obama administration wants to do will have the effect of increasing unemployment. As bad as joblessness is now, be prepared for it to get much, much worse.

    http://www.realclearmarkets.com/articles/2009/07/06/get_ready_for_14_percent_unemployment_97295.html

    http://research.stlouisfed.org/fred2/series/PNFIC96

    http://www.bea.gov/briefrm/nonresfi.htm

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