How much credit does Obama deserve for the recovery? How much blame?

I don't know. Economic models do not, in my view, qualify as successful scientific theories. They do, however, shed a bit of light on matters of public policy from time to time (some more than others). The perspective I offer on this question is one that I find persuasive, supported by what I think to be the most compelling models, but I hardly consider it the final word on the subject. So, take from it what you will.

The standard framework, in contemporary business cycle theory, for thinking about recessions is provided by the New Keynesian DSGE family of models. These models pin the blame for recessions upon insufficient aggregate demand (AD) for goods and services produced by the economy. Sticky prices (prices that change too slowly), in the face of negative AD shocks, cause the economy to produce less than it is capable of, rendering some fraction of the economy's basic inputs (land, labor, capital, etc.) idle. Given price stickiness, the recipe for greater utilization of the economy's capacity, which would increase output and employment, is more AD.

Even if this is the best way to think about most recessions, one may always suppose that this time was different, that this was a fundamentally different kind of recession. The evidence, however, suggests otherwise. Nominal gross domestic product (NGDP) measures the aggregate level of money expenditures. It is, therefore, the statistic that most closely tracks AD. During the postwar period, variation in NGDP growth explains about 2/3rds of the variation in output growth. Variation in output growth, in turn, explains about 3/4ths of the variation in unemployment. These figures increase, not decrease, when we restrict the data to the most recent recession (plus the subsequent recovery). In other words, this time looks to have been no different from a run-of-the-mill recession--just a very deep one, precipitated by a steep decline in NGDP. While the housing crisis, or the financial crisis, may have done something to NGDP, the economic plunge did not begin when the housing market started to collapse, nor when the shadow banking system suffered a run; it began when NGDP went south (before the demise of Lehman).

To me, therefore, it seems the focus of our inquiry should be on AD. Did Obama's policies (not only those he implemented, but also those he pursued aggressively) stimulate AD relative to what would have otherwise occurred? And to the extent that they did, were there other ways to stimulate AD that would have had fewer negative side effects? These are the questions we ought to be asking, in my view. There is much to economic policy besides AD, of course, but Obama's impact on the recovery from recession is almost entirely a story about AD. My next post will be about whether Obama could've done more to boost AD, and whether his efforts to date have been successful.

It's morning in America

US economy grows 243,000 jobs in the month of January. In other news, Obama is looking to be a safer bet for re-election everyday.

Addendum: I should explain what I think is happening. In part two of my series on the jobs crisis, I said that too-high (cyclical) unemployment is due to interest rates being too high. To be more precise, there is a so-called "natural" rate of interest, which is the interest rate that would equate planned savings and planned investment, keeping aggregate demand on target. Aggregate demand management involves moving the market rate of interest to keep up with movements in the natural rate of interest. The Fed has been keeping its policy rate near zero since late 2008, so why is the (cyclical) employment situation improving? My view is that the natural rate of interest is rising, which effectively makes the Fed's unchanged stance more expansionary than it was previously.

Why is the natural rate of interest rising? Well, folks haven't been spending a whole lot (hence weak aggregate demand). Consumer durables (e.g., cars) only work for so long. At some point, you cannot delay that new car purchase any longer, so, you have to borrow more (more planned investment) and consume more (less planned savings). Together, that makes for a higher natural rate of interest. In other words, when a recession hits, consumers delay a lot of discretionary purchases until they're more comfortable with their financial circumstances, but you can only delay such purchases for so long. This crisis has been going on so long, and Americans are sufficiently impatient, that they're starting to go ahead with those purchases anyway. And that means that the Fed is effectively stimulating aggregate demand more than it was before, even if its interest rate policy is effectively the same (though they have been dragging out the first projected rate hike for some time, so that probably helps, too). If enough people begin to replenish their consumer durables, a self-sustaining recovery may be underway, as long as the Fed doesn't prematurely strangle it. Hence, it's morning in America...I think. (Buy stocks, sell bonds).

P.S. Matt Yglesias agrees with me to an eery extent. In fairness I generally see things the same way he does...