The Obama Recovery

Editorial do WSJ

Americans already know that economic growth is flagging, but Friday's second quarter GDP report confirms it: The current recovery, already one of the weakest on record, nearly stalled in the first half of 2011.

The economy expanded by a wan 1.3% in the quarter, following a revised 0.4% in the first quarter, and another downward revision in last year's final quarter to 2.3%. This means that for nine months the economy has averaged growth of less than 1.5%, which is barely treading water. At this growth rate a single major shock—such as a European meltdown, or a Chinese slowdown—could tip the U.S. back into recession.

What meager growth there was came from exports, federal spending and business investment. Inventories grew slowly and businesses are flush with cash, so there's hope for a bounce off the mat in the second half. But when you add this report to the jobless rate of 9.2%, the flat to falling housing market, layoffs at firms like Cisco and Merck, and capital flowing out of the U.S., it all adds up to a growth recession.

The GDP revisions—done every year by the federal Bureau of Economic Analysis—also show that the recession was deeper than first thought. Output fell 8.9% in the fourth quarter of 2008, and 6.7% in the first quarter of 2009. This means the Obama Administration had to climb out of a deeper hole, but paradoxically it also means that the recovery should be far more rapid.

The historical pattern is that the deeper the recession, the more robust the recovery. This is precisely what happened after the deep 1982 recession, as the nearby table shows. Growth was 4.5% in 1983, 7.2% in 1984, and it averaged nearly 4% for the five years after that through 1989. That is what a healthy recovery is supposed to look like, which is in marked contrast to the anemic eight quarters of this recovery.

This tale of two recoveries is an object lesson in economic policy. Taking office in 2009, President Obama embarked on one of the greatest reflation bets in history. He deployed the entire arsenal of neo-Keynesian policies to lift domestic demand, much as former White House economist Larry Summers still instructs at Harvard and most of the media still recommend.

So Congress deployed nearly a $1 trillion in stimulus, plus a battalion of temporary and targeted programs: cash for clunkers, cash for caulkers, tax credits for home buyers, 99 weeks of jobless benefits, "clean energy" grants, subsidies to states, and so much more. We were told that every $1 of this spending would conjure $1.50 in new economic output. The Federal Reserve has also more than cooperated by keeping interest rates near-zero for 31 months.

The bet was that with all this stimulus the economy would rebound as it did in the 1980s. Most of Washington and Wall Street believed that Mr. Obama was set up beautifully to inherit a normal recovery, claim victory for his policies, and ride easily to re-election. The problem is that the policies haven't worked. We are left with slow growth, high unemployment and $4 trillion in new debt.

The architects of this Keynesian debacle now offer the ex-post explanation that recoveries that follow financial panics are always slower. And there is no doubt that the financial meltdown has required banks, businesses and consumers to shore up their balance sheets and pay down debt.

But this is all the more reason to have pursued policies that nurture business and consumer confidence, rather than frighten them into taking fewer risks. An economy recovering from financial duress needs incentives to invest again, not threats of higher taxes. It needs encouragement to rebuild animal spirits, not rants against "millionaires and billionaires" and banker baiting. It needs careful monetary management, not endless easing that leads to commodity bubbles and $4 gasoline.

Such an economy also needs consistent and restrained government policy, not the frenetic rewriting of the entire health-care (ObamaCare), financial (Dodd-Frank), and energy (29 major EPA rule-makings) industries.

Perhaps the best proof of this policy failure is the response of the neo-Keynesians to the current malaise. They want more of the same, only less. Mr. Summers proposes a one-year extension of the payroll tax cut that has coincided with this year's growth decline. In a statement Friday, chief White House economist Austan Goolsbee also invoked the payroll tax cut, plus more jobless payments, free trade agreements (good, but why has it taken three years?), and a new "infrastructure bank." Wasn't the stimulus supposed to finance "shovel ready" infrastructure?

The message is that these folks are intellectually tapped out. They can't explain their current failure any more than they could the stagflation of the 1970s.

The only way out of this mess is to return to the growth policies that nurtured the boom of the 1980s. The circumstances aren't the same, so some of the policy choices will have to be different. But the principles are the same: Encourage businesses to expand, rather than government; let markets allocate capital, rather than politicians; liberate entrepreneurs by reining in the regulatory state.

The Obama malaise wasn't inevitable and needn't continue. It will end when our political class admits that its nostrums have failed and it is time to once again free the creative energies of the American people.