Summers's Spin: WE DID IT!

Top White House economic aide Larry Summers gave a major policy speech at the Peterson Institute for International Economics today, but it had more to do with public relations than economics. The central message: WE DID IT! In other words, the U.S. economy has stepped back from the "abyss" of a second Great Depression, and we can thank President Obama's economic policies for turning the tide.

Summers's speech may mark the beginning of a major political struggle over who or what should get credit for an economic recovery, assuming that one gets underway later this year. Summers suggested that's what will happen, but Summers notwithstanding, it isn't necessarily clear that it will.

One conspicuous hole in his argument is that most of Obama's policies─proposed regulatory reforms and spending under the economic "stimulus" package─haven't yet taken effect. Most of the administration's financial reforms are still congressional proposals. Only a small fraction of the $787 billion stimulus package, passed by Congress in February, has been spent. Summers cited a total of $107 billion, consisting of $43 billion in tax relief and $64 billion in aid to state and local governments, construction projects, and the expansion of social programs.

As Summers sees it, back in January, Obama "faced the most serious economic and financial crisis of any president since Franklin Roosevelt." To support his case, he quoted economist and New York Times columnist Paul Krugman, who had said at the time: "Let's not mince words: This looks an awful lot like the beginning of a second Great Depression." Summers pointed to terrifying figures: in the three months ending in February, the economy had lost 2.1 million jobs─the "largest three-month decline since 1945," he said. Gross domestic product (GDP) was falling at roughly a 6 percent annual rate; stock options in March "implied a better than one-in-six chance of the Dow falling below 5000 within a year."

But by now, Summers said, we have "walked some substantial distance back from the abyss." The GDP is falling less rapidly, and "many private forecasters expect to see positive growth in the second half of this year." Stock options indicate only a one-in-100 chance of the Dow falling below 5000 this year. Consumer and business confidence has improved.

Most economists would probably echo Summers's assessment that the recession may be close to its low point. Whether they would endorse his explanation is another question.

A glaring weakness is that in one critical respect─joblessness─the economy is worse than expected, suggesting that the administration is watching the business cycle more than controlling it. In January, a study by Christina Romer, then the designated chairman of the Council of Economic Advisers, and Jared Bernstein, Vice President Biden's chief economist, estimated that without an economic stimulus program, unemployment would peak at about 9 percent and, with it, only at about 8 percent. In June, the jobless rate hit 9.5 percent, and many economists─including those at the Federal Reserve─expect it to reach or exceed 10 percent. Summers conceded that the severity of joblessness had surprised the administration.

Perhaps the strongest argument that Obama has bolstered the economy is that he projects confidence. The administration's numerous economic and financial proposals─including the managed bankruptcies of General Motors and Chrysler─may reinforce that effect. Summers didn't make that point explicitly, but he implied it.

Otherwise, the evidence that the administration has encouraged recovery looks flimsy. Even Summers conceded that the economic-stimulus package would not have much effect on job creation until 2010; only 10 percent of the impact is expected in 2009, he said. There are other factors that have likely promoted recovery: the Federal Reserve's easy credit policies, the sell-off of surplus inventories (requiring new production to satisfy sales), and the rise in the stock market. Pent-up demand for autos might contribute to a second-half recovery.

Of course, the evidence─one way or another─may not matter in the end. If the president and his allies claim often enough that their policies have succeeded, most Americans may believe them.