One source of puzzlement today among the policy elite is why, despite unprecedented intervention in the economy /markets by the Fed, along with unprecedented amounts of government stimulus, this economic recovery is the worst that anyone can remember. It is so bad in fact that more than half of the country still thinks that we are still in a recession, even 5 years after the recession officially ended.

So what has happened? How could so many smart people be so wrong? How could policies and actions that created earlier recoveries and expansions fail to do the same here? Those on the left will likely claim that the problem is that the stimulus should have been bigger. Many of those same pundits and policymakers will also claim that without the policies that they advocate, the Great Recession could have been the Great Depression II and that we should be satisfied with sluggish growth because things could have been so much worse. On the other hand, those on the right will argue that the policies were all wrong and that with tax cuts and less regulation, the economy would be humming along the way that it used to do back in the good old days.

In this argument, we are looking at Keynesian policies that may/may not have worked (at least they did not produce the result that was predicted at the time that they were implemented) vs. Reaganesque supply-side measures such as tax cuts that were not tried. At the time that everything appeared to be melting down, the left (aka Democrats) felt that they were looking at the second coming of the Great Depression and so they took actions largely in line with what they felt Roosevelt would have done (or in the case of Fed Chairman Ben Bernanke, what the Fed of the 1930s should have done). In other words, the left instituted roughly the same policies that they always advocate for; policy prescriptions that have been largely institutionalized in the Democrat psyche because a great Democrat President implemented them and they worked. The right (aka Republicans) on the other hand, continues to argue and advocate for roughly the same policies that they always advocate for (tax cuts); policy prescriptions that have been largely institutionalized in the Republican psyche because a great Republican President implemented THEM and they worked.

The problem with advocating policies on this basis is that Roosevelt’s policies were largely the appropriate policies for the economy of the 1930’s and Reagan’s policies were largely the appropriate policies for the economy of the 1980’s. To use Reagan as an example, his tax cuts cut the top tax rate from over 70% down to under 30%. This is a massive cut of tax rates and would naturally have a large impact on the economic incentive structure, even leaving aside the differences in economic structure that exist between our time and his. Implementing a reduction in tax rates from 39% (Clinton era rates) to 34-35% is tinkering around the edges and likely won’t have much of a change on the underlying incentive structure in the economy. To use Roosevelt as another example, his stimulus measures were going into an economy that was largely industrialized, in contrast to our own economy which is largely service-based. In addition, Roosevelt wasn’t facing the large bureaucracy that was sucking up large amounts of stimulus money to fund itself nor was he facing as large a phalanx of special interests (government was much smaller then)  that invariably uses its political influence to bring money to itself and put it into economically unproductive activities. Consequently, his stimulus measures were likely more economically effective whereas Obama’s stimulus appears to have been little more that payoffs to various Democrat special interests.

In summary, the economic measures advocated today are likely to have limited impact because the economy (government and the private sector) is largely structured differently than they were when the policies being advocated seemed to function. We need a different policy paradigm than the ones that are being advocated today, even if some of the policies being advocated (i.e. massive reduction in government regulations) would have a place in that paradigm. Reagan’s tax cuts worked because they were large and they were the right policy at the right time. Yours won’t because they won’t be.