THE DIFFERENCE BETWEEN 1992 AND 2008.

In recent weeks, it's become standard for pundits to suggest that Barack Obama had better trim his ambitions as he settles into the presidency amidst a recessionary economy. Why? Well, it's a recessionary economy. And we all know that recessions require reduced amibitions. Or at least we think we know that. But as Fareed Zakaria explained over the weekend, this received wisdom is often reliant on a basic misunderstanding of the specific context of the Clinton years, and how that differs from the current moment.

Clinton, of course, also entered office during a recession (though his recession was ending, rather than beginning). But he also entered office amidst a massive deficit -- 4.7% of GDP -- and a Federal Reserve that was holding fast to fairly high interest rates. Robert Rubin's argument was that these two things were linked: heavy government borrowing -- as evidenced by large deficits -- "crowds out" private investment because the government's demand for borrowed money raises interest rates (it raises the rice of borrowing, in other words), and higher interest rates slow private investment, which slows the economy. Bring down the deficit, he argued, and the Federal Reserve will bring down interest rates, which will stimulate the economy (this is the strategy that prompted James Carville's famous comment "I used to think if there was reincarnation, I wanted to come back as the President or the Pope or a .400 baseball hitter, but now I want to come back as the bond market. You can intimidate everybody.). Moreover, high interest rates meant government borrowing was, in itself, an expensive proposition, and so not a very good deal.

Rubin was right. But 2008 is not 1993. Barack Obama faces a recession, yes. And he faces a larger-than-expected deficit of about 3.6 percent (though that's bigger due to the stimulus package; in recent years the deficit has ranged from 1.6 percent in 2007 to 2.6 percent in 2005). The difference, though, is that unlike in 1992, interest rates are incredibly, historically, low. On the day of Clinton's inauguration, the federal funds rate was 3.96 percent. On the day of Obama's election, the rate was 0.23 percent. You can't slash those rates any further. The problem is not the crowding out of the private market or the intransigence of the Federal Reserve. So a strategy in which you cut public spending is totally unsuited to the moment. That's why economists like Larry Summers, who were closely associated with the Rubinomics of the early-90s, are now arguing for massive public spending and investment.

The point here is that not all recessions are the same. Clinton faced a recession in which there was reason to believe excess government spending was raising interest rates and lowering private sector demand and thus hurting the economy. But Obama faces a recession wherein low interest rates are not stimulating private sector demand and insufficient demand is badly hurting the economy. Unlike in 1992, this is the sort of recession where we need to spend our way out, and it's nice to see Zakaria saying so.

Image used under a CC license from WockeryJabby.