Rick Santorum has been making a few different versions of the argument
that the spike in gasoline prices in 2008 was the cause of the
financial crisis and subsequent recession. Some forms of this
argument, like the idea that high gas prices caused the housing bubble
to burst are indefensible for simple reasons of timing. But in some
ways this bolsters Santorum's larger point. The fall in house prices
and residential investment began well before the recession, and as
Brad Plumer argues there's a fair amount of evidence that the high gas
prices did contribute meaningfully to the economic slowdown.
What I would say against Santorum is that there's the recession that
the NBER Business Cycle Dating Committee says started way back in
December 2007 and then there's the Great Recession that played out in
the fall of 2008 and the subsequent winter and has dominated the
political agenda ever since. The recession that provided the backdrop
for 90% of the 2008 presidential campaign is pretty easy to explain.
Homebuilding activity fell off a cliff, and the workers were being
imperfectly transitioned into export-oriented and import-competing
industries. Joblessness was on the rise, and people were hurting. Oil
prices very plausibly played a role in making the transition out of
construction and into other things more difficult. But the Great
Recession that's troubling people simply isn't a matter of laid-off
construction workers being unable to find factory jobs. It's laid-off
construction workers being joined by laid-off factory workers and laid-
off retailers and laid-off middle managers followed by laid-off
teachers and cops. It's a fundamental failure of macroeconomic policy—
a large-scale simultaneous decline in basically every sector of the
economy—that's not explicable in terms of external shocks.
Incidentally, back in 1997 Ben Bernanke co-authored an interesting
paper (PDF) on how the deleterious impact of oil shocks can be
amplified by a poor monetary response. Expensive oil hurts the economy
directly in some ways, but if the monetary authorities respond by
tightening monetary policy that hurts the economy even more. The
European Central Bank doesn't seem to have read that paper, and twice
during the past few years has decided that the right answer to high
commodity prices is to raise interest rates and throw people out of
work. Bernanke, not surprisingly, has avoided making a flagrant
version of this error but I think he did make a small-scale version of
it. The Fed started cutting interest rates in late-2007 and pretty
steadily kept on cutting until they went to zero. But there was a
"pause" period from about May to September of 2008 as if the Fed
suddenly stopped caring about the weakness in the economy. That period
coincides with a big spike in the headline CPI even though core CPI
was simultaneously indicating a lessening of inflationary pressures.
With core CPI decelerating and unemployment rising, the Fed should
have been cutting rates. But instead the spiking oil prices seem to
have paralyzed them on core monetary policy, even while the Fed was
simultaneously scrambling to cope with a banking crisis. The in
October they went back to cutting rates, but also took the
contractionary measure of paying interest on excess bank reserves.