I’m getting a little tired of these retrospectives of the Administration’s actions to deal with the economic crisis in 2009-2010, but Ryan Lizza has a new one in the New Yorker, and I wanted to pull out a few key points. First of all, let’s recognize that the narrator is sometimes unreliable. Lizza, after a discussion of whether or not the Administration would nationalize the big banks, makes this strange assertion:
In hindsight, the case for nationalization was weak, but even if Obama had wanted to pursue it he couldn’t have. For the second time in as many months, a more aggressive course of action on the economy was thwarted by fears of congressional disapproval.
If you can find in this long article any place where Lizza marshals any facts or evidence to back up this assertion that the case for nationalization was weak, you win a pony. Maybe the case was weak, but I have no idea about that based on this article except that Ryan Lizza told me so. So understand that Lizza has his thumb on the scale throughout this article.
Despite this, there are a couple places that really reflect badly on the President and his economic team. The first concerns Larry Summers delivering one of a series of memos brought to light in this story. Here you see Summers justifying a political argument about limiting the size of the 2009 stimulus by making an economic argument that doesn’t hold any water whatsoever:
(Summers) offered the President four illustrative stimulus plans: $550 billion, $665 billion, $810 billion, and $890 billion. Obama was never offered the option of a stimulus package commensurate with the size of the hole in the economy––known by economists as the “output gap”––which was estimated at two trillion dollars during 2009 and 2010. Summers advised the President that a larger stimulus could actually make things worse. “An excessive recovery package could spook markets or the public and be counterproductive,” he wrote, and added that none of his recommendations “returns the unemployment rate to its normal, pre-recession level. To accomplish a more significant reduction in the output gap would require stimulus of well over $1 trillion based on purely mechanical assumptions—which would likely not accomplish the goal because of the impact it would have on markets.”
Paul Krugman, a Times columnist and a Nobel Prize-winning economist who persistently supported a larger stimulus, told me that Summers’s assertion about market fears was a “bang my head on the table” argument. “He’s invoking the invisible bond vigilantes, basically saying that investors would be scared and drive up interest rates. That’s a major economic misjudgment.” Since the beginning of the crisis, the U.S. has borrowed more than five trillion dollars, and the interest rate on the ten-year Treasury bills is under two per cent. The markets that Summers warned Obama about have been calm.
I don’t even think Summers believed that argument; it flies in the face of economic theory he knows. He merely said it to cover for the fact that the Administration proceeded far too cautiously on the stimulus, and didn’t want to ask for more than a modest number, below what would be required to fill the demand gap.
Later, when Obama negotiated the stimulus with Congressional leaders, we get this:
On February 1st, a day before Obama was scheduled to meet with congressional leaders from both parties to make his case for the stimulus, his advisers wrote him a memo recommending that he keep the stimulus package from growing: “We believe that it is critical to draw a sharp line not to exceed $900 billion, so that the size of the package does not spiral out of control.” Senators would likely amend the bill to add about forty billion dollars in personal projects—some worthy, some wasteful. At the same time, Obama hadn’t abandoned his dream of a moon-shot project. He had replaced the smart grid with a request for twenty billion dollars in funding for high-speed trains. But including that request was risky. “Critics may argue that such a proposal is not appropriate for a recovery bill because the funding we are proposing is likely to be spent over 10+ years,” the advisers wrote.
To find the extra money—forty billion to satisfy the senators and twenty billion for Obama—the President needed to cut sixty billion dollars from the bill. He was given two options: he could demand that Congress remove a seventy-billion-dollar tax provision that was worthless as a stimulus but was important to the House leadership, or he could cut sixty billion dollars of highly stimulative spending. He decided on the latter.
There was more concern about the package “spiraling out of control” than whether the amount would be optimal to save the economy. This is just misplaced concern. And that can be seen by the choice made in the end. The tax provision referenced here is the patch to the alternative minimum tax, something done every year in Washington without fail. It was not stimulus at all – it applied current law going forward – and it shouldn’t be considered part of that $787 billion total stimulus. But Obama went for it, to maintain good relations with Congress, on top of the $40 billion in pet projects to Congressmen. That drained $100 billion of actually stimulative spending that would actually have a high multiplier.
The article goes on to explain the pivot to austerity, which happened at the beginning of 2010, and which had a measurable impact on the economy. As Paul Krugman writes today, the US has achieved marginally better policy during the recession than, say, Europe. But that’s a low bar. Because of political concerns on the stimulus and a pivot to the deficit, we wasted a few years and extended suffering for millions of Americans. That’s not to say that a “just do it” approach would have worked – there’s still a Congress to contend with. But to say that Administration policy was optimal to deal with the Great Recession just stretches the truth.




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You can make the case that once the “economic dream team” was named
in late November, 2008 (hippies need not apply), the course of events was predetermined.
You’re right, allan, and I want to know who predetermined that dream team. Ya know?
I would not be surprised to discover Bob Rubin had something to do with that decision.
Sigh. Larry Summers, yet again.
btw Dave..were you an English major? Lizza is “an unreliable narrator.” Nice.
All this sounds completely fabricated after the fact and leaked by interested parties to avoid blame or get their talking points out.
Let’s call it for what it was and still is: A clueless and timid cluster-fuck and circle-jerk.
So true! I wasn’t really following things closely then, but even I knew we were screwed due to the folks with whom Obama chose to surround himself. History is written by the victors, but this certainly seems like one of those times that will be nothing but fantasy for future generations.
I tried…I really tried. But in the end I could find no such evidence. And I really wanted that pony, dammit…
When Lizza (or his sneaky editor) writes: “In hindsight, the case for nationalization was weak…”, we’re given a classic dangling modifier at the beginning; and you’re correct, David, to wonder about the article’s disembodied “narrator”.
You folks seem to forget the immensity of the numbers being bandied about for a stimulus package. Back then a trillion dollars was unheard of as a single emergency Govt program. No trillion dollar deficits had ever been imagined, much less instigated in one fell swoop.
Even Democrats couldn’t wrap their heads around a trillion dollar giveaway. Whether it was appropriate to spend more was not the issue. What got passed was the maximum Congress could stomach.
Hey Administration / Wall Street Morans:
How about we go back to the 3-6-3 model of banking?
Pay deposits at three, loan out the money at six, and then go home at three.
See how easy that is? (Even for morans like you…)
Assuming that’s true, then the bill should have been direct spending, not larded up with smoke-and-mirror, bullshit tax cuts.
Well, Larry is running for President of the World Bank.
Good point.
That is the FIRST thing you’ve written that I actually agree with. And, Shoto is correct about the tax cuts, which were there precisely because the House would not pass any package without them, and I might add tax cuts haven’t been stimulative when they were tried before, either. Summers, Geithner, et al, will not go down in history as great economic thinkers, and recover was further hamstrung by a recalcitrant Congress made up of politicians with zero understanding of economics, so there was no intellectual counterweight and bad arguments on both sides. Not that those counterweights were not available, they were simply not utilized, likely because the administration in the Whitehouse is Chicago School, which is all the rave these days.
The stimulus was successful triage and an economic disappointment, but it was a political disaster. Everybody knew the nation’s economy needed stimulating, including core Republican Party daddies like the US Chamber and NAM. The banks were desperate for cash, despite the adolescent, “Nah, we’re cool,” front they put up. The Republicans had just been reduced to a small regional party when a black Democrat carried Indiana, Virginia, Florida and North Carolina. Obama had the enemies of broad-based prosperity, regulation, sound banking and the entire Republican Party on the ropes.
Bipartisan comity is OK campaign rhetoric I guess, but for a Democrat to actually believe it to be workable after Clinton was impeached over a bj and 5 GOP Supreme Court Justices stole an election is political malfeasance on a criminal scale. Republicans play to win every day. Once the stimulus “fight” was over, everybody knew that Obama opens the bidding with his minimum offer and immediately gives in to “negotiating” while getting nothing in return. Comity is nice. In its absence, fear is a great substitute. Republicans and the entire chain of housing bubble criminals knew right away they had no reason to fear Obama. It immediately put the stop to any hopes for important leadership on behalf of the people against the vested interests.
Actually I remember how Obama insisted on passing this with 60 votes and getting Republican support even though this could have been done with 50+1 votes via reconciliation. This stimulus that was passed was not the only one he could have gotten signed, but Obama instead insisted upon artificial barriers to weaken it.
I found the article more informative about Lizza and his contemporaries in the Washington Press Corp than about Obama and his administration. For example
Puleeze! Barack Obama has absolutely no time for Keynesians. His economic advice is dominated by neoliberals and “centrist” political advisors such as Rahm Emmanuel and other banking-system alumni.
BTW, I thought New Yorker was renowned for fact checking…
No argument from me about that. The Chicago School had reign in the Administration and Obama was still under the illusion that he could govern in a bi-partisan manner. The fact that he likely agrees with Summers and the gang means that he is as clueless as the rest of the Congress. Wigwam hit the problem squarely with the comment about “no time for Keynesians”.
Trickle down doesn’t work? Who could ever image?
Whether it works on not depends on your political purpose. In 1980, there was a class war to which only the 1% showed up, and they’ve been trickling down on us every since. And, from their perspective, it works quite well.
You’re buying into DDay’s hasty conclusion, which he attributes to a false assertion (an opinion Lizza offers) caused by sloppy writing and sloppy editing. It seems to me that the so-called ‘case’ for nationalizing never had an advocate in the government, was nonetheless discussed, and dropped. Lizza was trying to be generous (obviously).
Hi, Mason! And Jamie, and Jeffrey, and Hank, and Ben, and Bill, and . . .
In response to AitchD @23
Of course not, Obama deliberately surrounds himself with neoliberals and banksters. Robert Rubin was in charge of the economics side of his transition team and he staffed the White House with Rubinites. Rubin’s Hamilton Project had to essentially shut down after the inauguration, because the entire staff had moved to the White House.
Somebody please refresh my memory: what was Obama’s rationale for The Cat Food Commission? Was it to appease the R’s, something he believed in or what?
That piece is ten fucking pages long and not a single syllable about the inactivity of the ‘Justice’ department. Nor is a mention of the contorted opinion that there was ‘nothing illegal’, from the President’s last presser in October. The idiocy of the 8% unemployment blunder tied to the stimulus or the sacrifice of bernstein and roemer from the economic team. Both were very flawed but when you read about the firewall of summers and emmanuel the malfeasance seems deliberate.
Not much new here. Larry Summers continues his unbroken record of failing upward. And the Cossacks still work for the Czar.