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.