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City of Brass

City of Brass

the economic Stimulus: behind the curtain

Ryan Lizza has a superb profile of Larry Summers, President Obama’s brilliant economic adviser, in The New Yorker. Lizza is one of my favorite political writers and he uses the profile on Summers as a backdrop for the larger story of how the major economic decisions in the Obama Administration have been made. In a nutshell, Obama’s economic team is comprised on incredibly brilliant people with a lot of ideas – and they disagree vociferously. The end result has been policies that have been run through the wringer in terms of skepticism and evaluation, ensuring that the risks of potential disaster were well-understood and the practical constraints preventing idealistic action were also abided by in favor of gettings omething rather than nothing done.

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The size of the economic stimulus is an excellent example. Republicans have long argued that the stimulus shoudl have been smaller, and more heavily reliant on tax cuts. Liberal economists like Paul Krugman meanwhile have argued that the stimulus was too small. So how did the Obama team decide how big to make it?

The most important question facing Obama that day was how large the stimulus should be. Since the election, as the economy continued to worsen, the consensus among economists kept rising. A hundred-billion-dollar stimulus had seemed prudent earlier in the year. Congress now appeared receptive to something on the order of five hundred billion. Joseph Stiglitz, the Nobel laureate, was calling for a trillion. Romer had run simulations of the effects of stimulus packages of varying sizes: six hundred billion dollars, eight hundred billion dollars, and $1.2 trillion. The best estimate for the output gap was some two trillion dollars over 2009 and 2010. Because of the multiplier effect, filling that gap didn’t require two trillion dollars of government spending, but Romer’s analysis, deeply informed by her work on the Depression, suggested that the package should probably be more than $1.2 trillion. The memo to Obama, however, detailed only two packages: a five-hundred-and-fifty-billion-dollar stimulus and an eight-hundred-and-ninety-billion-dollar stimulus. Summers did not include Romer’s $1.2-trillion projection. The memo argued that the stimulus should not be used to fill the entire output gap; rather, it was “an insurance package against catastrophic failure.” At the meeting, according to one participant, “there was no serious discussion to going above a trillion dollars.”

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There were sound arguments why the $1.2-trillion figure was too high. First, Emanuel and the legislative-affairs team thought that it would be impossible to move legislation of that size, and dismissed the idea out of hand. Congress was “a big constraint,” Axelrod said. “If we asked for $1.2 trillion, it probably would have created such a case of sticker shock that the system would have locked up there.” He pointed east, toward Capitol Hill. “And the world was watching us, the market was watching us. If we failed to produce a stimulus bill, that in and of itself could have had deleterious effects.”

There was also a mechanical argument against a stimulus of that size. Peter Orszag, who was celebrating his fortieth birthday that day, said that, while the argument for a bigger stimulus was sound theoretically, there were limits to how much money the government could practically spend in the near future.

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Summers brought a third argument to the debate, one that echoed his advice to Bill Clinton sixteen years earlier, when his Administration was facing persistent budget deficits that Summers believed were suppressing economic growth. He, like Romer, was guided by an understanding that in financial crises the risk of doing too little is greater than doing too much. He believed that filling the output gap through deficit spending was important, but that a package that was too large could potentially shift fears from the current crisis to the long-term budget deficit, which would have an unwelcome effect on the bond market. In the end, Summers made the case for the eight-hundred-and-ninety-billion-dollar option.

When the meeting broke up, after four hours of discussion, interrupted only briefly when the President brought out a cake and led the group in singing “Happy Birthday” to Orszag, there was still indecision about how big a stimulus Obama would recommend to Congress. Summers, Romer, Geithner, Orszag, Emanuel, and Jason Furman huddled in the corner to lock down the number. Emanuel made the final call: six hundred and seventy-five to seven hundred and seventy-five billion dollars, with the understanding that, as the bill made its way through Congress, it was more likely to grow than to shrink. The final legislation was for seven hundred and eighty-seven billion dollars.

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“A lot of my research has been figuring out what policymakers did, why they did it,” Romer told me. “I have a whole new level of sympathy. Until you’ve experienced it, you don’t realize how hard it is. It’s humbling.”

Later in the article, Lizza explains the similar internal dissent and discussion that preceded the Obama Administration’s decision about the future of the auto industry (again, with Summers providing a key skeptical role). As any PhD student who has had to defend their dissertation can tell you, a severly critical and rigorous environment always leads to better, more robust ideas. Larry Summers plays a key role in bringing that intellecctual and pragmatic rigorousness to the Obama White House. for As one of the other economic advisers (Austan Goolsbee, whose opinion was overridden by Summers in the debate) told Lizza for the article, “History has not been kind to Administrations where everybody agreed with each other and all they ever had to say was, Good idea, boss.”

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The whole article is well-worth a read (I admit I skipped over some of the childhood biographical bits, though). I think that the ending paragraph is worth excerpting, though:

So far, none of the worst fears of those who believed that the stimulus was too small or that nationalization was the only option or that taking over car companies would destroy the fabric of capitalism have materialized. Indeed, several private forecasters have credited the stimulus with blunting the impact of the recession-it probably added around three points to the G.D.P. last quarter-and the banking system has dramatically stabilized since the stress tests were completed. But competence has its limits as a source of inspiration. Paul Krugman said, “The stimulus helped, but the question is, ‘Is that enough?’ ” With unemployment at around ten per cent and still on an upward trajectory, the Administration is left arguing not that jobs are being created but that without Obama’s policies things would be worse. It’s not a very pithy slogan. And, undoubtedly, the huge government interventions laid the groundwork for the political backlash against Obama that was unleashed this past August and which has jeopardized his larger agenda on health care, global warming, and financial regulation. Obama and his team have pulled the economy back from the abyss, but they will get credit only when it has been rebuilt.

And for that, we need more than just 10 months, but more on the order of 5 years, to really know for sure.

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