Michael Grunwald on Obama's ARRA: From The New New Deal: Noted for August 1, 2013
Michael Grunwald: The New New Deal:
At one stimulus meeting after the ugly jobs report, Romer piped up: "One of the things we ought to put on the table is that this thing is much too small. It needs to be bigger, at least $800 billion."…. Summers immediately replied: “I agree.” “Nobody objected, so Larry took that as license to run,” Romer says. “Our feeling was: We’ve got to hit this with everything we’ve got.”…. Romer’s advice was to attack… with overwhelming force… between $800 billion and $1.2 trillion worth of jet fuel…. Rahm looked like he was about to pass a kidney stone…. It later became clear that Romer’s ugly analysis, while based on the most current data, was way too rosy….
Romer had suggested in one draft that it would require $1.8 trillion to fill the output gap, which Summers had declared “non-planetary”… triggering more accusations that Summers had withheld information from Obama. But that was a bum rap…. The memo… [said] $850 billion stimulus would close “just under half the output gap”.… As one White House economist told me… the president… knows how to multiply by two…. “Even I knew $1.8 trillion was non-planetary,” Romer says…. She didn’t feel like Summers was undermining or censoring her; she felt like Summers was on her side, a fellow maximalist, similarly worried about undershooting rather than overshooting.
Orszag, more of a minimalist, later complained to colleagues that Summers had orchestrated the entire Chicago meeting to advance his “make-it-big” agenda.
A longer excerpt:
In retrospect, the stimulus has taken on an aura of inevitability…. But Obama’s Beltway veterans thought nothing was inevitable. They remembered President Clinton’s ill-fated $19 billion stimulus…. In September, after Lehman Brothers failed, Majority Leader Reid had failed to move $56 billion through the Senate…. So Rahm kept pressing Schiliro: How much can we get? Schiliro told him $400 billion seemed doable. What about $600 billion? Yeah, maybe. “Beyond that, it got shaky,” Schiliro says….
At one stimulus meeting after the ugly jobs report, Romer piped up:
One of the things we ought to put on the table is that this thing is much too small. It needs to be bigger, at least $800 billion….
To Romer’s surprise, Summers immediately replied: “I agree.” “Nobody objected, so Larry took that as license to run,” Romer says. “Our feeling was: We’ve got to hit this with everything we’ve got.” That feeling was the driving force behind a fifty-seven-page “Executive Summary of Economic Policy Work”…. “The rule that it is better to err on the side of doing too much rather than too little should apply forcefully to the overall set of economic proposals,” Summers wrote….
The memo did include several caveats about a larger package: It might not be politically feasible. It could conceivably unsettle the bond markets. And the bigger the stimulus got, the harder it would be to keep timely, targeted, temporary, and wise. Summers only included four options for recovery plans, from $550 billion to $890 billion, and some liberals have accused him of providing intellectual cover for inadequate stimulus…. But his memo doesn’t read as a call for caution…. “Insufficient fiscal impetus,” Summers wrote, “could put recovery at risk, with catastrophic consequences.” It’s a call for action….
Stage-managing the meeting, Summers had assigned Romer to open with an overview of the emergency… She began with the most memorable sentence she’s ever uttered, a line that Obama’s aides have repeated ever since as a reminder of the mess dumped in his lap: “Mr. President-Elect,” she said, “this is your holy-shit moment.”… The only comparable collapse had ushered in the Depression…. Romer’s cheery demeanor made her awful news sound somewhat less awful—“like swallowing a pill in applesauce,” Axelrod says—but she laid out two potentially catastrophic scenarios. The death spiral could spin out of control, shredding the banking system and starting a depression, or we could muddle our way through a Japan-style lost decade…. They were confident that fiscal stimulus could make things better, filling the “output gap” between actual production and the economy’s potential production at full capacity.
But the current gap was almost unfathomable, over $2 trillion over the next two years. Romer’s advice was to attack it with overwhelming force. Government wouldn’t be able to plug the entire hole, even with Keynesian multipliers magnifying the impact of every dollar, but she argued for the biggest stimulus in history, somewhere between $800 billion and $1.2 trillion worth of jet fuel…. Rahm looked like he was about to pass a kidney stone….
It later became clear that Romer’s ugly analysis, while based on the most current data, was way too rosy…. Orszag… would have preferred to start smaller, closer to $600 billion. Geithner… also seemed uneasy about the incoming tide of red ink. He thought the financial rescue would be the real key…. No one voiced strenuous objections to Romer’s numbers.
“Yeah, there was sticker shock. It’s like, boom! But nobody was saying, whoa, whoa, no, no, it can’t be $800 billion,” Biden told me. “Everybody kind of forgets: We had just lost a couple trillion dollars. It wasn’t like it got picked up here and moved over there. It was lost! Lost! We all knew this was absolutely critical.”
Summers hadn’t mentioned Romer’s $1.2 trillion figure in his fifty-seven-page memo, which later prompted widespread criticism that he had tried to shrink the stimulus by surreptitiously limiting the policy menu. It also came out that Romer had suggested in one draft that it would require $1.8 trillion to fill the output gap, which Summers had declared “non-planetary”… triggering more accusations that Summers had withheld information from Obama. But that was a bum rap….
The memo also made it clear that even an $850 billion stimulus would close “just under half the output gap,” insufficient to “return the unemployment rate to its normal pre-recession level.” As one White House economist told me, whatever you think of the president, he knows how to multiply by two…. Romer had no issue with the deletion of her $1.8 trillion figure, which was less a proposal than an illustration of the scope of the problem…. “Even I knew $1.8 trillion was non-planetary,” Romer says. She did think her $1.2 trillion figure should have been in the memo, but it was never a major topic of discussion, and she did mention it to the president-elect. In any case, she didn’t feel like Summers was undermining or censoring her; she felt like Summers was on her side, a fellow maximalist, similarly worried about undershooting rather than overshooting.
Orszag, more of a minimalist, later complained to colleagues that Summers had orchestrated the entire Chicago meeting to advance his “make-it-big” agenda. “I kept saying: Look, guys, there’s no danger of doing too much. It’s like worrying about how much weight I should lose,” says the bulky Summers. “There’s no danger that I’m going to become anorexic.” Larry was the pill without the applesauce…. The main reason he kept the $1.2 trillion option out of his memo was that it didn’t seem like a real option. Rahm had told him there was no way Congress would go over $1 trillion. Pelosi didn’t even want to go past $600 billion…. A trillion was a psychological Rubicon. “It just wasn’t going to happen,” says Phil Schiliro, Obama’s legislative chief. “Nothing I had seen in my time in Washington led me to believe that was a workable proposition.”… Getting a bill done quickly would be impossible if congressional eyes were popping out of sockets…. Most of Obama’s advisers also assumed that if more stimulus was needed in the future, they could always go back to the Hill and get it.
