The New New Deal (11 page)

Okaaaaay.

“That day marked the end of John McCain’s campaign,” says Biden,
a longtime friend of the Arizona senator. “That poor son-of-a-gun. He was dealt a tough hand.”

The next day, the Fed had to bail out AIG, a gigantic insurance company that had fallen down the wormhole selling exotic financial instruments. McCain came out against the bailout, then changed his mind the next day.

The economy was going down, and so was McCain.

A
t Nasdaq, Obama had tried to warn Wall Street types that carnage on Main Street could create carnage for them. But the reverse was also true. A credit meltdown could make it impossible for ordinary Americans to get home loans, car loans, or business loans. A market meltdown could eviscerate their companies, jobs, and 401(k)s. AIG showed that it could even imperil their insurance policies. The Great Depression began as a financial crisis, but it’s remembered for 25 percent unemployment, black-and-white photos of impoverished families, and sagas of suffering like
The Grapes of Wrath
. As Bernanke says, when elephants fall, the grass gets trampled.

“Everyone knows that depressions suck,” says Berkeley economist Christina Romer, the Depression scholar who would become Obama’s first Council of Economic Advisers chair. “But when you study this stuff, you understand that depressions really, really suck.”

Bernanke and Paulson decided the only way to avoid Depression 2.0 would be a mammoth Wall Street rescue. They bluntly warned leaders of both parties that unless Congress quickly backstopped the banking system, the results would make the 1930s look mild. Pelosi balked at bailing out the greed-blinded gamblers of Wall Street without helping Main Street, but Paulson warned that Main Street would be eviscerated if Washington didn’t save Wall Street pronto. “Nancy, we’re racing to prevent a collapse of the financial markets,” he said.
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“This isn’t the time for stimulus.”

For the next two weeks, Washington was riveted by the fate of Bush’s Troubled Asset Relief Program, a $700 billion bailout for the nation’s largest financial institutions. Reid, McConnell, Pelosi, and Boehner all
agreed to support TARP, but Boehner struggled to persuade House Republicans to back the rescue. After doing Bush’s bidding for eight years, they were choosing an extremely inopportune time to rebel.

Then McCain threw the negotiations into turmoil by dragging the electoral circus to Washington, impulsively announcing he was “suspending” his campaign to help forge a deal, only to change his mind the next day after a surreal White House meeting where he wouldn’t even commit to support a deal. While Obama spoke for congressional Democrats, offering constructive suggestions on a path to consensus, McCain sat sullenly at a meeting he had demanded himself. “Obama took command,” says one Republican who attended. “He was the only one who seemed presidential—not the president, definitely not McCain.” After McCain stunned the room by refusing to take a position, the meeting dissolved into shouting and finger-pointing; Paulson got on his knees to beg the Democrats not to blow up TARP. They didn’t, but Pelosi and Reid did stage symbolic votes on new stimulus spending the next day, further poisoning the atmosphere on the Hill. They knew they couldn’t pass a law, but they wanted to put Republicans on record against aid for struggling families.

On, September 29, Pelosi marched TARP to the floor, hoping the glare of the spotlight would force Republicans to support it. But her speech blaming Republicans for the crisis only solidified their opposition, as did a barrage of F-bombs from Democratic conference chair Rahm Emanuel, a force of nature from Chicago who would soon become Obama’s chief of staff. “Rahm was standing in the middle of the well, frothing at the mouth, accosting people—that’s one of the reasons they lost,” recalls Congressman Steve LaTourette, an Ohio Republican. The vote failed, and the Dow plummeted a record 778 points.

The crash finally inspired action. The media backlash against Republicans who had whined about Pelosi’s speech and Emanuel’s antics—as if they had voted to sink the financial system because their feelings were hurt—also helped focus minds. On Wednesday, the Senate passed TARP, sweetened by some tax breaks for racetrack owners, arrow manufacturers, and the like. On Friday, the House reversed course and
passed it as well. Obama lobbied dozens of Democrats and persuaded several to flip to yes by promising a new push for stimulus. The Wall Street rescue, he told them, was like patching a hole in a sinking boat to get it to port. When he replaced Bush, Washington would finally help Main Street, and give the boat some proper repairs.

And yes, he meant when, not if.

McCain’s erratic response to the crisis, along with his embrace of a suddenly discredited philosophy, sank his candidacy. Obama helped his cause by remaining steady while the world fell apart. But if there were any doubt that 2008 was a change election, it evaporated when the world fell apart. The seventy-two-year-old Republican who had spent half his life in Congress did not look like change.

“Are we sure it’s too late to hand this pile of shit to McCain and the party that created it?” Obama bantered with one of his advisers in October.

Probably, the adviser replied.

“Well,” Obama cracked, “at least we’re buying low.”

O
bama’s campaign trip to Toledo in October 2008 is best remembered for his run-in with a bald, strapping, tax-averse plumber named Samuel J. Wurzelbacher, who got him to admit he wanted to “spread the wealth around.”
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McCain name-checked “Joe the Plumber” nineteen times during the next debate, and Republicans still repeat the sound bite as proof of Obama’s socialism. In fact, his argument for a more progressive tax code was about as socialist as school uniforms are fascist. He told Wurzelbacher he wanted to cut taxes for everyone with an income below $250,000—which included a certain plumber, before the five-minute chat catapulted him onto the conservative lecture circuit—while merely restoring Clinton-era rates on higher earners. Obama also explained that his wealth-spreading philosophy was about economic growth, not just economic justice, that in a demand-driven economy, there’s no consumer demand when consumers have no money. It’s the opposite of a trickle-down philosophy.

“My attitude is that if the economy’s good for folks from the bottom up, it’s going to be good for everybody,” Obama said. “If you’ve got a plumbing business, you’re going to be better off if you’ve got a whole bunch of customers who can afford to hire you. Right now everybody’s so pinched that business is bad for everybody.”

That’s the time for stimulus, which was what Obama came to Toledo to talk about. The next day, he unveiled his “Rescue Plan for the Middle Class,” an expansion of his January stimulus plan.
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For all the talk of socialism, its major new feature was a hiring tax credit for businesses, $3,000 for every new full-time employee. “It’s a plan that begins with the word on everyone’s mind. It’s spelled J-O-B-S,” Obama said.

The plan didn’t get much attention, partly because plans make for dull copy, partly because media etiquette disguised how ambitious the plan was. Reporters described it as a $60 billion proposal, about the same size as the stimulus bills that Pelosi and Reid pushed during the TARP debate.
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But that’s only because the press wasn’t counting elements of the plan that Obama had unveiled earlier. Journalistic conventions aside, Obama was proposing to inject $175 billion into the economy, three times as much as the Democrats in Congress.

“By October,” Furman says, “the world had changed.”

The hole in the economy now looked like a canyon, so more stimulus would be needed to fill it. And recessions sparked by financial distress are much nastier and longer than normal downturns, so the definition of what counted as “timely” stimulus could be stretched. Obama’s new plan included public works, like energy-efficient school retrofits as well as typical road and bridge repairs, even though his economic team considered infrastructure projects a leisurely way to move money. Obama even proposed some of the low-income heating aid that his economists had mocked in Hillary Clinton’s stimulus proposal.

“We were no longer thinking solely about speed,” Goolsbee says. “This was a totally different ball game. We were staring into the abyss: ‘Whoa, is this the start of another depression? Is this something that could go on for years?’”

Consumer confidence was at a forty-year low. The Dow was still plunging, the auto industry was hemorrhaging, and Bernanke was blasting out emergency loans as if he were allergic to money. Polls suggested only 5 percent of Americans thought the country was headed in the right direction, and you had to wonder what those 5 percent were smoking. Obama was buying low, all right. In his Toledo speech, he was
already trying to temper expectations about the recovery. “I won’t pretend this will be easy,” he said. “George Bush has dug a deep hole for us. It’s going to take a while for us to dig our way out.”

He just didn’t realize how deep a hole, or how much digging would be required. At the time, $175 billion worth of backfilling seemed extraordinarily aggressive, more than the Pentagon spent that year on the war on terror.

“We thought we were pushing the envelope,” recalls Brian Deese, Furman’s deputy for economic policy. “It was amazing how fast what was considered substantial kept changing.”

Once again, a Washington consensus was emerging for government action. The
Washington Post
reported that “stimulus proposals are proliferating like Halloween pumpkins,” and even the conservative
Washington Times
noted widespread agreement that “the next administration should—initially, at least—open its wallet, not tighten its belt.”
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McCain proposed emergency tax cuts, and Bernanke, who usually tiptoed around fiscal issues, urged Congress to enact a “significant” stimulus to prop up the economy. Pelosi and Reid threatened to call Congress back after the election to pass another $150 billion stimulus.

A secret team of Obama advisers was already thinking bigger.

T
he Obama-Clinton fight was a bitter slog. Clintonites saw Obama as a presumptuous line cutter. Obamans saw Clinton as a poll-driven, say-anything symbol of a broken system. But once the fight was over, Obama ordered his staff to act like it was over. This wasn’t just a strategy to win over the Hillary dead-enders who were calling themselves PUMAs (Party Unity My Ass) and vowing to vote for McCain. Obama needed the Clintonites. They were the Democrats with governing experience. He knew he couldn’t make change happen without an executive branch that could execute.

Obama’s put-the-past-in-the-past approach became a big story after
the election, when he chose Hillary to be his secretary of state; tapped Congressman Emanuel, a Clinton White House adviser, to be his chief of staff; and stocked his economic team with Clinton-era veterans like Summers, Geithner, Orszag, and Furman. Quietly, though, Obama had already cast his lot with the Clinton crowd after sewing up the nomination, when he asked John Podesta, President Clinton’s former chief of staff, to lead a secret “shadow transition” to prepare for an Obama administration. All nominees do at least some pre-transition planning, but Obama’s was by far the most elaborate in history.

Podesta was a logical choice to lead it, a Washington insider who spent the Bush era getting ready for the next Democratic transition. He led the Center for American Progress think tank, a Democratic government-in-exile that was assembling a fifty-six-chapter blueprint advising the next administration how to handle everything from terrorist threats to the Federal Trade Commission.
⁸⁷
His own book,
The Power of Progress
, included a draft inaugural address for the next Democratic president.
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And he had learned what not to do by watching the Clinton transition, which bogged down after its first two directors quit to accept cabinet positions. Podesta told Obama he’d run the shadow transition and the official transition but wouldn’t accept a permanent job.

Still, Obama loyalists feared that while they were working around the clock to beat McCain, Podesta would be building the architecture for a new quasi-Clinton administration. He never did much to dispel those fears. For example, he recruited President Clinton’s EPA head, Carol Browner, to run an energy and environmental policy team; she later became Obama’s White House energy and climate czar.

“That’s when the old guard started taking over,” grouses one Obama campaign aide.

The shadow transition’s economic policy team was a case in point. It was a Clinton reunion, led by Bill Daley, a Clinton commerce secretary who would later become Obama’s second chief of staff, and Josh Steiner, a Clinton Treasury official. It also included Jack Lew, a Clinton budget director who would be Obama’s third chief of staff; Doug Elmendorf, a Clinton Treasury economist who had replaced Furman at the similarly
incestuous Hamilton Project, and would soon replace Peter Orszag at the Congressional Budget Office; and Jonathan Orszag, a Clinton White House economist who was Peter’s brother. Dan Tarullo, another Clinton economist, and Karen Kornbluh, another Clinton Treasury veteran, were the only representatives from Obamaworld. Robert Greenstein, the founder and longtime head of the liberal Center for Budget and Policy Priorities, was the only team member who hadn’t served under Clinton. At an early meeting, Greenstein, a bearded, bespectacled budget analyst out of central casting, endured some ribbing because his PowerPoint slides weren’t formatted like everyone else’s.

“Guys, I wasn’t in the Clinton White House!” he responded.

Podesta ordered the shadow economic team to avoid contact with the campaign, which had more pressing work that fall. (Biden didn’t even want to hear about the shadow transition; he was afraid of jinxing the election.) And since secrecy was a must—publicity would make Obama look like he was already measuring the White House drapes—the team didn’t do much outreach, either. Its only sounding board was an advisory committee of even more familiar Clinton-era faces: Rubin, Summers, Reich, Clinton economic adviser Laura Tyson, Lew, who doubled as an official team member and unofficial wise man, and just one outsider, Xerox CEO Anne Mulcahy.