The New New Deal (12 page)

“It definitely felt like we were getting the band back together,” says one participant.

The band’s modest assignment was to produce a few briefing papers to hand off to the post-election transition team, which would presumably be too busy screening job candidates to do much policy analysis. “We figured we’d do some prep work, then once Obama picked his people, they wouldn’t care what we had to say,” another team member recalls. But once the economy imploded, that prep work took on outsized importance. The next president would have to act with superhero speed to deal with multiple nightmares unfolding in real time. Briefing papers from Washington veterans who were already immersed in those nightmares would be extremely useful.

Lew ran the stimulus prep. Obama would inherit crises in the banking,
housing, and auto sectors, but a jobs bill looked like Job One, an “early test of leadership,” as Lew noted in one memo. “In addition to direct policy impact, it will be symbolic of competence to execute effectively.” So Greenstein and Lew—a taller, clean-shaven version of the green-eyeshade type—tried to get a handle on the economic outlook. It felt like trying to grab a greased pig. In August, Greenstein reported that states had sliced $50 billion from their budgets to close their fiscal gaps. By October, he was warning that the states already faced $100 billion in new shortfalls. “Everything was going downhill so fast,” recalls Lew, whose employer, Citigroup, was itself clinging to life. “It was so hard for our thinking to keep up with events.” Lew spoke regularly with Summers, whose acerbic pessimism unnerved him.

“It really made an impression on me how Larry was getting more and more worried as he saw more and more data,” Lew says.

That was the unsettling backdrop for the team’s key meeting, an October 17 briefing for the advisory board in a Manhattan law office. In a logistical email, Steiner emphasized that the goal was not to relitigate the Rubin-Reich debates of the 1990s. “We are explicitly NOT making recommendations on matters such as how to prioritize between deficit reduction and investment,” he wrote. “We believe that the new President, Vice President and their team will make these choices.” Steiner warned that to prevent leaks, there would be no paper distributed: “With my apologies for stating what I am sure is obvious, the content of this meeting and the fact that it is occurring are both strictly confidential.” He added: “This effort is independent of the Obama campaign and the materials presented should not be construed as reflecting the campaign’s positions.”

That was a useful disclaimer, because Lew’s presentation didn’t reflect the campaign’s positions. Three days after Obama proposed his $175 billion stimulus plan, Lew suggested that as much as $300 billion might be needed. With credit markets seized up, consumers tapped out, businesses retrenching, and state and local governments staggering, it wasn’t clear where else a jump start could come from. The Fed had already taken the obvious steps to try to jolt the economy with
monetary policy, cutting interest rates almost to zero. Financially led recessions were always brutal, and this one looked like the worst since the Depression.

“People were like: Shit. That’s a big number,” Podesta recalls. “But it was looking cataclysmic out there. Nobody was saying: Oh, we won’t need that much.”

The group briefly discussed whether 2008 had anything in common with 1993, when Clinton decided to focus on deficit reduction, and the consensus was: Not much. “Every single person in that room agreed that in the long term, you had to get the deficit under control, but every single person also agreed that first there had to be a huge stimulus package,” another participant recalls. Greenstein did startle the room by projecting a trillion-dollar deficit for 2009, more than twice the latest CBO forecast, and Reich worried aloud that such gigantic shortfalls would cripple Obama’s long-term agenda. But nobody argued against short-term stimulus. Even the fervent deficit hawks accepted that a depression or a protracted recession would shrivel tax revenues and create more red ink than a hefty stimulus ever could.

Sure, there was always a possibility that stimulus would overheat the economy once it was in recovery, but that sounded like a fabulous problem to have. In an economy without demand, Depression-style deflation was a much bigger risk than inflation. As Summers argued, it would be much safer to err on the side of too much stimulus than not enough. If the fiscal boost overcaffeinated the economy, the Fed could always raise rates to mellow it out. The first priority, everyone agreed, should be averting a cataclysm.

A week later, a Goldman Sachs report called for anywhere from $300 billion to $500 billion worth of stimulus.
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A week after that, conservative Harvard economist Martin Feldstein, a top Reagan adviser, endorsed a $300 billion package in a
Washington Post
column.
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In those days, it didn’t take long for the unthinkable to look inevitable.

T
he shadow team was assigned to play the honest broker role that the National Economic Council is supposed to play at the White House,
summarizing the pros and cons of various policy options. Lew’s final stimulus presentation—a thirty-six-page “Confidential Discussion Draft” dated two days before election day—provided an admirably balanced overview, although it did leave clues about where the team stood.
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The page titled “Arguments for significant stimulus package” was so crammed with bullet points it required a smaller font, while the “Arguments for small stimulus package” page looked like it was formatted for a reader with vision problems.

Still, even in large type, Lew recognized that critics would argue the Bush stimulus and TARP had already added enough red ink. He noted that soaring deficits could conceivably spook bond markets and drive up interest rates, which could crowd out private investment. That raised a question: Should the stimulus be paid for? Democrats had adopted fiscally responsible pay-as-you-go rules after taking back Congress, and while the rules had been suspended for the Bush stimulus and TARP, Blue Dog Democrats had objected to Pelosi’s stimulus plan in the fall because it didn’t include offsetting spending cuts. In the short term, offsets would defeat the purpose of Keynesian stimulus; the point was to transfer public dollars into private hands. But Lew raised the possibility of offsetting short-term stimulus with longer-term austerity, or a “trigger” that would restrain spending automatically once the economy recovered. Otherwise, Congress would be tempted to decorate the package with ornamental add-ons.

“Stimulus may become a Christmas tree if it is the last chance to escape budget discipline,” Lew warned.

The main problems with offsets and triggers were political: “Fast action needed and specific offsets likely to cause delay.” At a time when the administration would need to avoid a protracted fight in Congress, spending cuts would be contentious, and tax hikes would be nonstarters. “It is critical to avoid controversies that would delay enactment,” Lew wrote. Anyway, it seemed unfair to demand offsets for a Main Street stimulus when the Wall Street bailout hadn’t been paid for. The team of Clintonites agreed that at some point there would have to be a pivot from a short-term fiscal festival to long-term fiscal discipline, but the worst economic crisis in seventy-five years didn’t seem like that point.

In fact, Lew suggested that while triggers designed to roll back the stimulus if the slump ended might be unworkable, triggers designed to expand the stimulus if the slump persisted could help avert future showdowns: “avoids need for time-consuming process if additional stimulus is needed later … prevents need to spend political capital on multiple rounds of stimulus.” The team’s Clinton-era combat veterans did not assume that passing jobs bills would be easy. They remembered Republicans blocking their relatively tiny $19 billion stimulus in 1993, even after Democrats whittled it down and offered offsets. They tended to be skeptical of Obama’s post-partisan dreams.

So even though unemployment benefits and food stamps were excellent stimulus, Lew warned that Republicans would criticize them as big-government welfare. State aid would be lampooned as state bail-outs, and a second round of tax rebate checks would “look like more of the same when the first round did not stop the recession.” A jobs bill might sound like fun, but politically, there was no perfect stimulus.

Not even the shovel-ready infrastructure projects that politicians loved so dearly.

J
ack Lew first set foot in the Office of Management and Budget in 1983, to negotiate a $4.6 billion stimulus package with the Reagan administration. At the time, he was working for House speaker Tip O’Neill, the backslapping New Deal Democrat who famously believed that all politics was local. Ever the loyal staffer, Lew helped stuff the bill with money for shovel-ready local infrastructure projects that would get people to work and get O’Neill’s ribbon-cutting members reelected.

When Lew returned to OMB as an associate director a decade later, the career staff remembered that money—because some of it still hadn’t gone out the door.

“I got a lot of grief over those spend-out rates,” Lew recalls.

Lew remained a proud Tip O’Neill liberal, just a skeptical one when it came to using infrastructure as stimulus. On this issue, he sided with the economists against the politicians. “Not clear whether plans, materials
and personnel are in place to accelerate public works rapidly,” his PowerPoint said. “Past experience suggests not.”

But past experience had not included a financial implosion. In the postwar era, the average recession had lasted less than a year, a tight timeline for even truly shovel-ready projects. Nobody expected an average recession this time. Lew thought the prospect of a deeper, longer downturn meant projects that took two or even three years might still be timely. And that meant the stimulus package could “become a recovery package and include measures to jump-start a longer-term growth agenda.” It could be a Trojan horse for Change We Can Believe In.

The shadow team recognized the pitfalls of this strategy, including “risk of package growing large and losing control,” as well as “risk of driving too much spending to longer-term agenda and not providing sufficient short-term stimulus.” Those were prescient concerns. It also foresaw that the rush to fund ready-to-go public works could accelerate lower-priority projects, and suggested an “absolute policy of no earmarks” to prevent Congress from larding up the package with pork. That was prescient advice.

But these battle-hardened Clintonites also had a prescient argument for using the crisis to start building Obama’s new foundation: “stimulus may be only chance for quick action on longer-term growth and energy/environment agenda.” Right now, Obama wore a halo of hope. Maybe his aura could survive four years of Washington slime, but just to be safe, this seemed like a good time to do the things he ran to do.

O
n election day, Christy Romer voted early. Like a giddy tourist boarding a cruise ship, she asked her husband, David—another Berkeley economist—to snap her picture outside the polling station. Then she took some rugs to the cleaners, stopped by the hardware store, and returned some clothes that didn’t fit. She didn’t bother to go to the office. She was too distracted to work. Romer had provided occasional advice
to the Obama campaign, and would soon become a top White House adviser, but it wasn’t her job prospects that had her in a tizzy. She was fired up about change.

In a field of gray eminences and dull conferences, Romer was a splash of passion and idealism. With apple cheeks and strawberry hair, a Midwestern accent and guileless smile, she gave the impression of a kindly middle-aged auntie, more likely to dispense hugs or cookies than sophisticated economic advice. She reminded everyone of Julia Child, if Julia Child had been enthusiastic about regression analysis instead of beef bourguignon. Now she was enthusiastic about Obama—not just his policies, but his interest in facts, data, experts. He seemed reality-based. And that 2004 convention speech convinced Romer he had that special something; she liked to watch it on YouTube. As a Depression scholar, she thought the United States needed a new New Deal, and she thought Obama could be a new FDR. At a time of real peril, he could help revive the American economy and restore the American spirit.

That night, the Romers had dinner guests, their Berkeley colleagues George Akerlof, a Nobel laureate, and Janet Yellen, who had chaired the CEA under Clinton and would be vice chair of the Fed under Obama. The two couples had watched the returns together in 2000, and Christy remembered the sinking feeling she had when the networks took Florida off the board, the first step toward eight years of George Bush. This time, there was no suspense. Obama was declared the winner at 8
P.M
Berkeley time, and the four ecstatic Keynesian economists cheered, hugged, and drank champagne. The electorate had repudiated the Republican Party, awarding Obama more than twice as many electoral votes as McCain, expanding Democratic majorities in both houses of Congress, obliterating turnout records. The Bush era was finally over.

Soon the president-elect came on the screen, live from Grant Park: “At this defining moment, change has come to America.”
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But also: “This victory alone is not the change we seek. It is only the chance to make this change.”

And finally: “Where we are met with cynicism, and doubt, and those who tell us we can’t, we will respond with that timeless creed that sums up the spirit of a people: Yes we can!”

After her guests left, Romer was so excited she couldn’t sit still. She had never felt an impulse like this before, but she needed to be part of a crowd. So she and David piled into their Honda Accord and drove into downtown Oakland. They followed the sound of honking horns and blaring music to Broadway, the troubled city’s main drag. They parked a few blocks away and walked toward the fun.

Then the two MIT-trained macroeconomists began dancing in the street, just about the only white faces in an exuberant black crowd, a pair of awkward fifty-year-olds surrounded by kids a third their age. Christy just wished she had brought a flag. It felt like a good night to wave a flag.