The New New Deal (15 page)

“When Austan got hosed, a lot of us were like: Hey! What’s happening to change we can believe in?” a campaign staffer recalls.

The team’s only traditional liberal was Biden’s chief economist, Jared Bernstein of the union-funded Economic Policy Institute, a New Age wonk who had studied double bass at the Manhattan School of Music, then had earned degrees in social work and philosophy. He had a mellow, good-energy vibe, but he wasn’t perceived as a heavyweight who could counter Summers or Geithner. Obama’s labor secretary, California congresswoman Hilda Solis, was also a staunch progressive, but it was clear she wouldn’t be part of the economic team.

Starting early in the transition, the Obama team seemed to go out of its way to accommodate Republican demands, signaling that it would put card-check on hold, include significant tax cuts in the stimulus, and keep the Bush tax cuts for the rich during the downturn. Obama’s plans to seize guns and impose the Fairness Doctrine existed only in the fevered imagination of the right. But when it came to Main Street stimulus, Obama’s team sounded a lot like traditional liberals.

“I don’t know what the exact number is, but it’s going to be a big number,” Goolsbee declared in a TV interview.
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“We’re out with the dithering, in with a bang.”

Of course, even the CEOs at the
Wall Street Journal
conference had sounded like liberals when it came to stimulus. But Summers kept warning that the dangers were all on the side of doing too little, not too much. By the time those 387 progressive economists sent their letter urging a $300–$400 billion package, his $500–$700 billion trial balloon was already appearing in news stories as Obama’s preferred policy.

“We knew this had to be big, but we didn’t comprehend just how big before Larry got deeply involved,” Furman says.

Christy Romer, the incoming CEA chair, felt even stronger about the need to go big. And when she was summoned to meet the president-elect for the first time in Chicago, she found out that he was on the same page.

R
omer’s first meeting with Obama has entered the realm of myth, but she remembers it vividly. She was waiting nervously in the Chicago transition offices to talk to him about the CEA job, finishing a last-minute comb of her hair, when she heard that familiar baritone: “Dr. Romer, so nice to meet you.” The president-elect shook her hand warmly, then ushered her into another office; she was flattered he had come out to greet her, rather than send an assistant to fetch her. Obama began their chat by remarking that there wasn’t much more the Fed could do to inject monetary stimulus into the economy. Romer bluntly responded that he was wrong. Even though the Fed was about to lower its key interest rate as close as it could go to zero, there were still ways it could help juice the economy.

This innocuous exchange among eggheads later sparked an odd sexism controversy, after journalist Ron Suskind wrote in his best-seller
Confidence Men
that “before exchanging hellos or even shaking hands,” the president-elect tried to deliver a “zinger,” saying monetary policy had “shot its wad.”
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Suskind used this “salty, sexual language” as his Exhibit A demonstrating that “the president didn’t have particularly strong women skills.” But Romer is positive that Obama never said those words to her, even after exchanging hellos and shaking hands; she used them to Suskind, paraphrasing the president-elect. She says Obama was courteous and professional, and she remembers that day as one of the most thrilling of her career. She found the entire kerfuffle surreal.

What Romer remembers most about that discussion was Obama’s laser focus on fiscal stimulus, and his interest in the lessons of the New Deal. Romer’s academic work had emphasized how FDR’s expansionary monetary policy of taking the United States off the gold standard had helped breathe life into a moribund economy. But like most scholars
of the era, she also believed that FDR’s expansionary fiscal policy had helped boost growth during his first term, and that his premature shift to austerity in 1937 had throttled the recovery. She saw two problems with FDR’s fiscal stimulus: It was too small, and he abandoned it too quickly. “One of my early themes was that sheer size matters,” Romer says. In the current crisis, even though she rejected the conventional wisdom that the Fed was out of ammunition, she thought the crisis was so grave that Congress desperately needed to act as well.

“I think we need a
very
large fiscal stimulus,” she said. Obama agreed.

Romer and Obama also agreed that part of Roosevelt’s genius was the way his own jaunty confidence had helped restore national confidence. Romer said it was hard to measure the effect of FDR’s forceful promises to fight the Depression like a foreign invader, but they had an effect. By contrast, Hoover’s passivity had left Americans feeling like no one was looking out for them, and Romer thought history was repeating itself. Where was Bush? She was glad Washington was stabilizing the banks, but who was stabilizing the rest of the economy?

Time
’s new cover, headlined “The New New Deal,” had depicted Obama with FDR’s trademark cigarette holder and pince-nez, and he was thinking a lot about the bond Roosevelt had forged with ordinary Americans through his speeches and fireside chats. Obama hoped to start a similar conversation with the public. He wouldn’t tell Americans they had nothing to fear except fear itself, because that wasn’t true. He lacked FDR’s talent for BS. But he thought that by projecting competence and determination, by assuring the country that he was on the case and developing appropriate policies, he might be able to help soothe some anxieties.

On November 24, Obama pitched his new New Deal at his news conference to introduce his economic team, trying to project Rooseveltian resolve.
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“If we do not act swiftly and boldly, most experts now believe we could lose millions of jobs next year. … We cannot hesitate and we cannot delay.” Obama refused to put a specific price tag on the stimulus, but pledged to “do what’s required to jolt this economy back
into shape.” At the urging of Rahm, who was convinced the stimulus would need a jobs number to get traction on the Hill, he did lay out a specific goal of creating or preserving 2.5 million jobs. He also committed to use the recovery effort to attack the nation’s energy, health care, education, and infrastructure problems, “to lay the groundwork for long-term sustained economic growth.”

At times, Obama sounded more like a pundit than a leader, talking about the importance of restoring confidence instead of just doing it. He seemed grim, not jaunty, and he kept undercutting his message of revival with caveats about the slog ahead—partly because he didn’t want to sugarcoat a nasty situation, partly because David Axelrod worried that inflating expectations now could create a backlash down the road. “I want to repeat, this will not be easy,” Obama said. “There are no shortcuts or quick fixes.” His exhortations about long-term investments also seemed to undercut his urgent message about short-term jobs. And the next day, Obama blurred his call for fiscal stimulus by preaching fiscal restraint. “There’s no doubt that we’ve been living beyond our means, and we’re going to have to make adjustments,” he said.

Obama had a real public relations challenge. He didn’t want to depress confidence. He didn’t want to promote irrational exuberance, either. He needed to project forcefulness but not profligacy. Like FDR, he was about to replace an unpopular president who was leaving the economy in shambles, but unlike FDR, he would take office before Americans really felt the pain. There were no Hoovervilles, no Dust Bowl. As the Reagan speechwriter Peggy Noonan wrote in the
Wall Street Journal
, everything still looked the same: “It’s as if the news is full of floods but we haven’t seen it rain.”
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Obama aides used a similar metaphor: The tidal wave was in motion, but it hadn’t hit the shore.

That time lag could create major political headaches. Sure, Obama was buying low, but was he buying low enough? Summers mused that FDR was lucky; the country had already suffered through three years of depression under Hoover before he took over. Everyone understood that it was Hoover’s depression.

“That’s probably true,” Romer earnestly replied. “But I’m so glad Obama is here. Maybe this time we won’t have to suffer so long.”

T
he November jobs report made the October report look like a ray of sunshine. Over 500,000 jobs had evaporated, the worst monthly decline since 1974. “The economy is unraveling so fast as to defy analysis through the usual statistical methods,” the
Washington Post
reported.
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Ordinarily sober analysts used phrases like “shockingly weak,” “indescribably terrible,” and “God-awful.”

It was Romer’s job to inform Obama the economy was in critical condition, which was not how she had imagined her first presidential briefing.

“I’m so sorry, Mr. President-Elect,” she blurted out. “The numbers are just horrible.”

“It’s not your fault,” Obama replied. “Yet.”

The end of 2008 tends to be remembered as an undifferentiated blob of bad news. It’s easy to forget the scary trajectory, the way bad kept getting worse. That “horrible” report of 500,000 lost jobs would later be revised to a beyond-horrible 800,000. By December, retail sales had reached their lowest ebb since 1969, wiping out chains like Circuit City, and one in ten mortgages were delinquent, a record. California governor Arnold Schwarzenegger declared a fiscal emergency. On the positive side, sort of, the global slowdown dragged crude prices 70 percent below their summertime peak. But it was hard to get excited about cheap gas when you couldn’t find a job or pay your bills.

This was the kind of vicious cycle Keynes had warned about, and it bolstered the case for a Keynesian response. More Americans without jobs or health insurance meant a deeper need for jobless benefits, Medicaid, and other antipoverty aid. And a bigger hole in the economy meant a bigger stimulus would be needed to fill it. As Romer later pointed out, fiscal stimulus was not considered an exotic or ideological
tool.
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“It is a tried and true remedy widely supported by economists across the political spectrum,” she explained in a speech. “It is standard fare in both introductory textbooks and more sophisticated modern theoretical models.”

At Obama’s transition headquarters in downtown Washington, the stimulus plan had now grown to $580 billion. That was ten times the size of the stimulus bills Congress had voted on just two months earlier—and about as much as the United States spent on Medicare and Medicaid that year.
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In a four-page summary distributed in early December—with each page marked “NOT TO BE SHARED”—Summers and Furman called the plan an effort to “jolt the economy, restore America after years of neglect, and make critical 21st century investments to begin the transformation of the American economy.”
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Rahm was already down on the word “stimulus”—overly Washington, insufficiently grand—so they called it “The American Economic Recovery Plan.”

The biggest addition was the New Jobs Investment Tax Credit, the hiring incentive for businesses that Obama had proposed in Toledo. Some critics dismissed the credit as free money for firms that would have hired anyway, but even if only one or two out of ten new hires were prompted by the incentive, it would still be a fairly inexpensive way to create jobs. As for the other eight or nine hires, well, giving money to growing firms would provide stimulus, too. The main goal was to splash cash into the economy, which was why the updated recovery plan also extended the Making Work Pay tax cuts over two years. Overall, 40 percent of the new plan consisted of tax breaks, which would annoy liberals, but would also provide an easy mechanism to get money out the door. On the spending side, there was only so much pig that could be shoved through the federal python in just two years.

“With numbers that huge, it starts to be a real logistical challenge to spend money quickly and still make sure you’re getting high bang-for-the-buck,” explains Brian Deese, who joined the NEC staff after the transition. “Tax cuts start to look pretty attractive as part of a package.”

But the new plan also jacked up spending on long-term priorities.
Geithner had told Obama that no matter what happened after the crisis was over, his main legacy would be preventing a second depression.
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The president-elect had replied: That’s not enough. In his radio address on December 6, he announced the first five elements of his recovery program, and they sounded like his campaign agenda in new clothing: “A massive effort to make public buildings more energy efficient.
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… The single largest new investment in our infrastructure since the creation of the interstate highway system. … The most sweeping effort to modernize and upgrade school buildings this country has ever seen. … We’ll renew our information superhighway. … We’ll make sure every doctor’s office and hospital in this country is using electronic medical records.” Change was in the works.

At the same time, Obama wanted to hammer home his short-term message that help was on the way. In his first inaugural, FDR had proclaimed that “the nation asks for action, and action now”—a line that prompted way more applause than “fear itself”—and Obama ripped him off: “We need action, and action now.”

This bifurcated approach—a short-term emergency intervention combined with a long-term foundation for growth—did not seem impossibly difficult to understand. Neither did the similarly dualistic notion of aggressive deficit spending while the economy needed stimulus, followed by fiscal restraint once the danger passed. These ideas were no more hypocritical or contradictory than Obama’s proposal to raise taxes on the rich and cut taxes for everyone else. He assumed the public was capable of grasping a straightforward two-part message.

That assumption would haunt him. It turns out that one-part messages—stimulus is bad, deficits are bad, taxes are bad, government is bad—are much easier to grasp.