The New New Deal (16 page)

O
bama chose his cabinet faster than any president-elect since Nixon, tapping prominent politicians (including Hillary Clinton at State and former Senate majority leader Tom Daschle at Health and Human Services), moderate Republicans (keeping Robert Gates at Defense and installing Congressman Ray LaHood at Transportation), and innovative
reformers (Steven Chu at Energy, Arne Duncan at Education, and New York City housing commissioner Shaun Donovan at HUD).
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He also named his senior White House staff in record time.

Rahm wanted the stimulus to move just as fast. He was hot for Obama to sign a bill on inauguration day, so he could begin his presidency with an act as dramatic as FDR’s bank holiday. But Phil Schiliro, a longtime congressional aide who was now Obama’s legislative director, kept pointing to the calendar. What Rahm was proposing would violate every law of legislative physics. The new Congress wouldn’t even arrive in Washington until the first week in January, which meant it would have two weeks to produce, debate, amend, and enact landmark legislation. “Some of the new members won’t even have staff yet, and we’ll be asking them to take the biggest vote of their lives,” Schiliro argued. How did Rahm intend to get a bill through God knows how many committees, then the House, then the Senate, then reconcile the two versions, and then back through the House and Senate again? Maybe first someone ought to start drafting some legislative language.

“We were already doing a bridge too far,” Schiliro says. “That was like ten bridges too far.”

Rahm spluttered and cursed his way through a few scheduling meetings, but soon he had to admit January 20 was outlandish. Instead, the team set a deadline of Presidents’ Day recess in mid-February, a slight nod toward sanity. The new plan called for Obama to build momentum first by signing two popular bills, one removing barriers to women’s equal pay lawsuits, the Lilly Ledbetter Fair Pay Act, the other expanding that children’s health insurance program that Bush had vetoed, known as S-CHIP. That would put some points on the board while the Recovery Act was taking shape. Rahm believed that in Fucknutsville, you’re either pitching or catching. He wanted to pitch.

If the new schedule made Schiliro feel marginally better about the logistics, he still worried about the politics. Obama’s first responsibility, even before he took office, would be a hideously unpopular push for Congress to approve the second $350 billion tranche of TARP. He had also pledged help for carmakers and homeowners, political land mines
in their own right. Meanwhile, Congress hadn’t finished last year’s budget, so Obama would have to deal with a giant “omnibus” spending package, as well as a supplemental spending package to fund wars, disasters, and anything else the Hill decided to supplement—at the same time he would be preparing to unveil next year’s budget. Plus the biggest stimulus ever? That was going to be a lot of spending, a lot of zeroes. To Schiliro, it felt like an Olympic dive with the highest degree of difficulty. At one early meeting, he warned: By the time we’re done with all that, we’ll be done spending money.

In retrospect, the stimulus has taken on an aura of inevitability, as if it were a foregone conclusion that Congress had to pass some kind of massive recovery bill. But Obama’s Beltway veterans thought nothing was inevitable. They remembered President Clinton’s ill-fated $19 billion stimulus. Even on a slightly more realistic legislative schedule, even during a presidential honeymoon, even in the midst of an economic bloodbath, a $580 billion package would be a heavy lift. In September, after Lehman Brothers failed, Majority Leader Reid had failed to move $56 billion through the Senate; even two centrist Democrats had voted no on enough-is-enough grounds.
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As Americans hunkered down, a Washington spending spree seemed totally off-key.

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. “I mean, even $300 billion was mind-boggling. We were talking about magnitudes of hundreds of billions of dollars more than anybody had been talking about.”

Almost anybody. The economic team had settled into Obama’s chaotic Washington transition offices at the corner of Sixth and E, taking over a section of the eighth floor. This team of rivals would later become notorious for its drama. In the coming months, Romer would furiously threaten to go home to Berkeley if Summers and Geithner kept huddling without her; Summers and Orszag would start holding competing budget meetings; Summers and Goolsbee would come to view each
other with mutual contempt. But in those intense early days, the team was still functioning fine. Even Summers was still playing nicely in the sandbox; his detractors suspect he was behaving in hopes that Obama would name him Fed chairman when Bernanke’s term expired. “He was trying really hard to control his inner Larry,” one economist recalls. The key players all worked within a few feet of one another, popping their heads into each other’s offices, meeting for hours on end.

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.”

That was even bigger than TARP.
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That was about what the United States had spent so far on the wars in Afghanistan and Iraq.

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.”

T
hat feeling was the driving force behind a fifty-seven-page “Executive Summary of Economic Policy Work” that Summers wrote with input from the rest of the economic team, laying the groundwork for the first few months of the Obama administration.
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The December 15 memo outlined the team’s thinking about the stimulus, as well as the banking, housing, auto, and budget crises. “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’s first and most important point was that a $600 billion stimulus would fail to push unemployment below 8 percent in two years. “This has convinced the economic team that a considerably larger package is justified,” 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, overemphasizing politics at a time he should have focused exclusively on the scary economics. It’s true that Summers considered his job partly political; as he told an aide, if you’re going to join the circus, sometimes you’ve got to dress up like a clown. But his memo doesn’t read as a call for caution. The language is dry, but bureaucratic sirens are blaring on almost every page.

“Insufficient fiscal impetus,” Summers wrote, “could put recovery at risk, with catastrophic consequences.” It’s a call for action, and action now.

T
he stories Obamaworld tells about itself tend to begin in the Chicago transition offices on December 16, 2008, when the president-elect met with his economic team for the first time to discuss the horror show he was about to inherit.
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David Axelrod, Obama’s schlumpy but savvy political guru, is a former reporter who understands the power of narrative, and he has helped spin that snowy Tuesday in the Windy City—“an unforgettable day,” he reminded me two years later—into a kind of Rosebud for the Obama White House. Obama was in his analytical element, coolly leading a four-hour discussion of the unappetizing policy choices framed by the Summers memo, repeatedly coming down on the side of bold action—a perfect opening scene for his presidency’s creation myth.

“Politics was in the room, but economics dominated the conversation,” recalls Jared Bernstein, the house liberal of the economic team.

Politics had its moment just before the meeting, when the economists previewed their message for Axelrod: The economy was hurtling toward a depression. Axelrod knew things were bad, but there are so many degrees of bad, and even he hadn’t grasped how close America was to rock-bottom bad. He said his research suggested the public had no clue whatsoever. Summers, the Washington veteran, dryly whispered
to Romer, the lifelong academic: “He doesn’t mean research the way we mean research.”

Okay, polling. Axelrod’s point was that the tidal wave hadn’t yet hit the shore. There hadn’t even been a real tsunami alert.

“The American people,” he said, “have not had their holy-shit moment.”

Stage-managing the meeting, Summers had assigned Romer to open with an overview of the emergency. With Axelrod’s analysis fresh in her mind, 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.”

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omer had searing memories of the recession of the early 1980s, the worst of the postwar era, the downturn triggered when Paul Volcker’s Fed jacked up interest rates to curb inflation.
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She was at grad school at MIT when her father told her he had been “sacked” from a Philadelphia chemical plant—but don’t worry, he had set aside money for her upcoming wedding. Her mother soon found out her teaching job was in jeopardy, too. But once inflation subsided and the Fed started lowering rates, consumption and investment came roaring back. By the time Romer returned from her honeymoon, her mom’s contract had been renewed. Her dad soon found a new job.

The gist of Romer’s Chicago presentation was that this wasn’t her father’s recession. With what Obama later described as “a chilling set of charts and graphs,” she showed that the situation was threatening to make 1982 look like the good old days. And this downturn had been triggered by a financial meltdown, not high interest rates, so it couldn’t be reversed by lower interest rates. The only comparable collapse had ushered in the Depression, the era Romer knew best.

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, an era of prolonged stagnation. She explained why depressions really, really suck—the wasted human capital, the lost tax revenue, the immeasurable suffering—but she also warned that the slow-bleed Japanese route could end up almost as badly as 25 percent unemployment.

Fortunately, economists had learned a lot about avoiding catastrophes. They knew from the errors of the Depression that tax hikes, spending cuts, or tighter money would make the crisis worse. And 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, an unheard-of 5 percent to 8 percent of GDP over two years. In FDR’s most aggressive year, the New Deal’s stimulus only amounted to about 1.5 percent of GDP.
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Rahm looked like he was about to pass a kidney stone.

“We were all thinking: ‘Oh, my God,’” Goolsbee recalls.

It later became clear that Romer’s ugly analysis, while based on the most current data, was way too rosy. The Federal Bureau of Economic Analysis had just pegged growth for the third quarter at –0.5 percent; it would later revise that to –4.0 percent, an unprecedented adjustment. Still, Romer recognized that the economy was in free fall, even though she had no idea how far it had already fallen.

Orszag, a nerdy-chic budget hawk with an independent streak—he wore cowboy boots even though he grew up in an academic family in the Boston suburbs—was about to assume responsibility for the biggest deficit in history.
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So he would have preferred to start smaller, closer
to $600 billion. Geithner, who was so worried about the banks that he thought Obama would need to launch a second TARP, also seemed uneasy about the incoming tide of red ink. He thought the financial rescue would be the real key to recovery; he’d later tell Romer there was more stimulus in TARP than in the stimulus. Romer would shoot back that there was more financial rescue in the stimulus than in the financial rescue; she thought the key to Wall Street stability would be restoring the health of its Main Street customers.

Anyway, 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.
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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”—a Larry-ism for unrealistic—triggering more accusations that Summers had withheld information from Obama.
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But that was a bum rap. His final memo mentioned that several outside economists—including Stiglitz, Reich, and former McCain adviser Ken Rogoff—supported at least $1 trillion. 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.