The New New Deal (22 page)

Whatever the reason, Democratic leaders wasted no time sending
the message that while they supported Obama’s agenda, they did not intend to bow down to his White House. Biden was about to become the presiding officer of his beloved Senate, but Reid announced that he was no longer welcome at Democratic caucus meetings. “I do not work for Barack Obama,” Reid told reporters.
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Pelosi owed her gavel to Rahm, but sternly warned him not to meddle in House matters or even backchannel with his former colleagues without notifying her.

This muscle flexing extended to substance, not just process. While Republicans were preparing a united front against the Recovery Act, Democrats were already squabbling about the details.

C
hairman Obey was not one of the Democrats griping about bailouts for governors. He knew state aid was terrible politics, but it was still his top Recovery Act priority; it didn’t make sense to inject stimulus if states were just going to counteract it. So when Jason Furman and Obama’s top domestic policy advisers, Melody Barnes and Heather Higginbottom, suggested $200 billion in state fiscal relief, Obey readily agreed. When they suggested half the money should flow through Medicaid to prevent states from cutting health care for the poor, Obey agreed again. Then they suggested sending the other half through an education fund that would require governors to adopt sweeping school reforms in order to qualify for the cash.

What? Obey definitely did not agree.

He blasted the fund as an “absolutely horrendous mistake” that could sink the bill. He predicted Republicans would trash it as “more social engineering from Washington,” while Democrats in thrall to teachers unions would be just as hostile: “I cannot think of an operation that will do more to discredit this entire package.”

This blowback was not a surprise. Furman, Barnes, and Higginbottom had proposed the fund in a post-Christmas memo to Rahm. “May be hard to enact without significant consensus reached among congressional stakeholders,” they noted.
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“Some will say the President-Elect is using an economic crisis to jam a controversial reform agenda.” They recognized “the political imperative to develop a package that would actually
pass Congress at a time when bailout fatigue is setting in.” Unity would be nice, but their party didn’t work like that.

So one evening, deputy budget director Rob Nabors and his colleagues went to Obey’s office to try to work out a deal with his old boss and some Senate Democrats; he let himself in with his old key. The members of Congress wanted to convert most of Obama’s school reform fund into a more flexible “stabilization fund” that states could use to patch holes in their budgets. Obey and Senator Tom Harkin of Iowa then hashed out a plan to distribute about $25 billion through existing programs for high-poverty schools and special education. They agreed to chip in $1 billion for Obama’s reforms.

That’s when Nabors finally spoke up. “We can’t go along with that,” he said.

Obey was livid, pounding his fist on the table. This was supposed to be a stimulus, not a backdoor effort to reinvent schools. He was trying to prevent brutal education cuts; he didn’t have time for trust-us-on-the-details reforms. “If you guys want to reform the hell out of the education system, do it when people aren’t drowning,” he snapped. And Nabors was Obey’s guy. How often had they fought together to steer education money to poor and disabled children?

“If my staff director was still here, he’d tell you to go to hell!” Obey bellowed.

Obey grabbed his coat to storm out of his office.

“Wait a minute, Mr. Chairman,” pleaded Phil Schiliro, Obama’s legislative director. “Let us check in.”

Obey, who enjoyed his gin-and-tonics, grumbled that if he wasn’t going to leave, he was going to have a drink. He poured one from his private stash.

After calling Emanuel and Arne Duncan, Nabors calmly outlined a deal: Obey could have his business-as-usual money, but Obama needed $15 billion for reform. The meeting broke up around midnight on a friendlier note, but this wouldn’t be the final skirmish. Not even the president could dictate terms to a crotchety old bull like David Obey.

“We all saw
Schoolhouse Rock
,” says one Obama aide. “We knew how a bill becomes a law.”

O
bama delivered his first formal speech of the transition on January 8 at George Mason University, making an urgent case for what he now called his American Recovery and Reinvestment Plan. The speech was a cross between the professorial and inspirational Obama, explaining what he wanted to do and how it would change the world:

We cannot depend on government alone to create jobs or long-term growth.
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But at this particular moment, only government can provide the short-term boost necessary to lift us from a recession this deep and severe. Only government can break the vicious cycles that are crippling our economy, where a lack of spending leads to lost jobs, which leads to even less spending. … This is not just another public works program. It is a plan that recognizes both the paradox and the promise of this moment—the fact that there are millions of Americans trying to find work, even as all around the country there is so much work to be done.

It was a compelling defense of Keynesian economics, but hardly anyone noticed. Obama wanted to start a conversation with the public, but in a conflict-addicted party and a conflict-driven media climate, he couldn’t even control his own end of the conversation.

That’s because shortly after he finished speaking in suburban Virginia, Summers and Axelrod met with Senate Democrats in the Capitol. Axelrod shared his latest polling, noting that two thirds of the public had confidence in Obama. But powerful Democrats like Budget chairman Kent Conrad of North Dakota and Finance chairman Max Baucus as well as reliable liberals like Harkin spent most of the meeting picking apart Obama’s plans for $300 billion worth of tax cuts. They were all dismissive of his tax credit for firms that hire new workers, ridiculing the idea that a $3,000 check would motivate businesses to add employees when demand for their products was evaporating. Several senators
were also skeptical of Making Work Pay. “Twenty bucks a week—how much of a lift is that going to give?” Conrad asked. Liberals were particularly concerned about Obama’s proposed tax breaks for businesses, like a “carryback” provision that would allow firms with large losses to claim refunds for taxes paid over the previous five years, a windfall for the big banks and home builders that had helped shred the economy. Harkin understood why Republicans were pushing carryback, but why was Obama?

“To me it looks a little bit like trickle-down,” he said.
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This was normal Democratic kvetching, not a vicious family feud. Summers told the senators: “Message received, loud and clear.” Obama had asked for ideas; he didn’t expect U.S. senators to behave like potted plants. And the transition team took their criticisms seriously. Even Furman and Treasury’s Gene Sperling, the hiring credit’s strongest advocates, agreed they ought to drop it after its hostile reception on the Hill. Sperling was such a fan of the credit that he had been teased at his wedding for peddling different versions to different presidential candidates, but it wasn’t worth a dispute that could delay the stimulus. “We had to let it go,” Sperling says. The Obama team also worked with the Senate to draft new tax credits for green manufacturing and college tuition.

Of course, the media did not emphasize this collaboration when the whiff of conflict was in the air. The day after Obama’s call to arms on the Recovery Act, the headlines were all about friendly fire: “Senate Allies Fault Obama on Stimulus.”
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“Democrats Make Clear They Will Guard Turf.” “Democratic Congress Shows Signs It Will Not Bow to Obama.”

Obama’s own party was doing McConnell’s work for him, slapping the stimulus with a “controversial” label. Every critical Democratic quote gave McConnell ammunition to use with colleagues tempted to burnish their bipartisan credentials by endorsing Barack Almighty’s first big initiative. “If you’re a Republican, you can’t be to the left of these Democrats who are saying there’s a bunch of crap in there,” a McConnell aide explained. “If they’re not embracing it fully, there’s no reason on God’s green earth you should.”

House Democrats weren’t embracing it fully, either. In early December, for example, Chairman Oberstar had proposed $45 billion worth of infrastructure for the Recovery Act. But when Obama’s proposal landed in the same ballpark, Oberstar upped his request to $85 billion.
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He saw infrastructure as the backbone of American prosperity, promoting long-term growth by making the U.S. economy more efficient, providing short-term jobs for U.S. workers with calluses on their hands, stoking demand for U.S. products like the iron ore mined in his district. He couldn’t stand watching China build better railways and Brazil build better ports. And when Summers visited House Democrats, the day after his tussle on the Senate side, Oberstar objected to his uncontroversial point that public works take a long time. “You’re wrong!” Oberstar cried. “You don’t understand how this works.” As Oberstar droned on about the intricacies of transportation projects—bidding processes, the difference between outlays and obligations, his summer job during college puddling concrete—Summers looked like he was back at a Harvard faculty meeting, trying not to roll his eyes while getting chastised by some wrinkly professor of medieval literature.

Democratic leaders did not want the circular firing squad to get out of hand. They really did support Obama’s agenda, and they knew their political fates were tied to his. At the next Senate caucus meeting, Reid reminded his members there was “a new sheriff in town.” They could criticize Obama’s plans, but they should call Rahm or Schiliro before going public. At the next House caucus meeting, when Oberstar started carping again, asking why Obama wanted so many tax cuts when public works create more jobs, Pelosi unceremoniously cut him off.

“The only reason we’re talking about stimulus is that Barack Obama won the election,” she declared. “He promised tax cuts, so that’s going to be in the package.”

But the sniping continued. As Obama raced to pass the Recovery Act and stave off a depression, Democrats complained that it was too big and too small, too rigidly partisan and too accommodating to the GOP, too focused on short-term stimulus and too focused on long-term transformation. It wouldn’t pour enough concrete; it wouldn’t
do enough about housing; it ought to be paired with deficit reduction. Obey, incapable of staying on anyone’s message, publicly mocked Obama as “the crown prince.”

Republicans accepted every gripe as a political gift.

And they were about to receive an even better gift.

T
he day after Obama’s little-noticed speech, the December employment report brought more nauseating news. Another 700,000 jobs had disappeared, the equivalent of Detroit’s entire population getting laid off for the holidays. The way things were going in the auto industry, that didn’t sound so far-fetched. At a stimulus hearing, the former McCain adviser Mark Zandi warned that the economy was “shutting down.”
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The next day, the transition released happier news: the Romer-Bernstein report.
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It was a preliminary analysis of the Recovery Act’s potential jobs impact, the first macroeconomic evidence that the stimulus could help jolt the economy out of cardiac arrest. It was also the most politically damaging document of Obama’s first term—and the term wouldn’t start for another ten days.

Romer-Bernstein actually originated with Rahm. He was happy to stuff campaign priorities like solar panels and school reforms into the stimulus, but when it came to selling it, he preferred a simpler message: Jobs. He liked to say jobs would be Obama’s number-one priority—and number-two, and number-three. Now that he had a jobs number for the Recovery Act, he wanted an official report to enhance the credibility of that three million figure on the Hill. In essence, he wanted a talking point to help sell the stimulus. The report would end up providing the most enduring talking point of the Obama era.

“Rahm decided he needed to attach a jobs number to sell this thing,” snipes one Obama aide. “I thought that was the most damaging thing we could’ve done. It was 1990s thinking.”

Summers assigned the work to Romer, who did most of the big-picture
analysis, and Bernstein, who focused on the specific impact on women and other demographic groups. They spent the bulk of their time crunching numbers and evaluating multipliers to try to nail down how much the stimulus would increase employment compared to the no-action baseline, the “delta” between what would happen with and without the Recovery Act. They spent less time assessing that no-action baseline, the economy’s expected trajectory without stimulus. Romer mostly followed forecasts from the Fed and two private firms. If anything, Romer says, their report’s no-action baseline was somewhat more negative than the Blue Chip consensus forecast, the usual starting point for White House calculations.

It wasn’t nearly negative enough. Page 4 of the report included a chart that has dogged Obama ever since. It predicted that without the Recovery Act, unemployment would peak at about 9 percent, but with the Recovery Act, unemployment would remain below 8 percent, and would fall to 7 percent by the end of 2010.

Most analysts believe Romer and Bernstein came close to the delta, their prediction of how much the stimulus would improve the economy.
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They just overestimated the baseline, the economy’s starting point. They worried at the time that they were being too optimistic; Bernstein had been quoted saying: “We’ll be lucky if the unemployment rate is below double digits by the end of next year.”
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But they figured their forecast would lack credibility if they strayed much further from the Blue Chip. They would have sounded like Chicken Littles.

“The fact remains that 8 percent was a conservative forecast at the time,” Bernstein says. “In hindsight, obviously, we just should’ve focused on the delta.”