The New New Deal (47 page)

There was just one problem. High-speed rail works when it’s connected to public transit, not when you have to drive to the station on one end and hail a cab at the other. But Florida’s Republican legislature had blocked a new Orlando-area commuter rail system, and shredded funding for an existing Miami-area line. So in October, LaHood flew to Orlando and delivered a blunt message to the region’s civic leaders: “Get your act together.” If Florida didn’t get serious about commuter rail, he warned, it wouldn’t get high-speed rail. This was another over-subscribed
program, with $7 in applications for every $1 in grants, so LaHood could afford to be selective.

LaHood had provided similar ultimatums to New York, Georgia, and Texas, to no avail. But Florida’s traditionally loony-tunes political system responded. Governor Crist called a special session, and the legislature overwhelmingly reversed itself on commuter rail, and even created a fund for high-speed rail.

“Las Vegas oddsmakers would’ve given a billion to one,” Turanchik told me. “This project has united Republicans and Democrats, labor and business. It’s giving people hope.”

It seemed like the next stop would be change.

R
emember when Christy Romer told her husband that if the jobless rate hit 10 percent, the White House would have bigger problems than her wrong 8 percent prediction?

She wasn’t wrong about that.

Unemployment hit double digits in October 2009, and Obama’s approval ratings slipped below 50 percent for the first time. Democrats promptly suffered humiliating losses in governor’s races in Virginia and New Jersey. The economy was growing, corporate profits were rebounding, and the long-term outlook was improving. But as the New Dealer Harry Hopkins once said, people don’t eat in the long run. They eat every day. With 27 million workers now unemployed or underemployed, the Republican drumbeat continued: Where are the jobs? Democrats were asking, too. And at the White House, Romer was pushing for more stimulus that could create more jobs.

Romer, the Great Depression historian, had been thinking a lot about the New Deal, especially direct government jobs programs like the WPA. She loved pointing out that the Roosevelt administration had managed to hire over four million Americans in the winter of 1934. Obama hadn’t proposed any federal hiring programs in the Recovery Act, because temporarily growing the government seemed like a logistical
and political nightmare. But the stimulus did include a $1.3 billion welfare-to-work experiment that helped states subsidize 260,000 private sector jobs, an impressive $5,000 per job. That was a drop in an immense bucket, but it illustrated the possibilities. At one point, Romer started calling the Agriculture Department and other agencies just to see how many new employees they could put to work in 2010 if funding were available.

“They’d say, ‘Oh, we could hire a lot, maybe even 20,000!’” Romer says. “That’s a long way from four million.”

Jared Bernstein, the economic team’s most ardent Keynesian, was thinking along similar lines. Despite all the vitriol about Obama’s big-government liberalism, the U.S. public sector was shrinking. The Recovery Act’s aid to states limited the shrinkage, but governors and mayors were still slashing services and jobs to balance their budgets, and states now faced yet another $200 billion shortfall. That fall, Bernstein pitched Biden chief of staff Ron Klain on three ways to boost government employment: More direct aid to save more public employee jobs. New grants to help cities hire extra staff for menial tasks like cleaning up blighted neighborhoods and digitizing public records. And extended deployments for temporary census workers to create a National Inventory of Structures.

A national inventory of what?

“You’re kidding, right?” Klain interrupted.

Nope. For $1 billion, 750,000 temporary census workers could stay on payroll for two extra months to create a “geo-coded” database of every structure in America. This could be used for “improved statistics on economic development and land use,” as a “resource for local planning departments to identify issues and opportunities,” as a “source of aggregate data …”

“What are you trying to do to us?” Klain groaned.

Alas, people counters would not be converted into structure counters.

“I think we could sell a plan to build buildings,” Klain said. “We cannot sell a plan to
count
buildings.” In fact, Obama’s political team wasn’t too keen on trying to build buildings, either.

“There wasn’t a lot of appetite for a new WPA,” Bernstein says.

After the Recovery Act passed, the White House’s primary focus quickly shifted to health care. But in Washington, the stimulus debate never really ended. The question of whether to push for more fiscal stimulus or pivot to deficit reduction—more gas or more brake—would be the central question of Obama’s first term.

Obama’s economic team basically agreed that in a slack economy, the ideal approach would be more short-term stimulus, along with a credible commitment to medium-term deficit reduction—gas now, brake later. But with the nation in a sour mood and the Recovery Act perceived as a failure, Obama’s political team didn’t see any way to push a second stimulus package through Congress, much less a New Deal–style government jobs program. Even within the increasingly fractious economic team, there was intense debate about the relative merits of gas and brake, and how aggressively to press the pedals. Romer and Bernstein wanted to keep jamming the accelerator to boost growth and jobs. They did not want to repeat FDR’s error of 1937, when his premature embrace of deficit reduction derailed a promising recovery. Larry Summers also advocated short-term stimulus, although he was often dismissive of actual stimulus proposals. Peter Orszag and Tim Geithner, while not necessarily opposed to short-term gas, emphasized the importance of tapping the medium-term brakes, to slow the growth of the deficit and send a fiscally responsible message to the markets. Orszag often suggested that commitments to rein in red ink down the road could themselves provide stimulus, by boosting the confidence of businesses and bondholders.

Meanwhile, Republican leaders were calling for immediate and massive spending cuts, which they claimed would create jobs by … well, the mechanism was never clear. Economically, it was hard to see how slamming the brakes would make the car go faster. As Governor Sanford had acknowledged, the country-doctor approach of strict austerity, whatever its long-term merits, was a prescription for short-term pain. But politically, the notion that government should skimp in hard times, just as families and businesses do, had real emotional appeal. Refusing to spend money the country didn’t have sounded appealing in theory,
even if in practice it would mean sucking cash out of the economy, cutting aid to desperate families, and rolling back long-awaited infrastructure projects.

This debate had been brewing since the transition, and Obama could see both sides. He cared about jobs and he cared about deficits. His emphasis shifted over time, and helped determine the arc of his presidency.

I
t can’t be said often enough: President Bush inherited a budget in the black, and bequeathed Obama a record-obliterating tide of red ink.
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In 2001, the projected ten-year surplus had been $5.6 trillion, enough to fund seven Recovery Acts and still balance the budget. In 2009, Bush’s gift bag included a ten-year deficit of $8 trillion. Eliminating the entire U.S. military wouldn’t have closed that gap.

Of course, the gift bag also included a dizzying economic nosedive.
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This not only created the jobs crisis, it was the main driver—even more than Bush’s tax cuts, wars, and all-around fiscal recklessness—of short-term deficits, because unemployed workers and unprofitable firms pay fewer taxes and receive more government aid. So for Obama, tackling the jobs crisis was not only much more urgent than tackling the deficit, it was the best way to start tackling the deficit. By avoiding a depression, the stimulus would keep the fiscal outlook merely unsustainable rather than unsalvageable. “When the economy was falling off the cliff, the Keynesian imperatives overshadowed everything,” Bernstein says.

But Obama always expected to pivot to fiscal discipline once the recovery was in gear. Temperamentally, he was more of a brakes guy than a gas guy, more comfortable in the role of dad taking away the credit card than teenager binging at the mall. He seemed defensive about the stimulus, often noting that he never planned to start his presidency with a spending spree, complaining it reinforced the Republican narrative that he was a typical liberal Democrat. Deficit reduction better
suited his self-image as a centrist, a maker of hard choices, a cleaner of Bush-era messes; he joked about his “inner Blue Dog.” He had promised “a new era of responsibility,” which became the title of his budget plan. He had pledged to rein in the out-of-control medical costs that imperiled America’s long-term solvency, which was the main reason he risked his presidency on health reform. And his pollsters were picking up the same independent voter anger about spending and debt that Republicans were trying to exploit. Obama’s political advisers, while opposed to his plunge into the health care swamp, were keen for him to convey concern about deficits in other ways. That’s what led to the
Dave
fiasco.

Obama had also stocked his economic team with deficit-conscious Bob Rubin disciples, who pressed him to do more than just convey concern. Geithner and Orszag started preaching the gospel of the pivot early in the transition, warning that exploding deficits could rattle markets and depress confidence; Orszag was also the leading advocate of health reforms that could “bend the cost curve.” Summers was on the gas side of the gas-brakes debate, but his fifty-seven-page memo before the December meeting in Chicago—which included input from the rest of the team, but had his name on top—still urged Obama to start scaling back his campaign promises to prepare for a fiscally constrained future. And conveying concern was important, too. The Clinton veterans all agreed that Obama needed to let the world know he was more than a big spender. Sure enough, the president hosted a “fiscal responsibility summit” a week after signing the stimulus, and vowed to slice the deficit in half by the end of his first term.

“The Clinton people were obsessed with deficit reduction from the start,” says one senior Obama aide. “They had that Rubinesque world-view.”

Since it quickly became clear that the hole in demand was much deeper than the Romer-Bernstein report suggested, some step-on-the-gas advocates—including Romer and Bernstein—began pushing for more stimulus as early as that spring. Productive workers and equipment were idle; federal borrowing costs were negligible; why not put more money and more people to work? Orszag and Geithner
pushed back: Why not give the Recovery Act a chance to work? “At first, everyone said: This is going to get worse before it gets better, and we’ll have to ride it out like a bad fever,” says one Orszag aide. “Then when it started to get worse, there was this mad scramble to find something else to do. Wait! We knew this was coming! Why are we going nuts?” Even some officials on the gas side of the debate thought that politically, calling for a second stimulus so quickly would sound like an admission of failure, a validation of Republican attacks. They figured that once the Recovery Act started generating jobs and visible progress, there would be more appetite for more stimulus on Capitol Hill.

“The theory was, once we could show a demonstrable climb, people would see the train was moving, and then we could shovel more coal in the engine,” Klain says.

The brake advocates also kept raising the specter that bond markets would go haywire if the president didn’t assure them he wasn’t a rabid spendaholic. The Clinton veterans all recalled how focusing on deficits over investments had helped keep interest rates low and bond markets happy during the 1990s. Secretary Geithner often seemed to suggest that unless Obama pledged to reduce deficits to precisely 3 percent of GDP, investors would suddenly lose faith in the dollar. After staring into the abyss of the financial crisis for a year, Geithner wanted to avoid another disaster at any cost; a second stimulus that might shave a point off the unemployment rate didn’t seem worth even a small additional risk of potential chaos. Of course, fretting about market stability and tail risks was part of the treasury secretary’s job description, but Orszag made similar arguments, and even Summers sometimes echoed them.

“I understand that there’s a treasury secretary,” Romer complained during one of these discussions. “I’m tired of having three.”

Obama’s more gas-inclined advisers sometimes felt like they were battling an invisible austerity scold named Bond Market, who sounded like an irrational worrywart. The actual bond market seemed perfectly calm about the actual deficit.
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The actual bond market wasn’t clamoring for austerity that could nip the recovery in the bud.

“Tim was always warning that the bond markets were about to freak out and punish us,” one White House adviser says. “Really? If we commit
to 4 percent of GDP instead of 3 percent in ten years, everything goes to hell? But he’s the treasury secretary. If he says we’ve got to do x and y to calm the markets, what are we supposed to say?”

What Romer tried to say was: High unemployment is a disaster, too. At the annual economic symposium in Jackson Hole in August 2009, Romer was appalled by the aura of triumphalism, as if policymakers could rest easy now that they had saved the banks and averted a worst-case scenario. Businesses weren’t hiring, and long-term joblessness was surging. There were real people behind all that data, and workers who stay out of the labor force for extended periods tend to suffer for the rest of their careers. Every point the government could cut off the unemployment rate would relieve untold human suffering. Romer kept reminding the Clintonites on the team: This isn’t 1993. It made sense to do fiscal contraction when unemployment was 7 percent and falling, but it’s 10 percent and rising. At one White House meeting, when Geithner described stimulus as a sugar rush, Romer shot back that it was a necessary antibiotic for a sick patient, not some junk food lollipop for a child.