The New New Deal (60 page)

Reasonable and balanced were not selling points in the Republican primary. For a few weeks, the front-runner was the megalomaniac reality TV star Donald Trump, who built his groundswell by questioning Obama’s citizenship. (The president finally released his birth certificate to prove he was native-born. Fewer than half of GOP primary voters were convinced.) Tea Party congresswoman Michele Bachmann, who claimed the 2011 East Coast earthquake was God’s way of demanding spending cuts, also took a turn on top of the polls. So did an obscure right-wing businessman named Herman Cain, who suggested the unemployed should blame themselves instead of Wall Street; Texas governor Perry, who dismissed Social Security as a Ponzi scheme; former speaker Gingrich, who proposed putting poor kids to work as janitors; and former Pennsylvania senator Rick Santorum, who called Obama a snob for urging young people to go to college.

There was one Republican candidate who terrified the White House: former Utah governor Jon Huntsman, the reality-based conservative who had slammed his own “very narrow party of angry people” before serving as Obama’s ambassador to China. But trashing the GOP and working for Obama was not a winning primary strategy, especially after his virtually disqualifying admission via Twitter that “I believe in evolution and trust scientists on global warming. Call me crazy.” Former Massachusetts governor Mitt Romney, widely considered the Republican favorite, also had a history of reality-based behavior, including the health reforms that inspired Obamacare. But he was furiously backpedaling from his sensible-moderate past for the primary, vowing to repeal Obamacare, questioning climate science, embracing the Ryan plan to privatize Medicare. He accused Perry of insufficient hostility to
illegal immigration, Gingrich of insufficient fervor for the free market, Santorum of sympathy for Big Labor and Big Government.

“It’s been a lot of fun watching Mitt bash these right-wingers from the right,” says one Obama aide.

By the end of 2011, Obama’s approval ratings were starting to rebound, thanks in part to the Republican presidential freak show. He began quoting a line from Biden, who had cribbed it from an old Boston pol: “Don’t compare me to the Almighty. Compare me to the alternative.” In December, overconfident House Republicans made Obama look even better when they tried to seize one hostage too many, threatening to let the lame-duck payroll tax cuts and jobless benefits expire if the president didn’t agree to deep cuts in Obamacare and other concessions on the Tea Party wish list. This time, Obama called their bluff, daring Boehner to raise taxes on 160 million Americans. Eventually, Boehner caved. So the economy got an extra year of stimulus, just as the White House had planned, and Obama got another opportunity to highlight Republican intransigence.

But the main reason Obama’s approval ratings started inching up was that the jobless rate started inching down. As I write this in March 2012, unemployment has dropped to 8.3 percent, still terribly high—and yes, still higher than the Romer-Bernstein 8 percent prediction—but heading in the right direction. Even Romney is no longer saying the economy is weak because of Obama. He’s saying the economy would have been even stronger without Obama. For a change, the counterfactual shoe is on the other foot.

Still, Obama is the ultimate counterfactual president. “That’s us: avoiding even bigger messes since 2009,” one aide quips. He helped reduce our dependence on foreign oil, but we’re still dependent. He helped prevent atrocities in Libya, but he didn’t get credit, because the atrocities were prevented. His financial reforms could avert another disaster, but presidents rarely earn points for averting disaster. One exception was George W. Bush, who got huge mileage out of “keeping us safe” after September 11. Obama has kept us safer, and wiped out most of al Qaeda’s leaders, but apparently there needs to be a spectacular
terrorist attack on U.S. soil during your presidency before you can get credit for avoiding another one.

The Recovery Act is the ultimate counterfactual policy. It’s impossible to know precisely what the economy would look like without stimulus, because there’s no way to run a double-blind study of an alternative U.S. economy. Nevertheless, it’s possible to start drawing conclusions about the Recovery Act’s impact.

T
he Great Recession will be remembered for rampant unemployment and rampant foreclosures. It won’t be remembered for rampant homelessness. There was no epidemic of foreclosed families on the streets, no Obama-era version of the Hooverville tent cities. The number of Americans without shelter actually declined one percent from 2009 to 2011.
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That wasn’t happenstance. That was the Recovery Act.

Remember that $1.5 billion homelessness prevention experiment with the sixty-fold funding increase? Early data suggest it’s been shockingly effective in keeping roofs over the heads of at-risk families. In the Miami area, it’s helped over 7,500 people with rent, utilities, and emergency rehousing, and only 103 have shown up in the shelter system. Nationwide, it’s helped house over 1.2 million Americans in crisis; if half of them had ended up on the streets instead, the homeless population would have doubled. Shelters would have been overwhelmed, along with emergency rooms and local jails.

“It works,” says Ron Book, a Florida Republican lobbyist who chairs the Miami-Dade County Homeless Trust. “It keeps people off the streets and saves an astronomical amount of money. I’m not a fan of the stimulus, but this is a huge bright spot.”

Whatever one thinks of using tax dollars to help people in precarious economic situations, the Recovery Act did help make their situations less precarious. It made food stamps more generous, transferring $20 billion to low-income families. It sent $250 checks to 55 million
elderly and disabled Americans, helping them make rent, buy groceries, and keep their lights on. It boosted unemployment benefits $25 a week, extended their duration to almost two years, and helped laid-off workers keep their health insurance by subsidizing most of their premiums. It gave states about $100 billion to prevent massive cuts in Medicaid funding, and instead cover nine million additional low-income patients. Its refundable tax cuts redistributed billions more to the working poor.

The Great Recession did slightly increase the U.S. poverty rate, from 14.9 percent to 15.5 percent, but experts had expected a dramatic spike. An analysis by the Center for Budget and Policy Priorities found the Recovery Act’s transfer payments directly lifted at least seven million Americans above the poverty line of $22,000 for a family of four.
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They also made 32 million poor Americans less poor.

When Romney infamously said he’s “not concerned about the very poor,” he was actually making a legitimate point: The safety net was covering their basic needs. But that had a lot to do with the Recovery Act that Romney and his party consider such an unmitigated disaster. Killing the stimulus would have killed funding for Meals on Wheels for poor seniors, subsidized lunches for poor children, subsidized child care for poor families, and other safety net programs. The center calculated that without the Recovery Act’s aid to the vulnerable, the poverty rate would have increased at least five times more than it did. And that didn’t take into account the stimulus produced by that aid, which went to families with the highest propensities to spend it.

This is where evaluating the Recovery Act gets a bit trickier. The stimulus definitely helped tens of millions of people in need. But it didn’t produce full employment, which would have reduced the number of people in need. Republicans often claim the stimulus hurt the economy by growing the public sector, crowding out private investments, and using borrowed money that will have to be paid back with interest. Sometimes they merely dismiss the stimulus as an illusory “sugar rush.” Even Keynesian true believers often criticize the way the Recovery Act was put together.

Economists will study the stimulus for decades to come. But so far,
the evidence suggests that in the short term it basically did what it was supposed to do.
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N
o, it didn’t keep unemployment below 8 percent.

This is the most common partisan indictment of the Recovery Act: Obama broke his 8 percent promise. But unemployment passed 8 percent the same month Obama signed the stimulus into law. It shouldn’t be blamed for failing to prevent an outcome that preceded its existence. And with the economy losing over 700,000 jobs that month, the jobless rate was clearly heading up no matter what Obama did. As impolitic as it was, the Romer-Bernstein report’s poor guess about the pre–Recovery Act baseline implied nothing about its forecasts of the Recovery Act’s impact.

In fact, the major private forecasting firms have mostly validated the White House forecasts of the Recovery Act’s impact.
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They estimate it increased GDP 2.1 percent to 3.8 percent at its peak, in line with Romer-Bernstein, and created or saved about 2.5 million jobs, slightly fewer than Romer-Bernstein. They’ve suggested that without the Recovery Act, unemployment would have hit 12 percent or higher, and would have remained in double digits through 2012. Their estimates largely depend on models of the economy rather than the actual economy, but it’s still notable that the leading forecasters all seem to agree.

Most economists do. Before it got caught up in Obama-era politics, Keynesian stimulus was the textbook response to a sharp downturn; as Romer said, it was about as controversial in the economics profession as antibiotics in the medical profession. Even now, 80 percent of the economists in a University of Chicago survey agreed the Recovery Act lowered unemployment, while only 4 percent disagreed.
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A
Washington Post
review of early stimulus studies identified six that demonstrated a positive effect on growth and jobs, versus only one useful study (by prominent Republican economist John Taylor) that found the stimulus failed—and critics noted that Taylor’s data just as easily support the conclusion that the stimulus was too small.
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Even most Republican politicians stopped arguing that the stimulus failed to produce any jobs,
instead claiming it cost too much per job. After all, the recipient reports alone documented 750,000 direct stimulus-funded jobs, and they only applied to one third of the Recovery Act.

If there’s no smoking gun to prove the stimulus helped stop the free-fall, the ballistics certainly match. Job losses peaked in January 2009, just before it passed. Output began improving that spring, just as it ramped up. The recession technically ended in June, just as it hit its stride. In pure macroeconomic terms, the Recovery Act seems to have outperformed the New Deal, because it injected more fiscal stimulus than the New Deal. “The evidence is so clear,” Mark Zandi says. “If it hadn’t become so politicized, every economist would agree.” Europe’s struggles after austerity have provided equally strong circumstantial evidence that anti-stimulus deepens slumps; similarly, the U.S. states that cut the most spending tended to lose the most jobs.

The obvious question is why, if the stimulus worked as planned, unemployment has remained so high for so long. Obama’s shadow transition team gave away part of the answer before he was even elected: Historically, recoveries from financial shocks are always slow and tough. And by some measures, the shocks of 2008 were nastier than the crash of 1929. Eight trillion dollars in housing wealth vanished almost overnight. The construction industry that created the bubble shut down, and millions of Americans could no longer use their homes as ATMs to finance the consumption that inflated the bubble. Families, businesses, and governments were all saddled with debt, leaving virtually no demand in the economy. Deleveraging takes time. So does restoring confidence.

The rest of the answer is that the Recovery Act wasn’t big enough to fill that giant hole in demand. As Biden says, it was never supposed to carry the whole sleigh. The December 2008 memo from Obama’s economic team acknowledged that it would plug less than half the output gap, and the team seriously underestimated that gap. Ultimately, the Recovery Act’s fiscal expansion didn’t even offset the contraction by state and local governments, and getting Congress to approve more stimulus turned out to be much harder than the team expected. For all
the vitriol about Obama’s new era of big government, the United States has shed over half a million public sector jobs during his presidency, or about two thirds of the government jobs added during the Bush era. This has prompted some liberals to complain that Keynesian stimulus was never tried; a more charitable reading is that Keynesian stimulus prevented even harsher anti-Keynesian cuts in the public sector. Meanwhile, the economy has added private sector jobs every month for two years, corporate America has enjoyed record profits, and the stock market has recovered its losses. It’s an odd brand of socialism.

The Republican counterargument is simple: Unemployment is too high and the deficit is too big, so Keynes was wrong and the stimulus failed. Of course, Republicans supported Bush’s stimulus in 2008 when unemployment was only 5 percent; most of them supported the concept of a stimulus in 2009; and Obama inherited a $1.2 trillion deficit that has not increased on his watch. So the partisan critiques seem awfully convenient. Republicans say they’re worried about borrowing, but borrowing costs are historically low. They never seemed to worry about borrowing during the Bush era, and they’re still happy to borrow to finance high-end tax cuts. The Recovery Act’s impact on the national debt was negligible compared to the impact of the Bush tax cuts or the Great Recession. Yet the GOP, after frittering away the Clinton surplus and leaving the economy in a ditch, has trashed Obama for putting the emergency tow on the Treasury’s credit card.

The sudden Republican horror that federal spending is “crowding out” private investments also seems curiously timed. For example, Romney, who launched a Green Energy Fund to seed start-ups in Massachusetts, has accused Obama of “killing solar energy by having the government play the role of venture capitalist.”
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That’s precisely backward; the U.S. solar industry was on the brink of death before the Recovery Act, but it has expanded sixfold over the last three years.
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While crowding out is a legitimate concern, there was probably less danger of it during the capital strike of early 2009 than at any time since the Depression. The Recovery Act actually “crowded in” private investments through matching requirements, which drew more than $100 billion in
clean-energy funding off the sidelines at a time when hardly anyone was investing in anything.