Obama pulled two ways on stimulus 2.0

September 2, 2010

Departing White House economic adviser Christina Romer says last year’s $814 billion stimulus package fell short. That may suggest those arguing for more fiscal action are gaining ground with the administration. But short of a renewed economic slump, electoral politics are working against more stimulus.

Not that Romer thinks all the spending and tax credits — originally calculated at $787 billion — didn’t work more or less as expected. She believes the U.S. economy would be in far worse shape today without them. But in her valedictory on Wednesday, Romer said the economic team failed to anticipate the violence of the recession. So despite the stimulus, the output gap and unemployment rate are far worse today than they expected in early 2009. But even with those original, overly rosy assumptions, Romer’s analysis back then suggested the stimulus plan should be bigger, around $1.2 trillion.

Her view was countered by rival adviser Lawrence Summers — he didn’t want President Barack Obama to even see that pricier option — and White House chief of staff Rahm Emanuel, who both thought the plan should be smaller for economic and political reasons. They won that debate. But Romer still thinks additional government action — more spending and more tax cuts — is needed. And given that the White House seems to be mulling fresh stimulus options, the president may now be inclined to agree with her.

Romer’s speech will surely give hope to liberal critics such as newspaper columnist and economist Paul Krugman who have been hectoring Team Obama to do more. And if Democrats suffer historic losses in the November midterms, her remarks may be a cornerstone of the case to replace Summers and perhaps even Treasury Secretary Timothy Geithner. The heightened expectation of changes in the administration’s economic team is illustrated by the speed with which a now-dispelled rumor about New York City Mayor Michael Bloomberg replacing Geithner spread through Wall Street and Washington this week.

But even a dramatic personnel shuffle won’t change the reality that the White House will almost surely face a far more hostile Congress in 2011. Angry liberals will want more spending, emboldened conservatives more tax cuts. Fashioning a politically viable compromise that makes economic sense and won’t alarm bond vigilantes will be a huge challenge. Romer should be relieved that it will be someone else’s.


We welcome comments that advance the story through relevant opinion, anecdotes, links and data. If you see a comment that you believe is irrelevant or inappropriate, you can flag it to our editors by using the report abuse links. Views expressed in the comments do not represent those of Reuters. For more information on our comment policy, see http://blogs.reuters.com/fulldisclosure/2010/09/27/toward-a-more-thoughtful-conversation-on-stories/

#1 suggestion I could give to increase spending, hence increase the need for goods and employees. Get rid of the tax if you don’t have insurance. All the taxes they have added in that bill already should be enough without having to penalize those who cannot afford it, yet are above the line for getting it free. So how does that help those people? Now instead of a halfway decent tax return that they will use to get caught up on bills or to spend on products/services they want/need…now it will go to the government to go…where?

Posted by mbahde | Report as abusive

Stability! Total personal debt must come down. This will take a number of years. As the deleveraging rolls out Shock and Awe must stop.
Interest rates must rise to the 2.5-3% range, CPI + 1%. Savers cannot be robbed while speculators are subsidized.

Posted by Mikej77 | Report as abusive

It is amazing that the administration thinks you can through money at a problem and it will go away. These are smart people. They should know better. If they had done nothing we would be in better shape today than we are. They are selling our futures with these stimulus plans. They should focus on cutting spending and letting the markets correct themselves. Anything else is artificial. This is no different than a company cooking the books. One side of the ledger may look real good while the other side is a disaster. Greg Urroz, CRS Phoenix, AZ Realtor

Posted by gurroz | Report as abusive