Opinion

Felix Salmon

Where Obama’s economic policy went wrong

By Felix Salmon
February 10, 2012

In one of his biggest errors as economic advisor to the president, Larry Summers told Barack Obama that “It is easier to add down the road to insufficient fiscal stimulus than to subtract from excessive fiscal stimulus. We can if necessary take further steps.”

He was absolutely wrong, of course, as Obama himself realized as early as the summer of 2009. Noam Scheiber reports:

A play for more stimulus, on the other hand, would be a defiant action, and Obama clearly recognized this. When Romer later urged him to double-down, he groused, “The American people don’t think it worked, so I can’t do it.”

This makes it seem as though the administration tried to get America to see the effects of the stimulus, and failed. But in fact, the opposite is true: a large part of the stimulus — the payroll-tax cut — was specifically designed to be invisible.

The tax cut was, by design, hard to notice. Faced with evidence that people were more likely to save than spend the tax rebate checks they received during the Bush administration, the Obama administration decided to take a different tack: it arranged for less tax money to be withheld from people’s paychecks.

They reasoned that people would be more likely to spend a small, recurring extra bit of money that they might not even notice, and that the quicker the money was spent, the faster it would cycle through the economy.

All of which makes it seem as though Summers was almost sabotaging his own plan. It makes some amount of conceptual sense to do a smaller stimulus up front, with the option of enlarging it later on if necessary. But it makes no conceptual sense to do that if you’re then going to construct a stimulus which provides zero political momentum for a re-up.

There’s evidence that the Obama economic team wasn’t entirely unhappy with the lack of a second stimulus:

By January 2011, two months after Democrats suffered a rout in the congressional midterm elections, the West Wing again faced a critical choice… Should they tackle the trillion-dollar deficit, co-opting the anti-government zeal that Republicans had ridden to power? Or should they try to lower the stubbornly high unemployment rate, which had exceeded 9 percent for 20 straight months?

The president’s team quickly concluded that the deficit was the higher priority.

Scheiber is sympathetic. He says that the decision to concentrate on unemployment would constitute “playing partisan hardball”, and adds:

The decision to focus on the deficit in 2011 was defensible at the time. It wasn’t until much later that the economy’s weakness became clear.

This is simply bonkers: I was describing the stubbornly-high unemployment rate as “Obama’s Katrina” as early as June 2010, when unemployment stood at 9.6%. By January 2011, nothing much had changed: the unemployment rate was still 9.4%. It’s hard to see what’s happened since then which has made the economy’s weakness any clearer.

Scheiber saves his harshest words for the White House political tacticians who ignored the debt ceiling issue for too long and overestimated the tractability of the House Republicans. But the truth is that Obama’s economic strategy has been a victim of political miscalculations more or less since day one. Obama’s economic team has been consistently modest in what it considers politically possible. Summers, in his memo, for instance, noted that Ken Rogoff, who he described as a “widely respected macroeconomist, former chief economist of the IMF, former McCain adviser”, wanted a trillion-dollar stimulus. Summers also consistently said that the risks of doing too little were greater than the risks of doing too much. But even so, the stimulus came in much lower than that, shrunk by second-guessing what was politically possible.

It’s almost as though the Obama economic team — with the notable exception of Christy Romer — was consistently looking for excuses to do less rather than more. Much of the team first got to know each other in the Clinton administration, and Scheiber talks a lot about how they didn’t grok the way that the Republican party has changed since those years. But the same can be said of their attitude to the economy. Clinton’s economic success, especially when Summers was at Treasury, was achieved with a less-is-more approach: his fiscal policy was conservative, and he let the Fed take care of the gas pedal. That doesn’t work in a crisis, and it certainly doesn’t work in this crisis, where the Fed has long since run up against the zero bound for interest rates. The problem is that no one on Obama’s economic team, and especially not Peter Orszag, seems to have had much of an appetite for anything else.

Comments
11 comments so far | RSS Comments RSS

Is it any wonder when economics is the study of what happened and why that hindsight is a better view than prediction?

Posted by FifthDecade | Report as abusive
 

Thanks FifthDecade. This piece is so pointless, it’s incredible.

Posted by MJGSimple | Report as abusive
 

“Faced with evidence that people were more likely to save than spend the tax rebate checks they received during the Bush administration, the Obama administration decided to take a different tack:”

A credit crisis seems especially like the moment when one might be well served not trying to avoid people’s improving their balance sheets.

Posted by dWj | Report as abusive
 

Don’t know how a piece entitled “Where Obama’s economic policy went wrong” can simply ignore the health care act. Whatever one thinks of the long-term goal, it legislated, in the midst of a period of high unemployment, that the cost of labor would increase in a couple years. Even worse, since the details were left to later regulations that are being promulgated in dribs and drabs, the amount of this increase was uncertain. Definitely not an encouragement to invest in long-term fixed assets.

Posted by realist50 | Report as abusive
 

O’bama’s “Economic Policy” has been long-term unemployment checks and food stamps. What paycheck? ..

Posted by Woltmann | Report as abusive
 

Shovel-readiness played a role. After the first several hundred million(!) in priorities were addressed, there were probably few ways for the government to spend money quickly and wisely. Keynes would probably say it doesnn’t matter whether the money is spent wisely, but most Americans don’t feel that way. Think about how big spending projects work — first you have the planners, then the engineers, then the environmental consultants and the lawyers and the community outreach, etc. (Think California high speed rail.) It’s years before you get to dig the first hole. And the professional classes who get all the early work weren’t the ones who needed jobs the most. A bigger stimulus would have required more than money, it would have required a major overhaul of how the government spends money.

Posted by RogerNegotiator | Report as abusive
 

It never ceases to amaze me that what was obvious to any semi-astute observer (I’m pointing at myself here) back in early 2008, was lost on the people who are supposed to understand this stuff. The economy had been systemically larded with fake value. That balloon was the basis for the orgy of consumer spending that kept the economy afloat – 70% is the number typically thrown around. Deflate that balloon and you take away the rose-coloured glasses many of those spenders were wearing. Now add to that the lost consumption from the jobs that flew away after the collapse of that bubble and you’re limping along – barely.

That double-whammy meant we wouldn’t be getting anywhere near the growth rate from the early part of this decade. There was no way the country was going to get back on track without a strong push. Why wasn’t that clear to the smartest guys in the room?

This thing has left me very sour on the so-called expertise that shuttles between New York and Washington, and the seemingly mindless chatter that passes for economic thinking from so many in Congress. There’s a lot of very disconnected people on those trains and planes.

Posted by NCimon | Report as abusive
 

Business as usual in Wasington DC. Different suit, different color, same kickbacks to lobbyists and continued drain of factories and capabilities here for short term financial gain. We are now at the point where the US political systems is being managed from outside of the USA.

Posted by Butch_from_PA | Report as abusive
 

NCimon: I agree, expertise is a joke. Virtually nobody in power gives a flying fart about the lower 50% (at least) of the US population, and all their “expertise” is heavily tilted to the interests of the rich and powerful. It’s funny that it took this to sour you on expertise. But maybe you’re young. For me, it was the Iraq war. For older people it was probably other stuff…

Posted by colburn | Report as abusive
 

Two thoughts on this…

(1) Maybe Obama should have hired political experts instead of economics experts? In retrospect, it is clear that the economic choices were being driven by (ineptly managed) politics.

(2) In the polarized political environment, we are seeing insufficient DISCUSSION. Plenty of disagreement, but with people sticking to diametrically opposed positions. Take the top 20 commenters on this blog and stick them in a room and they would ultimately hash out something superior to what Obama’s team settled on. (Selling it to Congress is another matter.) Hard to do that without heated discussion, though.

Posted by TFF | Report as abusive
 

At the beginning of the Obama presidency, Summers offered a 50+ page memo on his economic forecast and 3 different policy proposals. All offered predictions that were wrong by half in terms of economic performance and unemployment. He offered 3 stimulus proposals and Roamer argued that the most generous should be increased to approximately 12% of GDP. Summers disagreed and Orszag never believed that stimulus was needed. The Summers’ memo is cited in Ryan Lizza’s, “The Obama Memos,” New Yorker and is readily available online for those interested in reading the pathos of a megalomaniac.

The economic conditions required more than Obama assembling a posse of Pseudo-Randian free-marketeers. The presumption of Friedman economics, which is a propaganda tool for conservative political ideology, has made mush of economic brainpower over the last 30 years. Too little stimulus is assuredly a loser and to overdue a stimulus plan surely will not result in anything close to the economic malaise caused by an under aggressive economic policy. It’s brainless or should be. It’s painful to read about this stuff anymore.

Posted by sufrinsucatash | Report as abusive
 

Post Your Comment

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/
  •