Where Obama’s economic policy went wrong

February 10, 2012
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.”

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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.


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