March 20, 2012


REPLAY: As he faced an ailing economy, what could Obama have done differently? (John Cassidy, MARCH 26, 2012, The New Yorker)

Scheiber recounts how, a couple of days after Lehman Brothers collapsed, Austan Goolsbee, an economist at the University of Chicago who had been advising Obama during the campaign, travelled overnight from Montana to Miami on three different flights for an emergency meeting with the candidate. When he got there, he found Robert Rubin and Lawrence Summers, the twin titans of Clintonian neoliberalism, who had jetted in on a private plane. Together with Obama and several others, they discussed which parts of the financial system would need help from the government to survive, and which could be left to their own devices. "It was here that the candidate struck Rubin and Summers as impressively fluent," Scheiber writes. "After the meeting ended, they mused about how they would grade his financial know-how, and both were pleasantly surprised to find themselves in agreement: A or A-plus. Obama had won over the establishment." Or possibly vice versa.

After the election, Rubinites like Geithner, Summers, and Peter Orszag were ushered into the inner circle. Geithner, who had advised the Bush Administration on its bailout of A.I.G. and other big financial institutions, warned Obama, "You will be tying yourself to a strategy I was intimately involved in. . . .You need to understand the cost you take in doing that.'' One consequence was a raft of books and articles accusing Obama of abandoning progressive principles or being duped by the Rubinites. Yet the sellout narrative has obscured an equally important and less explored question: Could Obama have been a more effective technocrat? Given the political and financial constraints he was facing, were better policy options available than the ones he adopted?

Take the stimulus debate. Together with the Bush Administration's seven-hundred-billion-dollar bailout of the banking system and large-scale emergency lending by the Fed, the stimulus helped prevent a downward spiral of layoffs, bankruptcies, and foreclosures of the sort that ravaged the country during the early nineteen-thirties. That's the good news. Clearly, though, the government-induced boost to spending wasn't big enough to prevent unemployment rising to ten per cent by October, 2009, or to bring it back down much over the ensuing two years. What's more, the White House knew it wouldn't be. Summers, fearful of the reaction in the markets and on Capitol Hill, declined to entertain larger proposals (such as the $1.2 trillion favored by Christina Romer, the chair of the Council of Economic Advisers), and he stacked the terms of the internal debate from the beginning. In a December 15, 2008, memo to the President that my colleague Ryan Lizza unearthed, Summers initially presented two stimulus packages--one totalling six hundred and sixty-five billion dollars and the other eight hundred and eighty billion dollars. "Notice that neither of these packages returns the unemployment rate to its normal pre-recession level," the memo said. "To accomplish a more significant reduction in the output gap would require stimulus of well over $1 trillion based on purely mechanical assumptions--which would likely not accomplish the goal because of the impact it would have on the markets."

In size, the Obama stimulus, which was budgeted at seven hundred and eighty-seven billion dollars over two years, probably wasn't very different from what a McCain Administration would have introduced. In October, 2008, Mark Zandi, the chief economist at Moody's, who was advising McCain, told the Times, "Nothing is off the table. That includes all the various stimulus tools that might be used, given the severity of the crisis." Before sending the President his memo on the stimulus, Summers canvassed the opinions of other economists, Zandi included. Zandi advocated a stimulus of at least six hundred billion dollars in the first year, which is much bigger than what the White House proposed, and other Republican economists proposed similar figures. Larry Lindsey, who served in both Bush Administrations, estimated that eight hundred billion to a trillion would be desirable.

Posted by at March 20, 2012 6:09 PM

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