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What Obama could have done, Part II

By Ezra Klein,

I think Matt Yglesias’s response to my post about what Obama could or could not have done to radically change today’s economy sort of proves my point. He thinks it’s “dead wrong” to say that it’s difficult to come up with a plausible counterfactual in which the White House made different decisions that led to a radically different outcome today. So what’s he got?

Well, he says, Obama could have nominated more Fed governors more quickly. But when I asked Fed expert Joe Gagnon about whether this would matter, he shot me down. “If they had put me and someone else on the board, we would be out there dissenting on the other side from the inflation hawks,” he said, “but I’m not sure we could have swayed much policy. I don’t know that two votes is decisive.” If Gagnon doesn’t see a reason to believe that that would have radically changed the Fed’s policy, I’m inclined to trust him.

Another possibility, Matt says, is that the Obama administration could have passed a payroll tax cut tied to the unemployment rate. Perhaps, and a stimulus focused on the payroll tax is one of the alternatives I mentioned in my original post. But how much would that have done?

The initial feeling among Democrats was that a payroll tax cut was a relatively ineffective form of stimulus that endangered Social Security, and the initial feeling among Republicans was that they should not support the president’s stimulus proposal. So it would have been a tough political lift. But let’s say it had passed.

Would we really be in a very different space today? After all, we had a stimulus composed of policies that were, in theory, mostly more effective than the payroll tax cut, and that stimulus was followed by a payroll tax cut. So you could make the argument that Matt’s policy would have been marginally better or marginally worse — I’d prefer it, actually -- but it’s hard to make the argument that it would have been dramatically different.

Or perhaps more could have been done on housing. I think housing is the place where the White House made the most mistakes, and I’ve been spending a lot of time lately looking into alternative policies. But it’s slower going than you might think. Most policies that would have dramatically improved the housing situation would have dramatically destabilized something else (the banks, for instance). And the policies that wouldn’t have been destabilizing would not have done as much as their proponents hoped.

Let’s take, for instance, cramdown, in which bankruptcy judges could modify the principal on mortgages, and which is among the most popular of the policies offered. Last year, I asked Dean Baker, whose analyses of the housing market had been the most spot-on, what he thought of cramdown. “Cramdown is good,” he told me. “But I think people overstate the impact it would have. Most foreclosures don’t go through the bankruptcy process. It was 10 to 15 percent before the crisis, and let’s say it’s at 20 or 30 percent now. And it goes through a bankruptcy judge. They’re not necessarily going to be that sympathetic to debtors. Take an optimistic scenario where 30 percent went through bankruptcy, I’d be surprised if in more than half the cases the people could keep the home.”

I don’t want to go through too many more counterfactuals here because I don’t want to cannibalize a longer piece I’m working on. But suffice it to say that I’ve been looking for alternative scenarios in which the administration was either more politically astute or more radical and the result was a much better economy today. For reasons related to my article, I’d really like to find one. But I have had trouble finding anything really compelling. I think the White House made some very significant conceptual mistakes early on, and those led to some important political errors, but I can’t tell a story in which correcting all that led to a dramatically different economy today.

By contrast, I can tell a story where Congress made different decisions and we ended up in a very different place. If you take into account the revisions to the GDP data, we needed an initial stimulus well in excess of $2 trillion. I think a lot of that would have had to come through tax cuts and state and local aid, as I’ve been convinced that there just wasn’t the bandwidth to do much more direct government spending. But I think it could have been done in a relatively effective way, and if Congress was committed to doing as much of it as needed -- perhaps in conjunction with a deficit-reducing promise to, say, let the Bush tax cuts expire once the recession ended -- it would have made a huge difference. This is particularly true if you also imagine a much more aggressive Federal Reserve that fought to increase inflation expectations, and more aggressive action through Fannie Mae and Freddie Mac (though this was also constrained by Congress).

“Personally,” Matt writes, “I wouldn’t want to position myself as an ‘Obama defender’ who somehow holds the incumbent blameless for the objectively bad situation facing the country.” Fair enough. But I wasn’t really asking about the best way for people to position themselves. You can believe Obama has made pretty significant mistakes, as I do, but also find yourself pessimistic as to the difference a flawless performance by the president -- as opposed to a flawless performance by the Federal Reserve or the Congress -- would have made to the economy.

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