To those on the right, the stimulus was over the top and part of a broader program of overreaching government that has characterized this administration. In this view, in the face of a steep economic decline, tax cuts should have been the entire focus, a further step along the road to reducing the economic role of government.
Presidents are evaluated in part on their economic track record — and that is entirely appropriate. The Federal Reserve may control interest rates, and Congress holds great sway over budget details, but time and again our modern presidents have made the big calls on taxes and spending. The reelection attempts of Presidents Reagan, Clinton and both Bushes were significantly affected by how they had handled the budget. President Obama is running very much on the basis of how and why he used fiscal stimulus to tackle the financial crisis of 2008-09; his opponent, Mitt Romney, is running on the premise that those efforts fell short.
“The New New Deal,” by former Washington Post reporter Michael Grunwald, and “The Escape Artists,” by Noam Scheiber, a senior editor at the New Republic, are both good narratives of what happened with the stimulus and, more or less,why. Grunwald takes the view that it achieved more than is commonly supposed — or even than is claimed by the administration. Scheiber is more inclined to the view that the policy was bungled — the extent of the economic collapse was initially understated, so the response was insufficiently bold.
Both authors give strong voice to policy advisers and politicians and provide a nuanced portrayal of the thinking and tactics on either side of the aisle. Both are distinguished reporters, and their focuses reflect their somewhat different interests. Grunwald has more material on the broader inside-the-Beltway debates, while Scheiber digs deeper within the White House and the Treasury Department.
Both books read well. Rahm Emanuel has most of the good lines in “The New New Deal,” although the cuss words quickly wear thin. Larry Summers looms large in “The Escape Artists.” Grunwald has the more intriguing thesis: Despite the rush and the compromises, the Obama administration has made investments that will transform our economy through a variety of initiatives, including green energy, education reform and high-speed rail.
The energy point is worth making. Changes in technology can have a transformative effect, and an Energy Department program modeled after the Defense Department’s blue-sky grant-making should not be dismissed out of hand. The government may not be a good venture capitalist — a favorite line of Summers’s — but if the military can sometimes back winning technologies (think the Internet), why can’t other agencies? Grunwald offers a balanced discussion that serves as a useful reminder that for most of our history, there has been a symbiotic relationship between private enterprise and government. (Disclosure: I’m a professor at MIT, and the engineering/science side of the school comes off very well in this part of the book.)
But is this really a new New Deal, a set of programs that will fundamentally change the economy by, for example, elevating the role of government relative to business? That seems like a stretch. In fact, for most of the book Grunwald largely ignores his own argument, focusing instead on the policy sausage-making (with plenty to turn your stomach).
In the early euphoria of the Obama moment, the idea that he would repeat the impact of Franklin D. Roosevelt was very much in the air. Time magazine even ran a major story along those lines in November 2008, with Obama portrayed as FDR on the cover.However, Grunwald’s leading examples of potential transformation are not only unconvincing, they actually would make great raw material for the counterargument. One initiative, more funding for K-12 education, is certainly a terrific idea. But top-down reform in that decentralized sector is difficult, and the reader ends up doubtful that real change is coming.
High-speed rail may end up as the symbol of what can go wrong. According to Grunwald, high-speed rail was not originally in the stimulus legislation; it was added only after Emanuel’s brother Zeke accidentally spotted the omission and, naturally, swore mightily. Lines were proposed, and funding was offered in Florida and the Midwest, but various kinds of political backlash are preventing implementation. We will end up, it seems, with high-speed rail from Fresno to Bakersfield in California. Perhaps this is a foot in the door. Just as likely, it is high-speed rail to almost nowhere.
Early 2009 was like that — policy formulation by expletive and under enormous pressure. This is where Scheiber’s book is particularly good, as his account focuses more on the macroeconomic decision-making (plenty of the swearing in his account is done by Treasury Secretary Timothy Geithner). Scheiber — and to a lesser extent Grunwald — makes a big deal out of the fact that the administration’s initial forecast on the economic hardship was too optimistic. Very few advisers expected the financial crisis to result in the loss of so many jobs so fast. As a result, the argument goes, the economic team did not scale the stimulus appropriately: Whether you like higher spending or tax cuts, it would have been better to do more.
But as Grunwald lays out in some detail, it would have been hard to get more through Congress. Congress does not gleam in either account, but it’s an essential part of our government. What’s the difference between the United States and any authoritarian political system? We can produce charismatic, visionary leaders, yes, but that has also happened elsewhere. Our distinctive advantage, like it or not, is the checks and balances built into our Constitution, including the taxing and spending power of Congress.
As Scheiber’s economists know all too well, activist fiscal policy got a bad reputation in the decades before 2008, and for a good reason. It is very hard to fine-tune an economy using big or small changes in government spending and taxes. Fiscal policy, ideally, should be set for the medium term: Fund what you want to fund, and ensure that you have enough tax revenue to back it up. And this is where both books miss something big — perhaps not surprisingly, as their strongest voices are those of Democratic policymakers.
The incoming Obama administration was handed almost the perfect poison chalice. There was a massive decline in the economy at the end of 2008, with a dramatic fall in employment, as the George W. Bush administration turned out the lights and went home. Federal Reserve policy was unable to fully counter the collapse of credit in the United States and around the world. And we were in the middle of a well-organized tax revolt that had been going on since the 1970s, even though it greatly undermined our fiscal accounts and national security during the Bush years. We were the world’s largest debtor country long before Obama ran for president.
In a sense, the new administration could not avoid a political trap. There was no alternative but to propose a fiscal stimulus — a desperate measure to soften the economic blow that was already falling. Yet no stimulus could have prevented the worst recession since the 1930s. And the conditions were ripe for Republicans to attack anything that was done as further increasing our national debt (despite all they had done themselves to boost debt levels).
But as almost everyone outside Washington can tell you, the root cause of the dramatic problems in the fall of 2008 was a crisis among our largest financial institutions, which had borrowed heavily and taken reckless risks. Some top people in those firms were well-compensated during the boom, while the risks and costs were shoved onto the rest of us.
The depth of the crisis in 2008-09 was as much due to the financial deregulation of the 1990s (and ’80s) as to anything that happened subsequently. But the Obama administration did not want to confront and clean up the failing banks, partly because of the influence of former Clinton staffers in its senior ranks. These peoplebelieved in big banks during the 1990s and apparently believe in even bigger banks today. In Grunwald’s account, the issue of reforming the financial sector hardly arises — an irony, given how important that was to the original New Deal.
Scheiber offers more coverage of financial-reform details, but his protagonists consistently play down the importance of radical change and oppose those, such as Sen. Ted Kaufman of Delaware, who push for tougher restrictions on banks. Senior officials believed that unconditional support for big banks would help get the economy back on its feet. But generous bailouts did not win the Obama administration many friends, and its policies failed to address the underlying causes of the crisis and the legitimate concerns of millions who lost jobs. The bankers at the heart of the disaster walked away with billions.
The megabanks and their fellow travelers ended up greatly hurting the credibility of the government. The damage will be long-lasting and will have a profound negative effect on our shared economic prosperity. It remains to be seen whether this will destroy the impressive achievements of the original New Deal.
Which way will the electorate go on Nov. 6? Will voters support a president who pushed back hard against impending depression by increasing government spending and reducing taxes? Or will they turn against him because he sided too often with the big banks?
In the country as a whole, the race is very tight. But in swing states — such as Ohio, Florida and Virginia — it looks like more people remember how bad things were when Obama came into office. They may prefer to give him four more years to clean things up.
But if a second Obama administration fails to confront the dangerous practices of global megabanks, the nation should brace for more trouble ahead.
Simon Johnson is the co-author, with James Kwak, of “White House Burning: The Founding Fathers, Our National Debt, and Why It Matters to You” and “13 Bankers: The Wall Street Takeover and the Next Financial Meltdown.”