The truly decisive move that broke the arc of history was his handling of the stimulus. The public was desperate for a leader who would speak with confidence, and they were ready to follow wherever the president led. Yet instead of indicting the economic policies and principles that had just eliminated eight million jobs, in the most damaging of the tic-like gestures of compromise that have become the hallmark of his presidency — and against the advice of multiple Nobel-Prize-winning economists — he backed away from his advisers who proposed a big stimulus, and then diluted it with tax cuts that had already been shown to be inert. The result, as predicted in advance, was a half-stimulus that half-stimulated the economy.
Let’s get more specific than “big stimulus.” The proposal Obama backed away from was Christina Romer’s preliminary calculation that we needed about $1.2 trillion in stimulus. More recently, Romer told me that we probably needed something more like $2 trillion in stimulus. And more recently than that, we learned that the GDP dropped by much more than we initially thought, which implies that an update to Romer’s calculations would have returned results recommending far more than $2 trillion in stimulus.
The Obama administration backed off of the $1.2 trillion stimulus because it couldn’t pass Congress. But let’s put that question — and its $2 trillion+ cousin — aside. Imagine we could have passed such a stimulus. Could we have implemented it?
Last month, I spoke to Christina Romer, Larry Summers and Jared Bernstein on this question. The three of them were arguably the administration’s most persistent and consistent advocates for more stimulus. But they all said the same thing: The bigger the stimulus became, the harder it got to spend.
“We had a hard time spending $800 billion quickly, and with that much stimulus, the issue of diminishing returns could be important,” said Romer. “I don’t believe we could have efficiently and effectively put that large a stimulus to good use with requisite accountability,” Bernstein said. “It would not have been possible to move vastly more money into quick trigger infrastructure projects,” Summers said.
You could have pumped more money into a tax cut — say, a full payroll tax holiday — but Westen has ruled tax cuts out as “inert.” You also could have pushed more money into aid to state and local governments, but not a trillion dollars more. So even assuming you could have passed a much larger stimulus through Congress, it’s not clear you could have spent all that much of it on non-tax cut initiatives. The system isn’t equipped to handle such a hefty infusion in funds.
Which isn’t to say that we didn’t need a bigger stimulus. But the conclusion I’ve come to is that the stimulus should have been broken into three different bills: A much larger and more visible tax cut, along the lines of a full payroll-tax holiday; a bill supporting state and local governments, which would have included Medicaid and unemployment insurance; and a bill with infrastructure and investment funds, which wouldn’t have been on a two-year timetable. I’ve also come around to Peter Orszag’s view that it would have been wise to add a significant long-term deficit reduction package, but that’s a post for another day.