Paul Krugman writes that “the defense people outside the administration make for the inadequate stimulus is very different from the defense the administration makes. Outside defenders argue that Obama got all he could; but administration figures like Jay Carney claim that the reason the stimulus wasn’t bigger was that nobody realized how deep the recession was going to be.”
And former top White House economic adviser Larry Summers: “The administration proposed considerably more than Congress was willing to enact. Taking account of the addition of the AMT, the Administration’s Recovery Act proposals were cut back by about 20% in the process of passing Congress by very narrow margins.”
Here’s former Office of Management and Budget chief Peter Orszag from a 2010 Brookings event: “I know there’s been a lot of discussion, especially on the left, about whether the Recovery Act should have been bigger. And while I am sympathetic to that argument, I think it’s also not even remotely within the politically viable range. I was in the room when that was being negotiated, and I can personally guarantee you that I see no — 0 — 0.000 probability that it could have been any substantially larger. And I am actually pleased that it was as large as it was. In other words, I think we did the best that could have been done without significant delay.”
Summers again: “It was my judgment as an economist that there was no danger of doing too much stimulus and one should achieve as much stimulus as possible. There were a set of political calculations having to do with what the Congress could accept that were mostly determined by the president’s political advisers and ultimately by the president which pointed towards the size of the program that was ultimately passed.”
A week ago, on “60 Minutes,” Steve Kroft asked President Obama whether the stimulus should have been larger. “It is true that some people have argued, given the magnitude of the crisis we were in, we should have done an even larger Recovery Act,” Obama said. “And then I’m bumping up against the realities of Congress, which is this Recovery Act was twice as large as most people thought was even possible.”
Krugman goes on to criticize the administration for being unduly optimistic about the likely speed of our recovery from the crisis. Krugman has the standing to do this: He was on the pessimistic side of the argument, and he was right. But to illustrate how bad the financial crisis actually was, it’s worth noting that even Krugman’s pessimism was overly optimistic.
In January 2009, Krugman wrote, “I see the following scenario: a weak stimulus plan, perhaps even weaker than what we’re talking about now, is crafted to win those extra GOP votes. The plan limits the rise in unemployment, but things are still pretty bad, with the rate peaking at something like 9 percent and coming down only slowly.”
That’s closer than the administration’s estimates, which had unemployment peaking at 8 percent. But unemployment actually peaked at 10 percent. So Krugman was a percentage point more pessimistic than the administration, but reality was a percentage point more pessimistic than Krugman.
Given the severity of the crisis, I think the other interesting question is: In a world where congressional constraints had eased, could the administration have furnished a stimulus that was able to keep unemployment beneath 8 percent?
Every policymaker involved in the stimulus thinks that the media and many economists underestimate the implementation problems you run into with a giant stimulus. As the bill gets bigger, you run out of high-value programs, such as infrastructure, that you can start quickly, and begin having to put your money into things such as tax cuts that have less of a stimulative effect. More on that here.
As I suggest in this piece, I think one way to get around that is to do more direct hiring and job preservation. That’s got a big oomph on jobs, and aside from state and local aid, the stimulus did very little of it. But hiring a million more public-sector workers is a tough sell politically, and it comes with its own set of implementation problems. Where do you put them? Do their jobs have an expiration date? If not, when do you fire them? How?
I do think it’s odd that the administration didn’t leave itself more rhetorical room for the stimulus to be too small. There was a “to be sure” paragraph in the president’s speech celebrating the passage of the stimulus, in which Obama said, “I don’t want to pretend that today marks the end of our economic problems, nor does it constitute all of what we’re going to have to do to turn our economy around.” But the overall tone was celebration, optimism and turning a corner. There could have been a lot more “we’re not sure this is enough, but we hope it is, and if it isn’t, we’ll be back for more.”
That wouldn’t have made Congress very happy, but it would have helped in the long run. That said, I’m skeptical that presidential rhetoric matters much, and this is no exception. Whatever effects a more ambivalent tone might have had on public opinion would have been swamped by the actual trajectory of the economy.
So where do I end up? The stimulus was too small, but it probably couldn’t have been much bigger. If the administration had better understood the severity of the crisis, the bill might have included a different mix of policies and included less of a focus on long-term investments. The situation warranted a lot more direct hiring than the stimulus ultimately included, but I’m not sure that would have been possible under any circumstance. It also warranted more cautious rhetoric, but I think pundits tend to overstate the effect of presidential rhetoric, and this is one of those times.
In other words, Krugman was right. But if he had been president, I’m not sure that unemployment would be vastly lower today. Or, if it was vastly lower, I think it would be due to decisions related to the housing market and the Federal Reserve rather than the stimulus.