The New New Deal Read online

  It was Romer’s job to inform Obama the economy was in critical condition, which was not how she had imagined her first presidential briefing.

  “I’m so sorry, Mr. President-Elect,” she blurted out. “The numbers are just horrible.”

  “It’s not your fault,” Obama replied. “Yet.”

  The end of 2008 tends to be remembered as an undifferentiated blob of bad news. It’s easy to forget the scary trajectory, the way bad kept getting worse. That “horrible” report of 500,000 lost jobs would later be revised to a beyond-horrible 800,000. By December, retail sales had reached their lowest ebb since 1969, wiping out chains like Circuit City, and one in ten mortgages were delinquent, a record. California governor Arnold Schwarzenegger declared a fiscal emergency. On the positive side, sort of, the global slowdown dragged crude prices 70 percent below their summertime peak. But it was hard to get excited about cheap gas when you couldn’t find a job or pay your bills.

  This was the kind of vicious cycle Keynes had warned about, and it bolstered the case for a Keynesian response. More Americans without jobs or health insurance meant a deeper need for jobless benefits, Medicaid, and other antipoverty aid. And a bigger hole in the economy meant a bigger stimulus would be needed to fill it. As Romer later pointed out, fiscal stimulus was not considered an exotic or ideological tool.112 “It is a tried and true remedy widely supported by economists across the political spectrum,” she explained in a speech. “It is standard fare in both introductory textbooks and more sophisticated modern theoretical models.”

  At Obama’s transition headquarters in downtown Washington, the stimulus plan had now grown to $580 billion. That was ten times the size of the stimulus bills Congress had voted on just two months earlier—and about as much as the United States spent on Medicare and Medicaid that year.113 In a four-page summary distributed in early December—with each page marked “NOT TO BE SHARED”—Summers and Furman called the plan an effort to “jolt the economy, restore America after years of neglect, and make critical 21st century investments to begin the transformation of the American economy.”114 Rahm was already down on the word “stimulus”—overly Washington, insufficiently grand—so they called it “The American Economic Recovery Plan.”

  The biggest addition was the New Jobs Investment Tax Credit, the hiring incentive for businesses that Obama had proposed in Toledo. Some critics dismissed the credit as free money for firms that would have hired anyway, but even if only one or two out of ten new hires were prompted by the incentive, it would still be a fairly inexpensive way to create jobs. As for the other eight or nine hires, well, giving money to growing firms would provide stimulus, too. The main goal was to splash cash into the economy, which was why the updated recovery plan also extended the Making Work Pay tax cuts over two years. Overall, 40 percent of the new plan consisted of tax breaks, which would annoy liberals, but would also provide an easy mechanism to get money out the door. On the spending side, there was only so much pig that could be shoved through the federal python in just two years.

  “With numbers that huge, it starts to be a real logistical challenge to spend money quickly and still make sure you’re getting high bang-for-the-buck,” explains Brian Deese, who joined the NEC staff after the transition. “Tax cuts start to look pretty attractive as part of a package.”

  But the new plan also jacked up spending on long-term priorities. Geithner had told Obama that no matter what happened after the crisis was over, his main legacy would be preventing a second depression.115 The president-elect had replied: That’s not enough. In his radio address on December 6, he announced the first five elements of his recovery program, and they sounded like his campaign agenda in new clothing: “A massive effort to make public buildings more energy efficient.116 … The single largest new investment in our infrastructure since the creation of the interstate highway system. … The most sweeping effort to modernize and upgrade school buildings this country has ever seen. … We’ll renew our information superhighway. … We’ll make sure every doctor’s office and hospital in this country is using electronic medical records.” Change was in the works.

  At the same time, Obama wanted to hammer home his short-term message that help was on the way. In his first inaugural, FDR had proclaimed that “the nation asks for action, and action now”—a line that prompted way more applause than “fear itself”—and Obama ripped him off: “We need action, and action now.”

  This bifurcated approach—a short-term emergency intervention combined with a long-term foundation for growth—did not seem impossibly difficult to understand. Neither did the similarly dualistic notion of aggressive deficit spending while the economy needed stimulus, followed by fiscal restraint once the danger passed. These ideas were no more hypocritical or contradictory than Obama’s proposal to raise taxes on the rich and cut taxes for everyone else. He assumed the public was capable of grasping a straightforward two-part message.

  That assumption would haunt him. It turns out that one-part messages—stimulus is bad, deficits are bad, taxes are bad, government is bad—are much easier to grasp.

  Obama chose his cabinet faster than any president-elect since Nixon, tapping prominent politicians (including Hillary Clinton at State and former Senate majority leader Tom Daschle at Health and Human Services), moderate Republicans (keeping Robert Gates at Defense and installing Congressman Ray LaHood at Transportation), and innovative reformers (Steven Chu at Energy, Arne Duncan at Education, and New York City housing commissioner Shaun Donovan at HUD).117 He also named his senior White House staff in record time.

  Rahm wanted the stimulus to move just as fast. He was hot for Obama to sign a bill on inauguration day, so he could begin his presidency with an act as dramatic as FDR’s bank holiday. But Phil Schiliro, a longtime congressional aide who was now Obama’s legislative director, kept pointing to the calendar. What Rahm was proposing would violate every law of legislative physics. The new Congress wouldn’t even arrive in Washington until the first week in January, which meant it would have two weeks to produce, debate, amend, and enact landmark legislation. “Some of the new members won’t even have staff yet, and we’ll be asking them to take the biggest vote of their lives,” Schiliro argued. How did Rahm intend to get a bill through God knows how many committees, then the House, then the Senate, then reconcile the two versions, and then back through the House and Senate again? Maybe first someone ought to start drafting some legislative language.

  “We were already doing a bridge too far,” Schiliro says. “That was like ten bridges too far.”

  Rahm spluttered and cursed his way through a few scheduling meetings, but soon he had to admit January 20 was outlandish. Instead, the team set a deadline of Presidents’ Day recess in mid-February, a slight nod toward sanity. The new plan called for Obama to build momentum first by signing two popular bills, one removing barriers to women’s equal pay lawsuits, the Lilly Ledbetter Fair Pay Act, the other expanding that children’s health insurance program that Bush had vetoed, known as S-CHIP. That would put some points on the board while the Recovery Act was taking shape. Rahm believed that in Fucknutsville, you’re either pitching or catching. He wanted to pitch.

  If the new schedule made Schiliro feel marginally better about the logistics, he still worried about the politics. Obama’s first responsibility, even before he took office, would be a hideously unpopular push for Congress to approve the second $350 billion tranche of TARP. He had also pledged help for carmakers and homeowners, political land mines in their own right. Meanwhile, Congress hadn’t finished last year’s budget, so Obama would have to deal with a giant “omnibus” spending package, as well as a supplemental spending package to fund wars, disasters, and anything else the Hill decided to supplement—at the same time he would be preparing to unveil next year’s budget. Plus the biggest stimulus ever? That was going to be a lot of spending, a lot of zeroes. To Schiliro, it felt like an Olympic dive with the highest degree of difficulty. At one early meeting, he warned: By
the time we’re done with all that, we’ll be done spending money.

  In retrospect, the stimulus has taken on an aura of inevitability, as if it were a foregone conclusion that Congress had to pass some kind of massive recovery bill. But Obama’s Beltway veterans thought nothing was inevitable. They remembered President Clinton’s ill-fated $19 billion stimulus. Even on a slightly more realistic legislative schedule, even during a presidential honeymoon, even in the midst of an economic bloodbath, a $580 billion package would be a heavy lift. In September, after Lehman Brothers failed, Majority Leader Reid had failed to move $56 billion through the Senate; even two centrist Democrats had voted no on enough-is-enough grounds.118 As Americans hunkered down, a Washington spending spree seemed totally off-key.

  So Rahm kept pressing Schiliro: How much can we get?

  Schiliro told him $400 billion seemed doable.

  What about $600 billion?

  Yeah, maybe. “Beyond that, it got shaky,” Schiliro says. “I mean, even $300 billion was mind-boggling. We were talking about magnitudes of hundreds of billions of dollars more than anybody had been talking about.”

  Almost anybody. The economic team had settled into Obama’s chaotic Washington transition offices at the corner of Sixth and E, taking over a section of the eighth floor. This team of rivals would later become notorious for its drama. In the coming months, Romer would furiously threaten to go home to Berkeley if Summers and Geithner kept huddling without her; Summers and Orszag would start holding competing budget meetings; Summers and Goolsbee would come to view each other with mutual contempt. But in those intense early days, the team was still functioning fine. Even Summers was still playing nicely in the sandbox; his detractors suspect he was behaving in hopes that Obama would name him Fed chairman when Bernanke’s term expired. “He was trying really hard to control his inner Larry,” one economist recalls. The key players all worked within a few feet of one another, popping their heads into each other’s offices, meeting for hours on end.

  At one stimulus meeting after the ugly jobs report, Romer piped up: “One of the things we ought to put on the table is that this thing is much too small. It needs to be bigger, at least $800 billion.”

  That was even bigger than TARP.119 That was about what the United States had spent so far on the wars in Afghanistan and Iraq.

  To Romer’s surprise, Summers immediately replied: “I agree.”

  “Nobody objected, so Larry took that as license to run,” Romer says. “Our feeling was: We’ve got to hit this with everything we’ve got.”

  That feeling was the driving force behind a fifty-seven-page “Executive Summary of Economic Policy Work” that Summers wrote with input from the rest of the economic team, laying the groundwork for the first few months of the Obama administration.120 The December 15 memo outlined the team’s thinking about the stimulus, as well as the banking, housing, auto, and budget crises. “The rule that it is better to err on the side of doing too much rather than too little should apply forcefully to the overall set of economic proposals,” Summers wrote.

  The memo’s first and most important point was that a $600 billion stimulus would fail to push unemployment below 8 percent in two years. “This has convinced the economic team that a considerably larger package is justified,” Summers wrote.

  The memo did include several caveats about a larger package: It might not be politically feasible. It could conceivably unsettle the bond markets. And the bigger the stimulus got, the harder it would be to keep timely, targeted, temporary, and wise. Summers only included four options for recovery plans, from $550 billion to $890 billion, and some liberals have accused him of providing intellectual cover for inadequate stimulus, overemphasizing politics at a time he should have focused exclusively on the scary economics. It’s true that Summers considered his job partly political; as he told an aide, if you’re going to join the circus, sometimes you’ve got to dress up like a clown. But his memo doesn’t read as a call for caution. The language is dry, but bureaucratic sirens are blaring on almost every page.

  “Insufficient fiscal impetus,” Summers wrote, “could put recovery at risk, with catastrophic consequences.” It’s a call for action, and action now.

  — SIX —

  The Moment

  The stories Obamaworld tells about itself tend to begin in the Chicago transition offices on December 16, 2008, when the president-elect met with his economic team for the first time to discuss the horror show he was about to inherit.121 David Axelrod, Obama’s schlumpy but savvy political guru, is a former reporter who understands the power of narrative, and he has helped spin that snowy Tuesday in the Windy City—“an unforgettable day,” he reminded me two years later—into a kind of Rosebud for the Obama White House. Obama was in his analytical element, coolly leading a four-hour discussion of the unappetizing policy choices framed by the Summers memo, repeatedly coming down on the side of bold action—a perfect opening scene for his presidency’s creation myth.

  “Politics was in the room, but economics dominated the conversation,” recalls Jared Bernstein, the house liberal of the economic team.

  Politics had its moment just before the meeting, when the economists previewed their message for Axelrod: The economy was hurtling toward a depression. Axelrod knew things were bad, but there are so many degrees of bad, and even he hadn’t grasped how close America was to rock-bottom bad. He said his research suggested the public had no clue whatsoever. Summers, the Washington veteran, dryly whispered to Romer, the lifelong academic: “He doesn’t mean research the way we mean research.”

  Okay, polling. Axelrod’s point was that the tidal wave hadn’t yet hit the shore. There hadn’t even been a real tsunami alert.

  “The American people,” he said, “have not had their holy-shit moment.”

  Stage-managing the meeting, Summers had assigned Romer to open with an overview of the emergency. With Axelrod’s analysis fresh in her mind, she began with the most memorable sentence she’s ever uttered, a line that Obama’s aides have repeated ever since as a reminder of the mess dumped in his lap:

  “Mr. President-Elect,” she said, “this is your holy-shit moment.”

  “It’s Like, Boom!”

  Romer had searing memories of the recession of the early 1980s, the worst of the postwar era, the downturn triggered when Paul Volcker’s Fed jacked up interest rates to curb inflation.122 She was at grad school at MIT when her father told her he had been “sacked” from a Philadelphia chemical plant—but don’t worry, he had set aside money for her upcoming wedding. Her mother soon found out her teaching job was in jeopardy, too. But once inflation subsided and the Fed started lowering rates, consumption and investment came roaring back. By the time Romer returned from her honeymoon, her mom’s contract had been renewed. Her dad soon found a new job.

  The gist of Romer’s Chicago presentation was that this wasn’t her father’s recession. With what Obama later described as “a chilling set of charts and graphs,” she showed that the situation was threatening to make 1982 look like the good old days. And this downturn had been triggered by a financial meltdown, not high interest rates, so it couldn’t be reversed by lower interest rates. The only comparable collapse had ushered in the Depression, the era Romer knew best.

  Romer’s cheery demeanor made her awful news sound somewhat less awful—“like swallowing a pill in applesauce,” Axelrod says—but she laid out two potentially catastrophic scenarios. The death spiral could spin out of control, shredding the banking system and starting a depression, or we could muddle our way through a Japan-style lost decade, an era of prolonged stagnation. She explained why depressions really, really suck—the wasted human capital, the lost tax revenue, the immeasurable suffering—but she also warned that the slow-bleed Japanese route could end up almost as badly as 25 percent unemployment.

  Fortunately, economists had learned a lot about avoiding catastrophes. They knew from the errors of the Depression that tax hikes, spending cuts, or tighter money woul
d make the crisis worse. And they were confident that fiscal stimulus could make things better, filling the “output gap” between actual production and the economy’s potential production at full capacity. But the current gap was almost unfathomable, over $2 trillion over the next two years. Romer’s advice was to attack it with overwhelming force. Government wouldn’t be able to plug the entire hole, even with Keynesian multipliers magnifying the impact of every dollar, but she argued for the biggest stimulus in history, somewhere between $800 billion and $1.2 trillion worth of jet fuel, an unheard-of 5 percent to 8 percent of GDP over two years. In FDR’s most aggressive year, the New Deal’s stimulus only amounted to about 1.5 percent of GDP.123

  Rahm looked like he was about to pass a kidney stone.

  “We were all thinking: ‘Oh, my God,’” Goolsbee recalls.

  It later became clear that Romer’s ugly analysis, while based on the most current data, was way too rosy. The Federal Bureau of Economic Analysis had just pegged growth for the third quarter at –0.5 percent; it would later revise that to –4.0 percent, an unprecedented adjustment. Still, Romer recognized that the economy was in free fall, even though she had no idea how far it had already fallen.

  Orszag, a nerdy-chic budget hawk with an independent streak—he wore cowboy boots even though he grew up in an academic family in the Boston suburbs—was about to assume responsibility for the biggest deficit in history.124 So he would have preferred to start smaller, closer to $600 billion. Geithner, who was so worried about the banks that he thought Obama would need to launch a second TARP, also seemed uneasy about the incoming tide of red ink. He thought the financial rescue would be the real key to recovery; he’d later tell Romer there was more stimulus in TARP than in the stimulus. Romer would shoot back that there was more financial rescue in the stimulus than in the financial rescue; she thought the key to Wall Street stability would be restoring the health of its Main Street customers.