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How Obama Blew It

"The likely loss of unemployment benefits for 3.71 million Americans in a few months will only add to an economy edging ever closer to recession, according to analysis that puts the chances of another downturn at better than 1 in 3," CNBC reports.

Ever closer to recession? The only way that statement could be true would be if we were on our way back up from a depression.

Another downturn? We're still down. I don't understand this talk of a double-dip recession because we're still in the first dip - and it's a lot deeper than a dip. In fact, it's a lot worse than our experts thought.

"Two years ago, Commerce estimated the decline of the US economy at -0.5% in the third quarter of 2008 and -3.8% in the fourth quarter," David Frum notes. "It now puts the damage at -3.7% and -8.9%: Great Depression territory."

*

"As to that first question on mistakes made, Obama allowed that his administration had underestimated the severity of the recession, and so he did not prepare the American people 'for how long this was going to take' and the tough choices that lay ahead," AP reported last month. "Obama also said the problems in the housing market were more stubborn than expected, and he'd had to revamp his assistance programs several times."

It's quite clear now that Obama simply blew it upon taking office amidst an historic economic crisis. The man who campaigned on changing the country had his big shot and blew it. And Rahm Emanuel helped.

*

"The most important question facing Obama that day [in December 2008] was how large the stimulus should be," Ryan Lizza reported for the New Yorker in October 2009. "Since the election, as the economy continued to worsen, the consensus among economists kept rising. A hundred-billion-dollar stimulus had seemed prudent earlier in the year. Congress now appeared receptive to something on the order of five hundred billion. Joseph Stiglitz, the Nobel laureate, was calling for a trillion.

"[Chair of the Council of Economic Advisers Christina] Romer had run simulations of the effects of stimulus packages of varying sizes: six hundred billion dollars, eight hundred billion dollars, and $1.2 trillion. The best estimate for the output gap was some two trillion dollars over 2009 and 2010. Because of the multiplier effect, filling that gap didn't require two trillion dollars of government spending, but Romer's analysis, deeply informed by her work on the Depression, suggested that the package should probably be more than $1.2 trillion.

"The memo [sent] to Obama, however, detailed only two packages: a five-hundred-and-fifty-billion-dollar stimulus and an eight-hundred-and-ninety-billion-dollar stimulus. [National Economic Council director Larry] Summers did not include Romer's $1.2-trillion projection. The memo argued that the stimulus should not be used to fill the entire output gap; rather, it was 'an insurance package against catastrophic failure.' At the meeting, according to one participant, 'there was no serious discussion to going above a trillion dollars.'

"There were sound arguments why the $1.2-trillion figure was too high. First, Emanuel and the legislative-affairs team thought that it would be impossible to move legislation of that size, and dismissed the idea out of hand. Congress was 'a big constraint,' Axelrod said. 'If we asked for $1.2 trillion, it probably would have created such a case of sticker shock that the system would have locked up there.'"

Or Obama could have been a leader. Instead, he listened to Rahm.

*

"The problem for Obama, he wasn't as lucky as Roosevelt, because when Obama took over we were still in the middle of a free fall," former Wisconsin congressman David Obey recalled to The Fiscal Times. "So his Treasury people came in and his other economic people came in and said 'Hey, we need a package of $1.4 trillion.' We started sending suggestions down to OMB waiting for a call back. After two and a half weeks, we started getting feedback. We put together a package that by then the target had been trimmed to $1.2 trillion.

"And then Rahm Emanuel said to me, 'Geez, do you really think we can afford to come in with a package that big, isn't it going to scare people?'

"I said, 'Rahm, you will need that shock value so that people understand just how serious this problem is.'

"They wanted to hold it to less than $1 trillion. Then [Pennsylvania Senator Arlen] Specter and the two crown princesses from Maine [Sens. Olympia Snowe and Susan Collins] took it down to less than $800 billion. Spread over two-and-a-half years, that's a hell of a lot of money, but spread over two-and-a-half years in an economy this large, it doesn't have a lot of fiscal power."

*

Rahm's opposition, it was widely reported, to a trillion-dollar package was simply based on the aesthetics and politics of the word "trillion" - not the economics of the situation.

*

And even at the smaller size, Obama seemed to object to the size of his own plan instead of giving it a hard-sell. Obama moved in exactly the wrong direction.

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Lizza in the New Yorker:

"[Summers], like Romer, was guided by an understanding that in financial crises the risk of doing too little is greater than doing too much. He believed that filling the output gap through deficit spending was important, but that a package that was too large could potentially shift fears from the current crisis to the long-term budget deficit, which would have an unwelcome effect on the bond market. In the end, Summers made the case for the eight-hundred-and-ninety-billion-dollar option.

"When the meeting broke up, after four hours of discussion, interrupted only briefly when the President brought out a cake and led the group in singing 'Happy Birthday' to Orszag, there was still indecision about how big a stimulus Obama would recommend to Congress. Summers, Romer, Geithner, Orszag, Emanuel, and Jason Furman huddled in the corner to lock down the number. Emanuel made the final call: six hundred and seventy-five to seven hundred and seventy-five billion dollars, with the understanding that, as the bill made its way through Congress, it was more likely to grow than to shrink. The final legislation was for seven hundred and eighty-seven billion dollars."

*

Paul Krugman, January 2009:

"This really does look like a plan that falls well short of what advocates of strong stimulus were hoping for - and it seems as if that was done in order to win Republican votes. Yet even if the plan gets the hoped-for 80 votes in the Senate, which seems doubtful, responsibility for the plan's perceived failure, if it's spun that way, will be placed on Democrats.

"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. And then Mitch McConnell says 'See, government spending doesn't work.'"

*

David Leonhardt, February 2009:

"The odds that, a year from now, Mr. Obama and Congress will regret not having been more aggressive seem bigger than the odds that they'll think they overdid it . . . Today, the Obama administration can still blame the Bush administration for the economy's condition. Next year, fairly or not, that won't be so easy."

*

The next year, Geithner "steered Obama away from jobs focus" and "pushed austerity," the Washington Post reported.

*

It wasn't just the size of the stimulus, but it's shape. It wasn't a jobs bill.

"More than one-third of this bill is dedicated to providing tax relief to middle-class families, cutting taxes for 95 percent of American workers," Senate Majority Leader Harry Reid said at the time.

"[The bill] includes Obama's signature 'Making Work Pay' tax credit for 95 percent of workers, though negotiators agreed to trim the credit to $400 a year - or $800 for married couples. It would begin showing up in most workers' paychecks in June as an extra $13 a week in take-home pay, falling to about $8 a week next January."

*

At the time, I wrote this:

"I'm not against a stimulus bill, mind you, but I think John Dickerson has it right. And if this was a jobs bill and/or an infrastructure bill that would be great. Various other agenda items could be handled down the road, like the Green Deal. Instead, we have a mess . . .

"I've always been of the belief that FDR's New Deal was crucial in providing a social safety net that saved lives and provided a framework for a modern nation, but that it was really Hitler who got us out of the Great Depression. Wartime spending combined with rations that created pent-up demand resulted in a postwar boom that, like the Big Bang, spread far and wide until dissipating in the 70s in the face of changing global economic conditions - including the energy crisis - and the result of Vietnam war spending that wasn't backed by a tax increase, throwing the federal budget out of whack.

"I wish it weren't so, but does that mean FDR's spending wasn't massive enough? My hunch is that it wasn't targeted enough toward investment in technology, medical research, education and other non-consumer areas of the economy that pay the biggest long-term dividends. (Including job retraining for both skilled and unskilled workers, as well.) I'm glad the federal government offered grants to writers back then; I wish they'd give me one now. But make-work jobs aren't nearly as beneficial to the economy as jobs with long-term spinoff benefits.

"The sad irony is that we've actually been spending gazillions on a war for the last six years and our economy had nothing to show for it but huge deficits even before the financial meltdown.

"We could have stood to get a smart stimulus bill through quickly for immediate relief and then spent just a little bit of time thinking about what the hell we were doing before spending an ungodly amount of money on projects Ray LaHood can't wait to get his hands on."

Because, you see, it was a crappy bill full of non-stimulative pork and Rahm was its architect.

*

That was Obama's moment. His chance to save America. To be FDR. Instead, he was Obama. And he's been Obama ever since.

-

Comments welcome.




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Posted on August 4, 2011


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