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Romer's Legacy: The Stimulus That Might Have Been

August 6, 2010

On the day Christina Romer had the unenviable task of announcing another grim jobs report, Americans learned the chairwoman of the Council of Economic Advisers is leaving the Obama administration. Coming just weeks after the departure of popular Obama budget chief Peter Orszag, Romer's exit will leave the White House without two of the key players who helped architect the successful if undersized American Recovery and Reinvestment Act. In Christina Romer's case, her legacy won't be the ARRA as it is, but the stimulus that might have been.
In announcing the disappointing jobs numbers, Romer again called for new stimulus programs even as she attributed her departure to "family commitments." But as the National Journal suggested, her long-planned decision to leave may reflect being excluded from the White House economic family:

"She has been frustrated," a source with insight into the WH economics team said. "She doesn't feel that she has a direct line to the president. She would be giving different advice than Larry Summers [director of the National Economic Council], who does have a direct line to the president."
"She is ostensibly the chief economic adviser, but she doesn't seem to be playing that role," the source said.

As it turns out, that dynamic was in place even before Barack Obama took the office, including the critical decision to not to fight for a much larger stimulus program. Sadly, Romer's defeat would come back to haunt both the economic recovery and Democratic political prospects.
Writing in The New Yorker last fall, Ryan Lizza recounted how President Obama and his advisers, especially Larry Summers, concluded that discretion was the better part of valor when it came to the $1.2 trillion package many felt was needed:

The most important question facing Obama that day [in December 2008] was how large the stimulus should be. 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. 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 to Obama, however, detailed only two packages: a five-hundred-and-fifty-billion-dollar stimulus and an eight-hundred-and-ninety-billion-dollar stimulus. 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."

Of course, it's true, as David Axelrod argued, that Congress was a "big constraint." (As he put it, "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.") And to be sure, the entire Republican caucus would have been joined by some squeamish Democrats weak at the knees over the staggering price tag. As Matthew Yglesias summed up the administration's rejection of Christina Romer's prescription, "they felt it wasn't possible, legislatively speaking, to do what was objectively necessary."
Instead, President Obama set the pattern that would define much of his first year in office. Hostage to his own fetish of bipartisanship, Obama would make major concessions to Republicans before the negotiations even started. In return, he was greeted with virtually total Republican opposition. On the stimulus as on health care and so much else, President Obama extended his hand to the GOP, only to be slapped in the face.
The result has been a triple whammy for the President and his party. First, the recovery has been slower than it otherwise could have been. Second, the economy's slow ramp up has created a perception problem: Americans wrongly believe the stimulus has failed despite incontrovertible evidence of its success at producing jobs and economic growth. And last, the political blowback from that perception is not only making a second stimulus bill almost impossible, but threatens to wipe out the Democratic majorities in both houses of Congress.
And from the beginning, Paul Krugman has been prescient about the political path the recovery from the Bush recession would take. On January 5th, 2009, Krugman warned then President-elect Obama about the stimulus plan, "Look, Republicans are not going to come on board. Make 40% of the package tax cuts, they'll demand 100%." The next day on January 6th, Krugman warned that the $787 billion recovery package was not only too small, but would pose dire political consequences for President Obama:

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."

In October, Krugman updated his grim assessment. "I went back to my first blog post -- January 6, 2009 -- worrying that the Obama economic plan was too cautious...Alas, I didn't have it wrong -- except that unemployment will, if we're lucky, peak around 10 percent, not 9." A second stimulus would almost surely be required, an economic necessity that politically would be almost impossible to produce. As Ezra Klein recently described the self-fulfilling prophecy that unfolded for President Obama:

Ten percent unemployment and a terrible recession ended up discrediting the people trying to do more for the economy, as their previous intervention was deemed a failure. That, in turn, empowered the people attempting to do less for the economy. So rather than a modestly sized stimulus leaving the door open for more stimulus if needed, its modest size was used to discredit the idea of more stimulus when it became needed.

And in a nutshell, that is the tragic legacy of Christina Romer.
In her summary of the July jobs picture, Romer said, "Today's employment report emphasizes just how important the additional jobs measures before Congress are," adding, "In addition to the state fiscal relief nearing passage, the President strongly supports the small business jobs bill and targeted incentives for clean energy investments." Nobel Prize-winning economist Joseph Stiglitz couldn't agree more. Lamenting the "anemic recovery," Stiglitz called for another round of "better designed" stimulus measures, concluding the Obama administration took "a big gamble and it doesn't look like it's paying off."


Jon Perr
Jon Perr is a technology marketing consultant and product strategist who writes about American politics and public policy.

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