How did the stimulus get so small?

Krugman warned us that Obama's rescue plan wasn't big enough. But Larry Summers decided to play it safe

By Andrew Leonard
October 5, 2009 10:15PM (UTC)
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Even in uncertain times, there are some reliable verities. Such as: Paul Krugman looking at last week's generally discouraging economic indicators and choosing to remind his readers, once again, of his prediction back in January that the Obama stimulus would be too small.

Then, as fate would have it, within hours of Krugman's post, The New Yorker published a massive article by Ryan Lizza on Larry Summers and Obama's economic team. Buried deep within was the most detailed account we have seen so far on how the stimulus parameters were calculated.


The most important question facing Obama that day 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."

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." He pointed east, toward Capitol Hill. "And the world was watching us, the market was watching us. If we failed to produce a stimulus bill, that in and of itself could have had deleterious effects."

No sooner had HTWW digested Lizza's account, and started preparing a blog post on how it applied to Krugman's lament, than Krugman was up with his own new post that highlighted that very paragraph.

And here's how Krugman responded to the "politics" explanation of why the stimulus couldn't be bigger.

Maybe that was all that could have been done, politically. But it does not sound, from the Lizza article, as if either the economic team or the political team thought much about the risks of finding themselves where we are now -- with the economy still failing to deliver job growth despite the stimulus -- even though those risks were completely apparent at the time.

Is that fair? Look at everything that has happened, politically speaking, since the passage of the stimulus. The core argument that Republicans and moderate Democrats are employing to critique the Obama administration and, in particular, to fight against healthcare reform, boils down to an attack on supposedly "out of control" government spending. It might seem hard to believe, but the efficacy of that argument, as a political strategy, would be even greater if Obama had pushed for another half trillion of stimulus spending. Put yourself in Axelrod's position. Asking for $1.2 trillion might have ended up a spectacularly self-defeating gesture -- freezing the political system into instant gridlock and sabotaging all future possibilities of reform. That's a big price to pay, even if you could look ahead and imagine "the risks" of finding ourselves "where are now."


As for the Lizza piece in general: Felix Salmon gets to the heart of the matter.

Yikes the Ryan Lizza piece on Larry Summers is long -- over 11,500 words. And even then it manages to say absolutely nothing about some key issues, such as the $5.2 million he was paid by DE Shaw to work one day a week in 2008; or the allegations of Summers actively working to marginalize the influence of Paul Volcker; or l'affaire Shleifer.

So, yeah, there are some holes.

Andrew Leonard

Andrew Leonard is a staff writer at Salon. On Twitter, @koxinga21.

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Barack Obama How The World Works Paul Krugman U.s. Economy