Larry Summers: ARRA Was Too Small
by Charles Lemos, Mon Apr 11, 2011 at 01:12:23 PM EDT
Reporting from the Institute for New Economic Thinking's weekend conference in Bretton Woods, New Hampshire, Robert Kuttner of the American Prospect offers this tidbit:
Larry Summers, now back at Harvard, was the after-dinner entertainment, interviewed by the prodigious Martin Wolf of the Financial Times, the world’s most respected financial journalist.
Summers was terrific, acknowledging that the stimulus of February 2009 was too small, that the idea of deflating our way to recovery is insane, that de-regulation had been excessive, and that much of the economics profession missed the developing crisis because its infatuation with self-correcting markets.
If only this man had been Obama’s chief economic adviser!
It reminded me a bit of Eisenhower’s farewell address, warning of a military-industrial complex, or Citizen Jimmy Carter’s sublime post-presidency. Why do these people find their consciences and souls after they give up power?
If Larry Summers was the after-dinner entertainment, let's hope the guests found Alka-Seltzer tablets instead of mints on their pillows when they returned to their hotel rooms for the night. I suppose we should be relieved that Summers has found his Keynesian religion, but it wasn't as if his $787 billion fiscal stimulus number wasn't criticized at the time for being too small.
Certainly, economists such as Joseph Stiglitz, Paul Krugman and Dean Baker all thought the number too small. So did Congressman David Obey who first put together a $1.4 trillion package and then a $1.2 billion package only to be told to pare the numbers further. And inside the White House, Christina Romer argued for a bigger fiscal stimulus making the case that long-term unemployment posed a threat to the economy. They were all outweighed by a political calculus.
Ultimately Barack Obama, and not Larry Summers, bears responsibility for that decision. And it's a lesson, he still doesn't seem to quite mastered as yet. Back on February 9, 2009, Paul Krugman wrote this in his New York Times column:
I blame President Obama’s belief that he can transcend the partisan divide — a belief that warped his economic strategy.
After all, many people expected Mr. Obama to come out with a really strong stimulus plan, reflecting both the economy’s dire straits and his own electoral mandate.
Instead, however, he offered a plan that was clearly both too small and too heavily reliant on tax cuts. Why? Because he wanted the plan to have broad bipartisan support, and believed that it would. Not long ago administration strategists were talking about getting 80 or more votes in the Senate.
Mr. Obama’s postpartisan yearnings may also explain why he didn’t do something crucially important: speak forcefully about how government spending can help support the economy. Instead, he let conservatives define the debate, waiting until late last week before finally saying what needed to be said — that increasing spending is the whole point of the plan.
And Mr. Obama got nothing in return for his bipartisan outreach. Not one Republican voted for the House version of the stimulus plan, which was, by the way, better focused than the original administration proposal.
In the Senate, Republicans inveighed against “pork” — although the wasteful spending they claimed to have identified (much of it was fully justified) was a trivial share of the bill’s total. And they decried the bill’s cost — even as 36 out of 41 Republican senators voted to replace the Obama plan with $3 trillion, that’s right, $3 trillion in tax cuts over 10 years.
So Mr. Obama was reduced to bargaining for the votes of those centrists. And the centrists, predictably, extracted a pound of flesh — not, as far as anyone can tell, based on any coherent economic argument, but simply to demonstrate their centrist mojo. They probably would have demanded that $100 billion or so be cut from anything Mr. Obama proposed; by coming in with such a low initial bid, the president guaranteed that the final deal would be much too small.
Such are the perils of negotiating with yourself.
February 2009 might as well be April 2011. President Obama will lay out his plan for reducing the nation's deficit in a speech to the nation on Wednesday, and as the Wall Street Journal coyly observed "belatedly entering a fight over the nation's long-term financial future". The President, like Larry Summers, seems to found a Keynesian blood cell or two pulsing through his veins, and will call for tax increases for people making over $250,000 a year but he is also expected to offer cuts to entitlement programs, including Medicare and Medicaid, and changes to Social Security in forlorn hopes of bridging a partisan divide because for Obama his search for the political center is the compass that guides him. Hence items are now on the table that would have been inconceivable just two years ago because the political sands have shifted. Back in 2009, the center was Arlen Specter and Olympia Snowe; today the center is John Boehner.
Paul Krugman today writes in the New York Times that "Mr. Obama is conspicuously failing to mount any kind of challenge to the philosophy now dominating Washington discussion — a philosophy that says the poor must accept big cuts in Medicaid and food stamps; the middle class must accept big cuts in Medicare (actually a dismantling of the whole program); and corporations and the rich must accept big cuts in the taxes they have to pay."
It's surreal to be at this point and it's even more depressing that seventy-eight years of liberal achievements now rest in the hands of a man for whom cutting a deal with the ever rightward political center is his raison d'être. Never has the bully pulpit of the Presidency been so more profoundly wasted than on Barack Obama. It's also deeply ironic that as Barack Obama attempts to bring the country together under some mythical center, he is actually laying the seeds of further polarization. Instead of forcefully taking on the delusions of the American right, he is enabling them and that serves neither the cause of liberalism nor the interests of the country.