Magazine April 16, 2012, Issue

Chronicles of a Debt Foretold

You are not alone. Some of President Barack Obama’s own crackerjack advisers are surely as surprised and dismayed as anyone by America’s persistently weak economic recovery. Back in the spring of 2010 — just before the White House launched its ill-timed “Recovery Summer” publicity offensive right smack into a summer swoon — I visited a top White House economist. I asked if the nascent recovery had any real momentum. After giving me a lengthy and thorough survey of the major macroeconomic indicators, the economist concluded that “all the lights on the dashboard are flashing green.” Let the Obama boom begin.

A similarly rosy sentiment was expressed to me by another member of the Obama economic team at roughly the same time. This adviser, since returned to academia, had little patience for any suggestion that the anemic rebound evidenced a sluggish, “new normal” economy burdened by too much government debt. Economists Carmen Reinhart and Kenneth Rogoff have found that financial crises are usually followed by sharply higher government debt and significantly lower economic growth; but this White House economist was having none of it, arguing that no economy in history is comparable to America’s due to its global dominance and control of the world’s reserve currency. Past poor results do not guarantee future underperformance. And besides, the president’s 2009 stimulus package was really beginning to work its magic. America was going to be okay.

But sitting there, listening to all that West Wing optimism, I was reminded of Richard Nixon’s famous observation that the U.S. economy was so strong “it would take a genius” to wreck it. Indeed, the Obama administration was filled with geniuses, a veritable all-star team, no, dream team of superstar liberal economists: Lawrence Summers, Christina Romer, Austan Goolsbee, Peter Orszag, Alan Krueger, Jared Bernstein. And don’t forget Treasury Secretary Timothy Geithner, the Indispensable Man of the financial crisis, a figure so highly regarded back in the fall of 2008 that he just might have led President John McCain’s Treasury Department had the election gone the other way.

Just how Team Obama’s economic policies went so wrong –  and how its optimism was so misplaced — despite such accumulated brainpower and supposed expertise is the subject of two books covering much the same ground and reaching similar conclusions: Confidence Men: Wall Street, Washington, and the Education of a President (Harper, 528 pp., $29.99), by Ron Suskind, which came out last September, and The Escape Artists: How Obama’s Team Fumbled the Recovery (Simon & Schuster, 368 pp., $28), by Noam Scheiber, published in February. The liberal-talking-point regurgitators on CNN and MSNBC would no doubt dispute such a negative characterization of Obama’s economic record — as would, of course, the Obama White House. But the Obama Recovery after the Great Recession pales when contrasted against the Reagan Recovery after the Long Recession of 1980–82.

In the first ten quarters of the Obama Recovery, real GDP is up a total of 6 percent, versus 16 percent in the Reagan Recovery. Or to put it another way, after ten quarters of recovery, the Reagan annual GDP-growth rate was 6 percent versus Obama’s 2.4 percent (versus 4.6 percent for the average post–World War II expansion). In the 32 months of the Obama Recovery, the economy has added about 2 million net new jobs, versus 9 million during the first 32 months of the Reagan Recovery.

But forget the epic achievements of Ronaldus Maximus. The Obama Recovery also falls short of the benchmarks the Obama White House set for itself. There’s the now-infamous chart prepared by Bernstein and Romer in January 2009 showing the unemployment rate never quite hitting 8 percent if Congress passed a big stimulus plan. Yet, as the Congressional Budget Office recently noted, the unemployment rate has exceeded 8 percent since February 2009, making the past three years the longest stretch of high unemployment in this country since the Great Depression. And when you add in discouraged workers and the underemployed who desire full-time gigs, the jobless rate is 14.9 percent.

But while the administration’s unemployment forecasts have since become more restrained, Team Obama always sees fat times just around the corner. In August 2009, the White House — after having a half year to view the economy and the initial impact of its $800 billion stimulus — made a laughably optimistic forecast: GDP would rise 4.3 percent in 2011 (it actually rose 1.7 percent), 4.3 percent in 2012 . . . and 4.3 percent in 2013, too! And 2014? 4.0 percent growth.

Then, in the 2010 Economic Report of the President — this was the year of Recovery Summer — the White House econ team predicted GDP growth of 4.3 percent in 2011, 4.3 percent in 2012, 4.2 percent in 2013, and 3.9 percent in 2014. In the 2011 report, the forecast was for 3.1 percent growth in 2011, 4.0 percent in 2012, 4.5 percent in 2013, and 4.2 percent in 2014. And in the most recent report — out just this past February — the forecast sees 3.0 percent growth this year, 3.0 percent next year, and 4.0 percent in 2014. The Obama economy: always recovering, never recovered.

So what went wrong? What continues to go wrong? Both Scheiber and Suskind are good liberals who — like the Obama economic team — really never bother to question the Keynesian solution at the core of Obamanomics. They just think the medicine wasn’t tried, at least not in a large enough dose. So the problem, as they see it, has not been policy as much as personnel — and not the king himself, but his feckless court. And there is perhaps no better example of Obama’s being ill served by his economic dream team than the internal White House battle over the 2009 stimulus package. As Suskind writes, “The effectiveness of stimulus spending was still considered the realm of unproven economics . . . [but inside] Team Obama there was almost no discussion of whether to undertake a stimulus, just of how large it ought to be.”

And many liberals think they lost that debate to the budget hawks and the politically timid, a defeat that — Scheiber and Suskind also argue — has discolored the entire Obama presidency and ruined the political case for further major stimulus to boost growth and create jobs. If only Obama had followed the advice of Romer, the U.C.-Berkeley professor who headed his Council of Economic Advisers, for a far bigger fiscal intervention, the path of the Obama presidency might look a lot different. In a memo that Scheiber got hold of, Romer argued that to really do the job, the stimulus — later called the American Recovery and Reinvestment Act — needed to be a whopping $1.8 trillion of spending, tax cuts, and aid to state and local governments spread over two years.

Enter the villain of the episode, Lawrence Summers, head of Obama’s National Economic Council and treasury secretary at the end of the Clinton administration. Suskind, in the most striking passage of Confidence Men: “He can frame arguments with such force and conviction that people think he knows more than he does. Instead of looking at a record pockmarked with bad decisions, people see his extemporaneous brilliance and let themselves be dazzled. Summers’s long career has come to look, more and more, like one long demonstration of the difference between wisdom and smarts.”

Summers told Romer that a $1.8 trillion stimulus was politically impracticable. So Romer came up with a compromise proposal offering three options: $1.2 trillion, $850 billion, and $600 billion. But before the memo could get to Obama and the political team — the latter already dubious about any stimulus amount over $1 trillion — Summers struck the priciest option. Scheiber: “Summers worried that urging more than this amount would stamp him and Romer as oblivious in [the political team’s] eyes. ‘$1.2 trillion is nonplanetary,’ he told Romer, invoking a Summers-ism for ‘ludicrous.’ ‘People will think we don’t get it.’”

So Obama never saw the $1.2 trillion option, much less the $1.8 trillion option, and the need for a bigger plan was only gently hinted at during a subsequent meeting between Obama and his key advisers. Obama never knew his economics team was, in effect, presenting him with a politically predigested plan about how to approach what, for good or ill, would be the signature economic decision of his first term. “Neither the memo nor the meeting would have given Obama reason to suspect [that an $800 billion stimulus] was arguably $1 trillion too small,” Scheiber writes.

And that’s when the Obama presidency went off the tracks, according to Scheiber and Suskind. The skimpy stimulus led to an anemic recovery, which undercut political support for any further stimulus, drained Obama’s reservoir of political capital, and could lead to his defeat in November. And Obama, confident that he had just put in place a plan to keep unemployment from even hitting 8 percent, turned his attention away from pushing further economy-boosting measures and toward pushing health-care reform. When Obama finally realized that another massive dose of stimulus was needed, his “hope and change” honeymoon was over.

Even as it slowly became clear that the stimulus was not creating a sustainable recovery, some of Obama’s superstar economists were nudging him in the wrong direction. Scheiber blames Orszag, Obama’s budget director and health-reform guru, for distracting Obama with concerns about Washington’s unheard of trillion-dollar budget deficits. When, by August 2009, some, such as Romer, were thinking about a second helping of stimulus, Orszag’s debt fears prompted weeks of meetings on the subject, which, writes Scheiber, “at worst . . . contributed to an internal stalemate that rendered the president a bystander as the economy stalled out months later.” In short, blame Orszag for the 2010 summer swoon. Orszag’s debt obsession even prompted Obama to order him to draft “a secret memo laying out the government’s options in the event of a fiscal crisis, in which a runaway deficit sent interest rates spiraling upward.” (Though apparently Obama wasn’t concerned enough about a potential debt crisis to embrace the reforms of his own debt commission.)

But the Scheiber-Suskind “if only the stimulus had been bigger” fantasy is just that, a fantasy, as Michael Grabell, a reporter for the nonprofit journalism corporation ProPublica, documents in Money Well Spent? The Truth Behind the Trillion-Dollar Stimulus, the Biggest Economic Recovery Plan in History (PublicAffairs, 416 pp., $28.99). Rather than getting bogged down in a discussion of economic models and Keynesian multipliers, Grabell focuses on how the stimulus was executed: “The Recovery Act failed to live up to its promise not because it was too small [as those on the left argue] or because Keynesian economics is obsolete [as those on the right argue], but because it was poorly designed. Even advocates for a bigger stimulus need to acknowledge that their argument is really one about design and presentation.”

For starters, Team Obama was too clever by half. Inspired by new research in behavioral economics, it constructed a $116 billion tax credit to be “dribbled” out in paychecks at about $10 a week. But those tiny amounts, meant to boost consumer spending, were far too little to overcome panic about plunging home prices and fear of job loss. And the infrastructure spending, Grabell writes, was bogged down by regulatory gridlock. “Public transit advocates expected a windfall for bus companies like New Flyer in St. Cloud, Minn. But the transit money took longer to get out the door because every grant had to be reviewed by the Labor Department to ensure that it wouldn’t have a negative impact on transit unions.”

Now Grabell doesn’t doubt that the stimulus created some jobs and boosted growth. But the White House promised much more: It promised a return to prosperity. Vice President Joe Biden famously said the stimulus would “literally drop kick[] us out of this recession.” But Grabell concludes that the stimulus “failed to do what America expected it to do — bring about a strong, sustainable recovery. The drop kick was shanked.” It’s hard to see how a vastly larger stimulus, unless perhaps nearly all the additional money was in the form of tax cuts, would have produced a vastly improved result.

But the stimulus-squashing Summers and debt-obsessed Orszag weren’t the only advisers who let Obama down. Suskind paints Geithner as the useful idiot of Wall Street. Confidence Men opens with a White House press gathering at which Obama announced the formation of the new Consumer Financial Protection Bureau. On Obama’s left was Elizabeth Warren, author of the new agency and a liberal folk hero for her anti-bank tirades in the media. On Obama’s right was Geithner, author “of a string of efforts over the past year to neutralize Warren . . . and render her politically inert.” Indeed, she was never appointed to head the new agency and is now running for U.S. Senate in Massachusetts.

Geithner’s biggest political play, Suskind writes, was ignoring a directive by Obama to plan for a government takeover and restructuring of Citigroup in early 2009. Geithner’s team at Treasury simply ignored the president, a move that showed how the “young president’s authority was being systematically undermined or hedged by his seasoned advisers . . . a matter perilously close to insubordination.” Geithner has denied deep-sixing Operation Nationalize Citi. But the overall picture of staff squabbling and dysfunction is about what you might expect in an administration whose leader had never really led anything before coming to the Oval Office.

Both books try to complete their character arcs on a high note, showing Obama finally taking charge, no longer leading from behind. For Suskind, it was Obama’s pushing the payroll-tax cut at end of 2010 even though it meant enraging his liberal base by extending the Bush tax cuts for another two years. “The future was unknowable. But at least this month, as Christmas neared, there seemed to be a president in the White House.” For Scheiber, the $500 billion American Jobs Act, Stimulus 2.0, proposed in September 2011, is proof of Obama’s awakening: “The key mistake of the first stimulus — really of his entire economic agenda — had been to undershoot. Now he was refusing to make it again.”

So, in the end, the problem with the Obama presidency and its response to the Great Recession lay, according to Scheiber and Suskind, at the feet of aides who prevented Obama from being Obama. But now that the president has been awakened and empowered — note his election-year embrace of class-warfare populism — a second Obama term may be far more ideological than the first. Scheiber gives a taste of what Obama being his true self is like:

Energy was a particular obsession of the president-elect’s, and therefore a particular source of frustration. Week after week, Romer would march in with an estimate of the jobs all the investments in clean energy would produce; week after week, Obama would send her back to check the numbers. “I don’t get it,” he’d say. “We make these large-scale investments in infrastructure. What do you mean, there are no jobs?” But the numbers rarely budged.

Ideology over economic reality: That may be the new normal for America.

– Mr. Pethokoukis is a columnist at the American Enterprise Institute and a contributor to CNBC.

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