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January 29, 2012
David Warsh, Proprietor


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One Thing Obama Could Have Done Differently

Curious about why you’ve heard so little out of Davos?  For the first time in thirty years, China sent none of its various vice-premiers to the World Economic Forum, ostensibly because the meetings this weekend fall in the middle of Chinese New Year celebrations.  More likely the Chinese are preoccupied with the regular ten-year leadership shakeup coming later this year (not that much simpler than elections!). Euro-fatigue also dimmed the enthusiasm for the annual corporate gabfest at the Swiss ski resort.

That doesn’t mean nothing happened.  Bill Gates wrote a check for $750 million to the Global Fund to Fight Aids, Tuberculosis and Malaria, nearly making up the shortfall in its recent $13 billion fund-drive. Bloomberg News bought a page in the Financial Times to advertise its Davos coverage, and the FT, long one of the forum’s biggest boosters, brought to a boil a month-long series (“Capitalism in Crisis”), produced a special section, and maintained a witty round-the-clock blog (subscription required).

But the most interesting thing about the Davos meeting this year has been the Larry Summers Redemption Tour, which was timed to coincide with it. At issue is the economist’s service as chief economic adviser to the Obama administration in its first two years. A failure, as presumed by some?  Or, despite the bumps along the way, more nearly e success?

The tour began ten days ago with a well-sourced report by Bloomberg that Summers was among those whom President Barack Obama would consider appointing president of the World Bank when Robert Zoellick’s five-year term expires later this year. “Educating girls” is the single most important investment opportunity in the developing world, Summers told Tom Keene on Bloomberg Television.  There were those op-ed pieces last Monday, too, in The Washington Post and the FT.   (“Economic Insecurity is No Excuse for Inaction.”)

An interview that Summers gave on behalf of the London School of Economics Growth Commission on his way to Davos turned out badly, especially in this YouTube version. The interviewer, Krishnan Guru-Murthy, sought to incorporate the documentary film “Inside Job” in his line of questioning. Unlike his handler, who can be heard objecting in the background, Summers kept his temper while on camera.  But he reportedly was plenty angry afterwards. (The full interview is here.)

And even then, Summers didn’t attract much press attention, compared to former years.

Far more intriguing was an 11,000-word report, “The Obama Memos” that appeared last week in The New Yorker about a thick sheaf of memoranda prepared for the president during his first to years by his economic team, which Summers led. Journalist Ryan Lizza describes reviewing “hundreds of pages of internal White House documents,” without saying where he got them. More than twenty memos are discussed, often with their presidential jottings; the sequence ends in the summer of 2010, about the time that Budget Director Peter Orszag and Council of Economic Advisers chair Christina Romer left office.

But the centerpiece of his article is Summer’s initial stimulus memo, dated December 15, 2008, fifty-seven pages long, marked “sensitive and confidential” and never [before] made public.” It is, Lizza writes, “the ur-text of economic policymaking for the Obama Administration.”

A veteran  reporter, Lizza has been The New Yorker’s Washington correspondent since 2007 –  he vigorously covered the primaries in 2008. In October 2009, he wrote Inside the Crisis:  Larry Summers and the White House Economics Team, featuring perhaps the last photograph of Orszag, Romer, Summers, Treasury Secretary Timothy Geithner and Jared Bernstein, economic adviser to Vice President Joe Biden, all together, all beaming on the White House lawn.

By then things were already beginning to fall apart among the president’s economics team, a process described in 2010, not without controversy, by former Wall Street Journal reporter Ron Suskind in Confidence Men: Wall Street, Washington, and the Education of a President, which drew heavily on Orszag’s witness and was profoundly antagonistic to Summers.  Chances are that Lizza is working on a book of his own.  His article seemed timed to coincide with the Davos forum.

Summers’ memo is deeply interesting for the choices it presented to the president-elect a month before his inauguration.  Remember, this was more or less the same task that Summers had been assigned as a youthful apprentice to Treasury Secretary-designate Lloyd Bentsen and NEC director Robert Rubin in 1992 in the interval before Bill Clinton’s inauguration — canvassing bond buyers, underwriters, economists and others about the likely effects of various fiscal and monetary policies in the coming years. The decisions that Clinton subsequently made about the mix of tax increases and budgetary stringency to pursue put the US on a path that, in combination with the good fortune of the Internet boom, led eight years later to a budget surplus.  Summers replaced Rubin (who had subsequently replaced Bentsen) as Secretary of the Treasury, in 1999.

Summers’ executive summary in December 2008 noted that the president would have to submit or sign several large pieces of legislation immediately upon taking office – a stimulus package, a continuing resolution, the Iraq/Afghanistan supplemental appropriation, and something related to the government’s Troubled Asset Relief Program.

He described the likely future this way:  the economy in 2009, Obama’s first year in office, was expected to lose 3 to 4 million jobs in the absence of any stimulus; already it had lost nearly 3 million.  Unemployment would rise to 9 percent and not begin to fall until 2011.

A $600 billion stimulus over two years would create 2.5 million jobs relative to what would happen with no special Federal government boost. The measure could be expected to hold the unemployment rate to 8 percent in 2010. The composition of the package was important.

No more than $225 billion over two years could sensibly be spent on the president’s core priorities – energy, infrastructure, health, education, protecting the most vulnerable. To achieve the full desired stimulus effect, therefore, would require some combination of state fiscal relief and tax cuts for individuals and businesses.

The memo described four alternative plans, ranging from $550 billion to$890 billion, depending entirely on the generosity of state aid and tax relief.

At one point Summers warned, “An excessive recovery package could spook markets or the public and be counterproductive…”  But that didn’t mean the figure couldn’t be substantially more than $600 billion, given the current climate of opinion – a view shared by Federal Reserve officials, he said.

Still, he wrote, “strong measures to reinforce medium-term fiscal credibility” were desirable. “It is easier to add down the road to insufficient stimulus than to subtract from excessive fiscal stimulus.”

There was a lively argument last week about this aspect of things. Paul Krugman, of The New York Times and Princeton University,  told Lizza that he thought Summers, in the memo, had misjudged the specter of bond market vigilantes who might be frightened and drive up interest rates. Jared Bernstein, who as the vice president’s representative sat in on the White House talks, defended Summers, saying the was “among those who recognized the urgency of the Keynesian imperative.” And Ezra Klein, of The Washington Post has scouted out much more backstory to the memo than I provide here. After a lot of log-rolling, the American Recovery and Reinvestment Act came it at $800 billion

Most interesting to me, however, was the passage beginning on page 10, where Summers writes of his advice, “This is standard macroeconomic analysis and it had led most leading economists to call for substantial stimulus packages.” He then reports the results his consultations, and his reading of “published accounts”:

Among progressive economists:

Robert Reich (1.2 trillion over two years)

Joe Stiglitz ($1 trillion over two)

Paul Krugman (at least $600 billion in one year)

Jaimie Galbraith ($900 billion in one year)

Institute for America’s Future, a statement signed by Dean Baker and several senior labor leaders (at least $900 billion

Among others:

“Senior Federal Reserve officials” (well over $600 billion)

Adam Posen, of the Peterson Institute for International Economics ($500 billion to $700 billion in one year)

Goldman Sachs ($600 billion in one year)

An Open Letter signed by 387 economists led by Nobel laureeates Robert Solow, George Akerlof and Joseph Stiglitz ($300 billion to $400 billion in November, presumably significantly higher now)

Among Republican economists:

Marty Feldstein, ($400 billion in the first year)

Larry Lindsey ($800 billion to $1 trillion)

Ken Rogoff ($1 trillionj over two years)

Mark Zandi, (at least $600 billion in one year)

Summers wrote, “Greg Mankiw is the only economist we have consulted who refused to name a number and was generally skeptical about stimulus.”  Mankiw. a former chief economic adviser to George W. Bush, noted last week on his blog that his lonely dissent at the time “reflects the range of economists that Team Obama chose to consult.”

Indeed. Summers apparently didn’t talk to former Bush Council of Economic Advisers member Randall Kroszner, for example, who recently had been rejected by Democrats as a nominee to be a governor of the Fed, or to anyone else in at the University of Chicago. Nor did he solicit the opinion of John Taylor, of Stanford University, a former Bush Treasury official and monetary policy expert who had been a candidate for the job to which that Ben Bernanke had been appointed.

Among the economists whose opinions were presented to Obama, nearly all were, like Summers, trained at Harvard or MIT. Yale (Galbraith) and the University of Pennsylvania (Zandi) were the exceptions; Robert Reich went to law school.  But Summers didn’t mention his Harvard colleague Robert Barro, who subsequently proved to be the most trenchant critic of the form the stimulus took.

Within a week of Summers’ memo, Nobel laureate Robert Lucas, of the University of Chicago, would write, in Bernanke is the Best Stimulus Right Now, an op-ed in The Wall Street Journal, “There are many ways to stimulate spending, and many of these methods are now under serious consideration.  How could it be otherwise?  But monetary policy, as Mr. Bernanke implements it, has been the most helpful counter-recession action taken to date, in my opinion, and it will continue to have many advantages in coming months.”  And a week after that, at the meetings of the American Economic Association, Taylor began a crusade against the stimulus that has since been generalized into the broad consensus among Republican politicians.

(For what it’s worth, I think the administration got it about right, though the President might well have high-lighted Summers point’ about the $225 billion limit on sensible Federal spending on his core priorities, and emphasized that the rest was going to the states and to tax cuts.)

The omission of the doubters’ point of view are interesting mainly because of the way Summers’ memo undercuts the argument of Lizza’s article in The New Yorker – that Obama’s goal of post-partisanship turned out to have been “not just naive but delusional” in the face of Republican intransigence.  Lizza says that the experience of the 2010 midterm elections shows that only partisan dominance can succeed. He may be right.  It is, however, certainly too soon to be certain.

Summers probably would argue that a major memo on foreign policy, say, wouldn’t have sought the opinions of people at the Heritage Foundation or the American Enterprise Institute; that a major memo on education policy wouldn’t have included the views of voucher advocates. Seeking support and input from elected officials of the other party is bipartisan, he might say, but seeking expert opinions at wide variance from your own is a waste of time.

Unless, of course, your boss is seeking to appear – or even to be – post-partisan.  Lizza makes much at the beginning of his article of a dinner George Will gave in January, 2009 to welcome the president-elect.  A regular Who’s Who of conservative pundits were in attendance: Michael Barone, David Brooks, Charles Krauthammer, William Kristol, Lawrence Kudlow, Rich Lowry and Peggy Noonan.  Four years later, he notes, all routinely disparage the president, often in the strongest possible terms.

So did Obama waste his time listening to their views? The answer, it seems to me, is no.  Four years later, they are the ones who seem shallow and foolish, not him.

The main effect of Summers’ memo is to show that there was no similar attempt to take account of the a wide dispersion of conservative macroeconomic opinions (though Feldstein, Lindsey and Rogoff are certainly part of the conservative spectrum). Obama began his presidency on a thoroughly partisan note, probably without knowing it – an odd fate for a man who for a dozen years had taught at the University of Chicago Law School.   It is going to be a long while before the history of those years is well understood.

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One Comment

  1. Thorstein Veblen wrote:

    What, consulting 5 Republican economists wasn’t bipartisan enough? Going with Marty Feldstein’s recommendation, who is a card-carrying Republican, is too liberal partisan for your taste?

    Another issue is that economic conditions were deteriorating rapidly from December into January into February, so all of those recommendations from the experts would have become outdated quickly. The White House should have been thinking about how to sneak stimulus II from February, and that’s what the consensus liberal economist opinion was. It wasn’t what the White House did.

    Third issue is that all these Republican economists that opposed stimulus in 2009 advocated large stimulus packages during the 2001 recession, even though we weren’t in a liquidity trap. Their opposition to stimulus in 2009 came solely due to their party identification.

    Saturday, May 26, 2012 at 6:10 pm | Permalink

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