The Administration’s Key Miscalculation on Fiscal Stimulus

The world’s heard endless debates over why the Obama administration didn’t go for a bigger fiscal stimulus in 2009, and I think the New Yorker’s Ryan Lizza has unearthed some powerful new evidence about their thinking in the form of this long memo from Larry Summers to the president-elect in December 2009. Summers makes a point that, as a matter of logic, counts as a powerful reason for aiming relatively low on fiscal stimulus. He acknowledges that a plan in the $800-billion range won’t fully close the output gap but says “it is easier to add down the road to insufficient fiscal stimulus than to subtract from excessive fiscal stimulus. We can if necessary take further steps. However, this is a key moment to get ahead of the curve in responding to economic distress.”

If that’s right, then it would of course be a huge waste of time to pick a fight with Congress about a $1.2 trillion stimulus package. You do what you can do, and when it turns out to be insufficient you go do some more. The logic is impeccable, but of course the political analysis was totally mistaken. In retrospect, the administration has started saying it would have been politically infeasible to do more than $800 billion and that’s all there was too it. But according to this document, the contemporaneous political judgment was actually about something else—they thought they could go back and get more later. But having made that judgment, where was the follow-through? Nobody ever tried to write reconciliation instructions about this, use the health care bill as a vehicle for stimulus, or otherwise act as if they remembered that this initial memo had explicitly stated that the stimulus they were going for was insufficient.