Why $1.8 Trillion Was Never on the Table

Noam Scheiber today excerpts one of the most interesting finds from his excellent book The Escape Artists which you should buy and read if you want to understand the economic policymaking process in the Obama administration. It’s not as sensationalistic as Confidence Men, but it’s better. The find in question is that Christina Romer initially wanted to say to the president during the transition winter of 2008-09 that a $1.8 trillion stimulus was needed to fill the output gap, but Larry Summers—without disagreeing with her—decided that it would be poor bureaucratic politics to present such a large figure as the high-end range. His calculus was not merely that $1.8 trillion would be politically infeasible in terms of the U.S. Congress, he felt it would be infeasible in terms of the internal politics of the Obama administration, which according to Scheiber featured a split at the very beginning between a Romer/Summers desire to go big on stimulus and Geithner/Orszag concern about freaking out financial markets. Summers wanted to win the inside policy argument, and thought that heading in with a lower ask would make that more likely.

It is of course easy to second-guess Summers at this point or leap directly to the question of what kind of difference it might have made if Obama had come to Congress with the $1.8 trillion ask. But it’s also interesting to consider the possibility that Summers was correct, and that if he and Romer had presented Obama, Rahm Emannuel, and David Axelrod with Romer’s original memo that they would have gotten dismissed as cranks and the “pivot to deficits” would have come even sooner.

I see this all as part of a story about how what people actually believe about things matters. There’s a long and complicated story about how the Affordable Care Act came to be enacted into law. But a very short version of the story is that the vast majority of people operating at a high level in the Democratic Party sincerely believed that enacting some kind of universal health care program into law was a good idea. By contrast even though we’ve now spent years debating macroeconomic stabilization policy, it just wasn’t the case that as of December 2008 there was overwhelming consensus among Democrats about the utility of running large budget deficits during a period when the natural rate of interest falls below zero. There seems to have been lots of ambivalence among members of congress, among high-level political operatives, to an extent among economic policy hands, and up to and including the president of the United States about this. If there was consensus, you’d have started with the fact that the $1.8 trillion idea had a lot of practical problems with it, everyone would have set about trying to solve the practical problems (giant tax cut works both politically and institutionally) and on we’d go. But there was no consensus so from the very beginning the idea was beseiged by politicking and tactical gambits.