Free Markets, Free People

Larry Summers


Had Christy Romer gotten her way, the stimulus could have been much worse

When Larry Summers and team were preparing a memo for Barack Obama on the planned stimulus, Christina Romer was a part of the effort.  The New Republic brings to light a conflict within that team about how much stimulus they should recommend.  As you recall, the final recommendation included two options.  Option one was a “modest” stimulus in the rage of $550 to $670 of legislated money (about the same amount that Paul Krugman first recommended).  The second option was for $850 billion and was the option Obama chose.

Summers mentions in the memo that in order to make a bigger impact on the “output gap”, a stimulus of over a trillion dollars was needed but most likely “not accomplish the goal” of reducing the “output gap” because of the “impact it would have on markets”.

Romer, on the other hand, felt that closing the “output gap” was much more important than the impact such a move might have on markets and recommended a much higher stimulus.  How much higher?  Approximately twice the level of the highest option presented to Obama of $850 billion.  That’s right, about $1.7 trillion dollars.  Romer claimed that doing so would bring the unemployment rate to “5.1%”.  But then, as we remember, the country was promised that if the stimulus that was eventually passed was made law, unemployment would remain under 8%.  

Of course it didn’t rising to 10.5%.  However the prediction came directly from the memo Summers presented to the president – $880 billion stimulus would create 3.4 million jobs and keep the unemployment rate at 7.3%..  Neither of those came true and the administration was reduced to claiming “saved” jobs in its defense.

Romer’s predictions were even rosier.  She believed that a $900 billion stimulus would create 3.75 million jobs and put the unemployment rate at 6.6%.  Again, not even close.

Yet, when you read the comments of others out there, you find some of them still implying that a larger stimulus would have been better for what ailed us.  That our problem was the size of the stimulus, not its design.

Of course that’s patent nonsense.  The stimulus failed because it was horribly designed and terribly executed.  And it was aimed at the wrong things.   It became a combination of slush fund for politicians and budget short-fall device for states.  Where what little was aimed at it supposed purpose (creating jobs) it failed.  We discovered that “shovel ready” was anything but.  Additionally it was used to bail out industries government had no business bailing out.

Whether it was $900 billion or $1.7 trillion, those facts wouldn’t have changed one bit.  About all that might have happened had Romer gotten her way is a few states might have been able to delay their financial reckoning for another year or so.

Noam Scheiber, the author of the TNR article (and an upcoming book on how the Obama White House “fumbled” the recovery) doesn’t go as far as to claim the larger stimulus would have been a better choice although he certainly implies it.  He argues that Obama wouldn’t have proposed it because Congress – even a totally Democratic Congress – wouldn’t have passed a $1.8 trillion dollar stimulus.

However, he argues, the inclusion of the higher stimulus number would have gotten Obama to “have felt a greater sense of urgency had he better understood how far he was from the ideal.”

First, I don’t agree that a Nancy Peolosi/Harry Reid controlled Congress wouldn’t have done exactly that, i.e. passed an almost $2 trillion dollar stimulus package.  One only has to remember how they steamrolled the health care bill through to doubt such a thing couldn’t have happened with a larger stimulus.  Secondly, it is highly debatable that Romer’s number was any sort of an “ideal”.

It was, at most, a “best guess” and given her predictions of the effect of a $900 billion stimulus (the size eventually passed) on job creation and unemployment, it is a suspect “best guess”.

And finally, regardless of the numbers proposed, it was a terribly designed and executed program that redefined “waste, fraud and abuse”.  Doubling that wouldn’t have made it better.

Unlike some out there lamenting Summers refusal to have included Romer’s recommendation, I applaud it.  That doesn’t mean I agree with the number he came up with, but to use Washington DC budgetspeak, he “saved” us about a trillion dollars.

~McQ

Twitter: @McQandO

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