Glass-Steagall and the Crisis
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The $600B Stimulus Program: How We Got Here

How we wound up with a cumulative $600 billion over three years in expansionary fiscal policy.

Ryan Lizza:

Larry Summers and the White House economic team:December 16, 2008... Obama’s top advisers gathered.... Obama... Biden; Summers; Rahm Emanuel, the chief of staff; David Axelrod, Obama’s senior adviser; Timothy Geithner, the Treasury Secretary; Christina Romer, the chair of the Council of Economic Advisers; Peter Orszag, the budget director; Jared Bernstein, Biden’s top economic adviser; and several more. Others, like Lee Sachs, a former Bear Stearns executive and Clinton Treasury official, who was an expert on the financial crisis and who later joined Geithner at Treasury, were brought in via teleconference. Summers led the meeting like an orchestra conductor....

[N]obody’s task was more important than Romer’s. She had drafted a crucial section of the memo which included an economic forecast and projections about the impact of a fiscal stimulus.... Romer was entering government for the first time. “I’m the quintessential outsider here,” she told me. But she was a “giant supporter of the President, probably since 2004.” She said, “On a bad day, my husband would find me at home clicking on the Democratic Convention speech, saying, ‘I want this man to be President.’ ” At the December meeting, it was Romer’s job to explain just how bad the economy was likely to get. “David Axelrod said we have to have a ‘holy-shit moment,’” she began. “Well, Mr. President, this is your ‘holy-shit moment.’ It’s worse than we thought.” She gave a short tutorial about what happens to an economy during a depression.... The purpose of a stimulus is to fill the hole left during a recession by the difference between the economy’s potential and what it’s actually producing—what economists call the “output gap.” She explained the impact of different types of stimulus, giving a lesson on “fiscal multipliers”--the term economists use to describe the economic impact of every dollar of stimulus.... Axelrod told me, “The basic message was that, if we didn’t act quickly to replace the output we were losing, unemployment could skyrocket.” Romer mentioned that employers had dropped more than half a million workers from the payrolls in November, the biggest cut in more than three decades. “The conditions are grim, and deteriorating rapidly,” she told the President.

The most important question facing Obama that day was how large the stimulus should be.... A hundred-billion-dollar stimulus had seemed prudent earlier in the year. Congress now appeared receptive to something on the order of five hundred billion. Joseph Stiglitz, the Nobel laureate, was calling for a trillion. Romer had run simulations of the effects of stimulus packages of varying sizes: six hundred billion dollars, eight hundred billion dollars, and $1.2 trillion. The best estimate for the output gap was some two trillion dollars over 2009 and 2010.... Romer’s analysis... suggested that the package should probably be more than $1.2 trillion. The memo to Obama, however, detailed only two packages: a five-hundred-and-fifty-billion-dollar stimulus and an eight-hundred-and-ninety-billion-dollar stimulus. Summers did not include Romer’s $1.2-trillion projection. The memo argued that the stimulus should not be used to fill the entire output gap; rather, it was “an insurance package against catastrophic failure.” At the meeting, according to one participant, “there was no serious discussion to going above a trillion dollars.”

There were sound arguments why the $1.2-trillion figure was too high.... Emanuel and the legislative-affairs team thought that it would be impossible to move.... Congress was “a big constraint,” Axelrod said. “If we asked for $1.2 trillion, it probably would have created such a case of sticker shock that the system would have locked up there.... If we failed to produce a stimulus bill, that in and of itself could have had deleterious effects.”... Peter Orszag, who was celebrating his fortieth birthday that day, said that, while the argument for a bigger stimulus was sound theoretically, there were limits to how much money the government could practically spend.... Summers... believed... that a package that was too large could potentially shift fears from the current crisis to the long-term budget deficit... have an unwelcome effect on the [long term] bond market. In the end, Summers made the case for the eight-hundred-and-ninety-billion-dollar option....

Emanuel made the final call: six hundred and seventy-five to seven hundred and seventy-five billion dollars, with the understanding that, as the bill made its way through Congress, it was more likely to grow than to shrink. The final legislation was for seven hundred and eighty-seven billion dollars...

Well, the final legislation was for $600B in stimulus over three years--2009, 2919, and 2011--over which we thought in December the counterfactual no-stimulus output gap would be $2.5T and now think it likely to be above $4T...

Emanuel's argument that congress would choke and puke on a larger package was a real worry, Orszag's argument that the government cannot effectively boost spending too far too fast was a real worry, and Summers's argument that too large a deficit will crack the dollar's status as safe asset in the global economy and produce a spike in long-term interest rates that will partially neutralize the stimulus was a real worry--it is, after all, what happened to Austria in 1931 when the government ran deficits to support the Credit-Anstalt. But from today's perspective it looks as though the points made by Summers and Orszag are weaker than we all thought last December.

The point made by Emmanuel, however, still appears to be very strong: even though Obama bid $800B, all he got in February was $600B--even though the argument that the situation had deteriorated substantially further since mid-December was made and was made strongly.