Thursday, August 11, 2011

Obama's Biggest Policy Mistake?

Ezra Klein did a great interview with Larry Summers a little while back that I didn't get around to reading until last night (as I've said, Klein's interviews are always great and always must-reads), and while there are several fascinating bits this is the one that stood out to me:
Third, politics aside there were difficulties in moving spending rapidly in 2009. So-called shovel-ready projects often were not in fact ready to go. Almost everyone close to the process feels that Joe Biden and his team did a very good job of moving the stimulus money through the system and, as a consequence, money moved more or less on the schedule we projected in 2009. They would be the first to say that it would not have been possible to move vastly more money into quick trigger infrastructure projects. Of course it would have been possible to increase the tax cuts or assistance to state and local governments, but there were severe political limits in both those areas (my emphasis).
I'm not buying it, and I think Summers is engaging in a bit of a shell game here. I buy the "shovel-ready" part of it; for better or worse, the way the world was set up in 2009 made rapid federal government spending on public works far more problematic than it would have been in 1933. Fair enough.

But then he shifts as sort of an afterthought to the failure on state and local governments. It wasn't an afterthought! I'd still like to see a good economic estimate of the damage done directly and indirectly by state government contraction, but I'm willing to bet it's very large, given that we already know that the direct effects are large.

Matt Yglesias has a great chart today showing the magnitude of the problem -- that is, the decline in state and local government revenues. And he's absolutely right: "If this could have all been 'automatic stabilized' away with access to the federal government’s current cheap, cheap, cheap borrowing costs we’d be in much better shape." Summers says there were "severe political limits" to state and local government aid, but I don't believe that at all. If they had treated it as a top priority during fall 2009 -- when the Democrats actually had 60 Senators -- I'm pretty confident they could have passed both a short-term and a long-term fix. Yes, the already-active Tea Partiers would have screamed about another bailout. But that would have only opened up a chance for the White House to contrast the Democratic bailout for teachers, cops, and firefighters with the Bush bailout for the banks. And anyway, who cares? As long as the mechanism worked, the White House (and skittish Democratic legislators) should have been very willing to take some hits in fall 2009 in exchange for putting the recovery on much sounder footing.


  1. This is where I'm shaky on the Obama administration. I'd like to think that they would have gone for a "bailout for the states" in Fall 2009, but were limited by what they thought conservative Democrats would do, but I'm not sure that that's the case.

  2. "But then he shifts as sort of an afterthought to the failure on state and local governments. It wasn't an afterthought! I'd still like to see a good economic estimate of the damage done directly and indirectly by state government contraction, but I'm willing to bet it's very large, given that we already know that the direct effects are large."

    Krugman has covered this (I'm too lazy to Google)

    As for Larry Summers, every thing that I've seen is consistent with the theory that his first and only goal was saving the banks and Wall St. Once that was done, he went back to Harvard/Wall St and resumed life as normal.

  3. On shovel ready: this would have required a commitment to planning American taxpayers are reluctant to shoulder to have worked as many Americans imagined. Transportation seems to be better at seeding this, and they're still slow.

    But I wonder if it's really a symptom of another problem: our unwillingness to embrace government that has more assessment/review/revamp built in to the process. The 'big government' ideology points toward this -- there's a lot of government that doesn't work as it should. I don't know a single progressive or liberal who'd argue that there's no regulation that should be revisited and either revised or revoked.

    But we don't have a strong habit of planning, including planning how to review the layers of law clogging our system; the layers of infrastructure clogging or growth.

  4. J.B., What would you propose as the best vehicle for federal assistance? Did you like the Build America Bonds? Would you prefer infrastructure grants? Should the feds offer to match any dollars paid to state pensions?

  5. I remember the political debate over state and local "bailouts" very well.

    The basic problem was how to get the money to the states and localities that actually needed it to prevent a contraction. As you might expect, the immediate pushback to any sort of efficient allocation was that we would be rewarding the places that had mismanaged their finances.

    And unfortunately, some of the states and localities that would have benefited the most from such a program were represented by Republicans who were opposing everything, and some of the places that would benefit the least were represented by conservative Democrats (recall that lots of places in the interior of the country outside of the Auto Belt, where many conservative Democrats come from, were not experiencing extremely high economic distress).

    So there was nothing close to the necessary number of votes in Congress for a large scale and efficient state and local "bailout" program. In other words, like so much else with the stimulus debate, this idea wasn't so much killed by Tea Party Republicans acting alone (although they were complicit), but also by conservative Democrats who didn't see the benefit for their particular constituents and didn't think it would sell.

    On the other hand, I agree these conservative Democrats were likely being politically foolish in the sense that not helping the national economy using the most efficient means available proved to be very harmful to their partisan, and sometimes personal, interests in 2010 (and perhaps beyond). But that doesn't imply there was something that the White House could have done in 2009 to change their minds--these were often long-standing members of Congress with their own convictions about how to survive as Democrats in non-Democratic jurisdictions, and in fact in many cases Obama had not come close to winning in their jurisdiction. So wrong as they proved to be, that doesn't mean that at the time they were persuadable by Obama and his political team.

  6. Aside from the fact that bailing state and local governments was a huge political mistake, it was a waste of money. All of the stimulus should have gone to infrastructure projects, which by now would be shovel ready and putting money into the economy in a constructive way.

  7. Re BrianTH on efficient allocation of aid: who cares? We could have just thrown $x per person to every state whether they needed it or not. Base the number on what Michigan needs, and let the others get a windfall. That drives up the price tag but the price tag is basically irrelevant. Politically, any big number plays the same. As far as cost to the Treasury, we can afford it and it's way better to waste some money on pork and tax cuts for South Dakota than to hold back while the rest drown.

    Alternatively, you could target the neediest states, but don't for one second let it be connected to their budget situation--either in fact or in rhetoric. Say it's an employment stimulus for the states and tie the amount each state gets to the statewide unemployment rate. Every news story that talks about the funding distribution then gives one more reminder that, hey, this is all about curing unemployment. If you're daring, this approach gives one extra potential bonus. Rather than allocate a fixed number of dollars, you could allocate $x per month for every unemployed person in a state for the next 3 years. Then if the recession is worse than expected, as it was, you've got an automatic stabilizer already passed.

    Re Steve851: I absolutely agree that all that babble about shovel-ready projects looks pretty stupid right now (but not with your other claims). Somehow they got it into their heads that all the stimulus should be done in two years and then cut off. Now we desperately need more stimulus, and if they had started planning those "unready" projects back in '08, they could be underway now.

  8. i asked @ezraklein if he really thought actual conservatives would've passed an unapologetic somewhat-open-ended investment bill in 2009 and got no reply.

    there was some other aid to states, like 'race to the top' which at the time i thought was skunky policy extortion but now i'm not as sure.

    as far as getting semi-automatic stabilizers fully loaded, in late 2008 anyone who cared already knew team obama wasn't floating rescue packages large enough to fill the state shortfall.

  9. Note that government employment in Texas grew substantially to create the "Texas miracle" that conservatives like to cite and attribute to conservative policies. Funny how rhetoric trumps data. Had other states been helped to do what Texas did--that is, increase not decrease government employment--they would have suffered less.

    Summers and many others in Obama's administration were guilty of erring on the side that undercut their arguments for doing what needed to be done. They should have erred on the other side. Additionally, many of those "not shovel-ready" projects were needed regardless, so they should have been begun as soon as possible.

  10. Chaz,

    The total size of the stimulus bill absolutely did matter. The conservative Democrats were insisting on a bill that would score well under $1 trillion. Moreover, Senators from small-population states abhor per capita programs, because they know how that looks when the numbers get published.

    Tying the amount of aid to states to their unemployment rate was in fact proposed by some people, but then you run right into the problem I identified above: a key group of conservative Democrats represented jurisdictions where unemployment was not particularly elevated.

    Not liking any of these ideas, the conservative Democrats insisted on most of the stimulus taking the form of federal spending that would benefit their jurisdictions in the standard proportions (meaning according to the long-standing formulas providing disproportionate funding to lower-population jurisdictions), or tax cuts. And the total price tag had to be well under $1 trillion. It is easy to argue, particularly with the benefit of hindsight, that these conditions were foolish, but again that doesn't imply it would have been possible at the time to convince these conservative Democrats otherwise.

  11. "...the Democratic bailout for teachers, cops, and firefighters..."



    And this is exactly what the Left wants... to bail out public employee labor unions. We see this in Wisconsin.

    They want to bankrupt the country, bury us in debt, to protect their political allies.

    The Tea Party rejects that, and supply siders all preferred another approach, but the Left is married to public employee labor unions, and has joined that with a nice bit of corporate cronyism and Goldman Sachsmanism. Now, they're seeing a massive backlash from fiscal conservatives, Main Street, libertarians, to such a degree that it's now become a populist movement, in its totality.

    This is all predictable, and all came about because the Left overreached. If they'd compromised at the federal level, they woulda got much of what they wanted. They went for it all, and ignored all compromise.

    And now today they're bleating about "compromise". Ha. You sowed the wind... and now you're reaping the whirlwind.

    This is all just an epic policy and political fail. The country deserved better. It's going to toss those who failed. Let's hope the next guys can do better.

  12. The biggest 'policy' mistake the Democrats made was not translating Obama's campaign promises of change into a platter of institutional reforms at the beginning of the 2009 session, particularly the neutering of the filibuster. While this would have enabled a larger stimulus measure that would likely still not been enought, it would have had the more important result of enabling the Democrats to pass additional stimulus measures down the line - instead, they passed one big one and then had to fight and scrap to get anything else on the table with the result being that work on jobs has basically stalled out.

    The ancilliary benefit, depending on your political outlook, is that a climate bill would probably have passed that could also have affected the economy and the government's finances (via support for clean jobs and perhaps a carbon tax of some kind) and a health care bill would have been passed that would likely have had a bigger government role designed to lower costs over time.

    Ultimately, everything flows down to their failure to tackle the institutions of Washington. It's possible that such an effort would have failed, but we'll never really know at this point.

  13. Obama thinks that all the money wasted on his non-shovel-ready jobs is a big joke. Unfortunately, the joke is on us taxpayers.


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