How the Stimulus Shaped the White House

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President Obama's first big economic fight framed the way the White House views the economy and the GOP

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The political story everybody is talking about this morning is Ryan Lizza's monster 11,000-word essay on the president's on-the-job training in political realism. In his campaign, Obama pledged to unearth a unity that lurked beneath the country's partisanship. Today, 30 hours before a State of the Union address that many expect to double as a campaign speech draft, he is moving toward the sort of unsentimental, populist, and (dare I say it?) Clintonian approach from which he once took such pains to distinguish himself.

The most interesting passage drills deep into the debate over the stimulus, which goes all the way back to December 2008. In a secret memo sent just after the election, Larry Summers offered Obama four illustrative stimulus plans to boost the economy, worth $550 billion, $665 billion, $810 billion, and $890 billion. Even the largest of these plans would fill hardly half of the lost productivity in the economy, which economists have sized at $2 trillion. But Summers told the president that it wasn't economically desirable or politically feasible to try to fill the hole entirely...

 "An excessive recovery package could spook markets or the public and be counterproductive," he wrote, and added that none of his recommendations "returns the unemployment rate to its normal, pre-recession level. To accomplish a more significant reduction in the output gap would require stimulus of well over $1 trillion based on purely mechanical assumptions--which would likely not accomplish the goal because of the impact it would have on markets."

And so the battle lines were drawn, with Summers and Peter Orszag calling for stimulus restraint and Christina Romer, the incoming chairman of the Council of Economic Advisers, leading the charge for a stimulus bill worth more than then $800 billion. When Romer tried to move the stimulus conversation toward $1 trillion, Chief of Staff Rahm Emanuel reported responded: "What are you smoking?"

Why is the story of the stimulus still important? It plays into at least three different narratives about the Obama administration and the economy that matter to our understanding of the tumultuous economic debate and the 2012 reelection. First, a few reports have suggested that it was political constraints, and not economics, that limited the stimulus to $800 billion. Lizza's story suggests that $800 billion was considered the largest possible stimulus by both political and economic standards. The most influential voices in the administration considered a larger stimulus not only impossible, politically, but dangerous, substantively.

The second story is a critique you'll hear on the left as often as the right: The White House promised that the stimulus would save us from 9 percent unemployment and instead it allowed 10 percent unemployment. Lizza's story adds to evidence that the administration clearly underestimated the size of this recession. Summers wrote to the president that the economy, which had lost 2 million jobs in 2008, would lose another 4 million jobs in 2009 without a stimulus. By July, the economy was already 4 million jobs in the hole. The economy shed 5 million jobs in the full year, even after passing the largest stimulus plan detailed in Summer's memo. Conservatives see this as a failure of stimulus policy, and they might be right. I tend to see it as evidence that the stimulus, while record-setting, was still too small.

The final narrative is about Obama's relationship with the Republican caucus. The president's most important lesson in politics was arguably his first lesson, when zero House Republicans voted for his stimulus bill. Of the three Republicans who voted for it in the Senate, one, Arlen Specter, would become a Democrat before the end of the year. Three months after the president was elected to uncover the latent unity in U.S. politics, he discovered instead that the only unity in Washington existed in the House GOP, and it was, from the onset, dead-set against him. And so, three years later, the president is running as an unsentimental populist, as leaks of his State of the Union speech suggest, not just because he considers it a superior vehicle for his economic policy, but also because the message of hope has been rendered hopeless.

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Derek Thompson is a senior editor at The Atlantic, where he writes about economics, labor markets, and the entertainment business.

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