Why the Stimulus Ran Out of Steam

Last week, the bottom seemed to fall out of the economy all at once. Second-quarter growth was revised downward. The Dow dropped below 10,000. Sales of single-family homes plunged to their lowest level in 15 years. The White House appeared helpless. Asked whether, in hindsight, the stimulus had been too small, White House spokesman Robert Gibbs demurred. ''Nobody had, in January of 2009, a sufficient grasp [of] the sheer depth of what we were facing,'' he said. ''I think that's true for virtually every economist that made predictions.''

But that just wasn't true -- one of the economists who foresaw the depth of the crisis, Christina Romer, even works in the White House. Her arguments for a larger stimulus went unheeded.

The faltering recovery and the credibility this has cost the the White House will probably lose the Democrats one or both houses of Congress, making the insufficiency of the stimulus easily the most consequential error for an administration that has done a lot right. To appreciate how it happened, it's necessary to understand the twin imperatives that dominate White House thinking. They usually function in harmony, but on this issue clashed to devastating effect.

Every administration is a response to those that immediately preceded it, and Barack Obama's is no different. It prides itself on two distinguishing characteristics, both in their own right admirable. The first is a devotion to experts and empirical data, a reaction against the ideology-driven presidency of George W. Bush. The second is a Washington political savvy, personified by White House chief of staff Rahm Emanuel, that imagines itself the antithesis of the Arkansas provincialism that brought about Bill Clinton's disastrous first two years. This administration fairly bursts with wonks and politicos, especially veterans of Congress.

They are not immune from error; Obama's faith in expert advice and in his own strategists' ability to pass a climate bill prompted his ill-considered proposal to expand offshore drilling just weeks before the Gulf disaster. But more often than not these traits have combined to impressive effect. The new health care law incorporates many of the brightest ideas from academia on how to cut costs, and managed to get through Congress, a feat that had eluded presidents since Roosevelt.

When Obama's top advisers gathered in Chicago to devise an economic strategy just after the presidential election they largely agreed about what to do. Aggressive monetary and fiscal expansion had been the standard response to economic setbacks from the Great Depression onward. The question was, how aggressive should they be?

According to an account last fall in the New Yorker, Romer, an expert on the Great Depression, modeled the effects of stimulus packages of $600 billion, $800 billion, and $1.2 trillion, and concluded that the largest one would be necessary to fill the expected output gap over 2009 and 2010. Economists outside the White House agreed. But Romer's recommendation, deemed politically unfeasible, never got a proper hearing. Instead, two smaller measures were put forward, with Emanuel making the determination to go with a package of $675 billion to $775 billion. Politics trumped economics.
Last week, the Congressional Budget Office published an analysis of what the stimulus has done. It calculated that the package has lifted GDP by between 1.5 percent and 4.1 percent and reduced the unemployment rate by 0.7 to 1.8 percentage points. In other words, the stimulus has worked -- but not well enough to produce an adequate recovery.

This came as no surprise. Earlier this year, the White House considered calling for reinforcements. But political caution again took precedence, and any further stimulus initiative was deemed unfeasible on the grounds that it wouldn't pass Congress and that the public would recoil at the added size of the deficit. The president kept quiet. The strategy adopted was to pass a series of small measures -- a $50 billion unemployment bill, a $40 billion tax extenders bill, a $30 billion small business bill -- that they judged should collectively produce a big effect.
That approach clearly hasn't worked, economically or politically. Only the unemployment bill has passed, and that at half the size. Meanwhile, caution has failed to translate into more effective politics, leaving the president in the awkward position of having to campaign for puny bills plainly inadequate to the larger problem. It's hard to imagine the clamor over the deficit being any louder, and easy to believe that it might have been quieter had a stronger stimulus lifted the economy to a healthier state, for all the long-term costs.

The White House insists that it could not have gotten a larger stimulus through Congress, a debatable claim. But by twice neglecting to try, it has staked its fortunes on a policy that has visibly fallen short on the issue of greatest concern, the economy. Because of the divide between the experts and the strategists, nothing is happening. Given the weak state of the economy, the White House cannot claim that the stimulus it settled for has sufficed. Unwilling to call for another one, it is left to look on silently and helplessly.

Joshua Green writes a weekly column for the Boston Globe.