That was almost a year ago. Today, President Obama’s poll numbers are weaker than ever. The political betting markets give him a less than 50 percent chance of being reelected in 2012. Why? It’s that unemployment is stuck above 9 percent. It’s that a double-dip recession is a real possibility. It’s that the market seems to dive on most days that end in “y.”
Obama’s fortunes won’t rebound until the economy rebounds. And so any account of what he has done wrong, or what he could do right, needs to provide, first and foremost, a persuasive case of how the White House could have done more to promote an economic recovery over the last three years, or could do more to accelerate one now.
That account, however, doesn’t make for as satisfying a story. It’s not about heroes and villains, or dramatic meetings and angry confrontations. It’s about tough tradeoffs between what was politically possible, operationally plausible, and substantively wise. It is about whether more stimulus could have passed Congress or a different chairman of the Federal Reserve would have unleashed more effective monetary policy. And it’s much more about the collision of America’s political and economic institutions than the collision of particular personalities.
Suskind’s narrative takes place in the White House. But the economic response really took place elsewhere. Almost anything the White House wanted to do that would cost money had to be authorized by Congress. Tax cuts? State and local aid? Infrastructure spending? Nationalizing the banks? Congress. Giving bankruptcy judges the power to write down mortgage principal? Direct-employment programs? German-style work-sharing programs? In each case, Congress.
And that was what the discussions in the White House were really about. Congress. Suskind doesn’t dwell on this fact, but his reporting backs it up. The idea to nationalize Citigroup came up as a sort of consolation policy after the idea to nationalize the entire banking system was killed by Emanuel.
“Everyone shut the fuck up,” Suskind quotes the profane chief of staff as saying. “Let me be clear—taking down the banking system in a program that could cost $700 billion is a fantasy. With all the money that already went to TARP, no one is getting that kind of money through Congress.”
The same goes for stimulus. When Obama angrily dismisses Romer’s umpteenth argument for more stimulus, it’s not because he disagrees. It’s because he can’t get it passed. “Enough!” Suskind quotes him as shouting. “I said it before, I’ll say it again. It’s not going to happen. We can’t go back to Congress again. We just can’t!”
The truth of the matter is this: every member of the White House’s economic and political team was closer to every other member than any of them were to the swing votes in the Senate. Tim Geithner and Christina Romer have their differences, but they’re mostly talking the same language. Put them in a room with Senators Ben Nelson, Scott Brown, and Susan Collins—all of whom would have rejected a strong new stimulus—and they may as well be Martians.
It is easy to tell the story of what the White House did wrong in its response to the financial crisis: it underestimated it. It had good reason to underestimate it, of course. Almost everyone was underestimating it. In the fourth quarter of 2008, when Obama’s economic team was meeting in Chicago to map out their policies, the Bureau of Economic Accounts thought the economy was contracting at a rate of 3.8 percent per year. It wouldn’t be until this year that we learned the economy was really contracting at a rate of 9 percent. And it wasn’t just the BEA. The Federal Reserve has been continuously overoptimistic. So have the leading private forecasting firms, like Macroeconomic Advisers and Moody’s Analytics. And so have Wall Street banks like Goldman Sachs and JPMorgan.
The observers who got it right were the ones who could tell a story that didn’t rely on the early data. Kenneth Rogoff and Carmen Reinhart, who would publish This Time Is Different: Eight Centuries of Financial Folly, their epic history of financial crises, in late 2009, saw that the recovery would be slow and tough. Economists like Paul Krugman and Joseph Stiglitz, who were more knowledgeable about the struggles over recession in Japan and had their own Keynesian understanding of financial panics, were also suitably pessimistic.
But early mistakes can be corrected. If the initial stimulus is too small, you make it bigger. If your housing policies are too modest, you toughen them up. If the private sector sheds jobs and long-term unemployment becomes a problem, you begin hiring workers directly.
Or so goes the theory. The reality is more troubling. The initial stimulus was too small, but there’s no plausible case that Congress would have been willing to make it much bigger just because the Obama administration had a theory that the financial crisis would lead to a worse recession than most forecasters expected. The trouble was that attacking a financial crisis with a too-small stimulus was a bit like attacking pneumonia with too-few antibiotics: you feel better for awhile, and then it comes back. And this time, it’s harder to kill.
The problem is political. Having very publicly passed a very big policy that you promised would revive the economy, the country blames you when the economy does not, in fact, revive. Your policies are discredited and your opponents are emboldened. You lose seats in the next election and your leverage over lawmakers. So you can’t, with any prospect of success, go back to the well and ask for a bigger stimulus or more money to buy up bad mortgages. And then, when the economy gets worse, you’re simultaneously in charge and out of options. You came to Washington promising change and now you’re begging for patience. It’s a crummy situation, and there’s no combination of policy proposals or speeches that can get you out of it. But this is the vise that has tightened around Barack Obama’s presidency.
The combination of stimulus, TARP, and aggressive monetary policy quickly broke the recession. We went from losing 800,000 jobs a month in January 2009 to losing 39,000 jobs a month in January 2010. By March 2010—the same month Obama signed his health care bill into law—we were adding jobs again. It looked like we were on a steady path back to recovery.
Then, in the summer of 2010, the recovery began to wobble. We lost jobs for four months straight. Though employment picked up in the fall and the monthly jobs report never again turned negative, the economy proved unexpectedly stuck at what PIMCO CEO Mohamed el-Erian calls “stall speed”—it’s neither getting worse nor getting much better. Job growth, though positive, has been too slow to cut into the unemployment rate. If it were up to the administration, it would have passed substantially more stimulus as it realized the initial round was much too small. But the Republican Party, which opposed the initial stimulus, has successfully blocked the administration from passing further jobs programs.
It’s possible that if Obama had chosen a different set of advisers, they could have changed the outcome around the margins. The initial stimulus could have focused more on jobs and less on tax cuts, and the President could have emphasized that more would likely be needed. The Obama administration could have moved more quickly to nominate its own director for Fannie Mae and Freddie Mac back when Democrats had sixty seats in the Senate, and that would have given it more freedom to ramp up its housing policy even in the absence of congressional action.
But in general, the fundamental constraints on the administration’s leaders have not been economic or conceptual, but political. They know they need to act. But they can’t act, or at least they can’t act at the scale necessary to really change the economic situation. Republicans won’t let them. Between 2009 and 2011, Senate Republicans launched more filibusters than we had seen in the 1950s, 1960s, and 1970s combined. Democrats had sixty votes for a short period of time, but with Senators Ben Nelson and Joe Lieberman included in that total, they never had easy control of the Senate, whose minority leader, Mitch McConnell, said in October 2010, “The single most important thing we want to achieve is for President Obama to be a one-term president.”
The question, then, is whether the administration could have done more to plan for its inevitable political weakness when it was at the height of its powers. One oft-promoted possibility would have been to abandon health care reform and focus solely on jobs. But it’s not clear what, exactly, that would have meant doing. Health care reform took up most of 2009. The stimulus didn’t really begin spending its money until 2010, and the recovery didn’t flag until later that year.
There is little reason to believe that in 2009, before the stimulus had actually begun doing its work, the Obama administration could have gone back to Congress asking for more. And if the White House, which commanded the largest Democratic majority since the 1970s, had spent the year sitting on its hands waiting to see how the stimulus turned out rather than taking on health care reform or energy or financial regulation, its base would never have forgiven it.
Another option would have been to mount a frontal assault on the filibuster, much as John F. Kennedy’s administration began by launching a frontal assault on the House Rules Committee, which was bottling up civil rights legislation.
I don’t consider this plausible. For one thing, the White House understandably wanted to use its political capital on policies that would be understandable and tangible to Americans rather than on a divisive set of procedural reforms. For another, it would have been very difficult for a candidate who had come to power promising a new era of postpartisanship to begin his presidency by ripping minority protections out of the United States Senate. And finally, there is no evidence that Democratic senators, many of whom quite like the power that the filibuster gives them, would have gone along with the plan.
But if the White House couldn’t go through Congress, perhaps it could have done a better job going around it. A major omission in Suskind’s book—which is also a major omission in political punditry more generally—is that it makes little mention of the Federal Reserve. But the Fed is arguably more powerful than Congress when it comes to setting economic policy, and it is certainly more powerful than the president.
The White House made two major mistakes here. One was leaving two seats on the Fed’s Board of Governors unfilled. Congress certainly deserves some of the blame for this—Senate Republicans filibustered Peter Diamond, a Nobel laureate economist whom the Obama administration nominated to fill one of the open slots—but the truth is that the White House was slow to nominate Diamond, passive once it did nominate him, and seemingly lost once his nomination failed. At the moment, the two seats on the Fed’s Board of Governors remain open, and the White House has not put forward any new candidates. Those seats matter because the Federal Reserve is a cautious institution that is more comfortable fighting inflation than pursuing full employment, and if you want it to act with more vigor, you need to bring that energy in from the outside.