Wednesday, February 22, 2012

Obama, Romer, Summers and the Stimulus

Who among us likes Larry Summers (Averted Gaze)? From the right and the left he is reviled. Larry Summers may also have been responsible for the length of this recession. Summers -- who has had his issues over the years in his dealings with women -- squashed Christy Romer's initial stimulus recommendation, playing politics when arguably he ought to have been playing economist. From TNR:
Last month, my friend and former colleague, Ryan Lizza, wrote a much-discussed piece in The New Yorker based on a copy of this and several other previously-unpublished memos. The piece and the corresponding memo described the stimulus options that Obama’s team—including Larry Summers, his top economic adviser, and Christy Romer, soon to be his chief White House economist—ultimately sent him. The options ranged from about $550 billion to just under $900 billion.
Intriguingly, Lizza also noted that Romer “was frustrated that she wasn’t allowed to present an even larger option,” suggesting that while the memo he obtained may have been the end of the story, it was far from the whole story.
Now, based on reporting I’ve done for my forthcoming book on the Obama administration, I can fill in a major gap in the narrative—an earlier version of the same memo that includes Romer’s larger option. (A source provided the memo on the condition that he not be named.) In this version of the memo, Romer calculated that it would take an eye-popping $1.7-to-$1.8 trillion to fill the entire hole in the economy—the “output gap,” in economist-speak. “An ambitious goal would be to eliminate the output gap by 2011–Q1 [the first quarter of 2011], returning the economy to full employment by that date,” she wrote. “To achieve that magnitude of effective stimulus using a feasible combination of spending, taxes and transfers to states and localities would require package costing about $1.8 trillion over two years.” Alas, these words never made it into the memo the president saw.
The article concludes, elegiacally, "Though Obama was never going to propose a $1.8 trillion stimulus, and Congress certainly wasn’t going to pass one, the president may well have felt a greater sense of urgency had he better understood how far he was from the ideal."


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