There was some talk about the fact that there were people -- and we talked to them, [Council of Economic Advisers Chair Christina] Romer included -- that were really thinking that the stimulus needed to be, like, up to $1.8 trillion. There was debate among them about how much they could get through. There was debate about what they should sweeten the pot with, for instance, one-third of it was tax cuts of some sort. What was going on?
Unfortunately, there hadn't been the discussions with the Republicans regarding what policies we thought would be important to be included in that type of a package. And although he talks about the tax cuts, they weren't the type of tax cuts that Republicans would have promoted that would have resulted in stimulating the economy, the pro-growth policies.
And I also think there was an opportunity to reach more of a common ground on the infrastructure, on the transportation piece of that stimulus package. And unfortunately, it was a very small percentage, I think maybe like 6 percent or 7 percent of the entire stimulus package that went to transportation and infrastructure funding, which Republicans and Democrats alike recognized that that's funding, you get it out immediately, and it really does spur the economy, job creation, as well as addressing important infrastructure needs in the country.
… When you look back at it now, what was done right and what was done wrong. What should we maybe have known? What did we learn from it?
When I look back, I'd say the thing that I would have argued for doing differently was, about a third of the stimulus, about $290 billion, was in tax cuts. …
For tax cuts to really help you in a stimulus sense, the recipients have to spend them. We still have a 70 percent consumption economy, so if they're not spending their tax cuts, they're not stimulating the economy. If they're spending those tax cuts on imported goods, that stimulates somebody else's economy.
I think with hindsight, you can say that the tax cuts definitely helped, but they didn't have the kind of bang for the buck, the kind of job creation impact that some of the other measures had.
State and local fiscal relief, for example, turned out to be very effective stimulus. Forget the modeling, I recall mayors with pink slips in one hand that they were about to administer to their police or their educators and stimulus checks in the other hand, and then ripping up the pink slips. I know it's dramatic, but it actually occurred.
Same thing with the infrastructure. People complain that it took too long for some of it to come online. That never struck me as a problem, because we just knew how long and deep this thing was going to be.
… What was the stimulus? … How did you understand the problems that could occur and how directly was it tied into the issue of jobs?
Everyone on the economics team had the same orientation -- and in fact, the vast majority of economists have this orientation -- which is that what was really going on in the economy at that time, most damagingly, was not the housing bubble bursting and the credit freeze. All of that was very symptomatic, but it was the contraction of demand.
In an economy like ours, if consumers aren't buying, if customers aren't in stores, if investors aren't active, if people aren't just out there generating economic actively, which is what economists call demand, the unemployment rates start going up. People are just going to start losing jobs, employers won't be creating jobs, because they don't have any incentive to do so. …
You'll not be surprised to hear that there's a different opinion about that meeting from the other side, so let me ask you your reaction to it. The story has been reported -- and Democrats will talk about it -- is that before that meeting on the same day, before the president arrives, the speaker [John Boehner, R-Ohio] gives a little speech to everyone and says, "Hey, I'm not voting for this thing, and I'm hoping that in fact the rest of you are pretty much onboard here," and that in fact the Republicans, this was the beginning of what the Democrats feel was a refusal to approve anything that came from the administration. What's your memory of that event? Did that event happen in that way?
That's interesting. I was around the leadership table; I was in the room, and I don't ever remember the speaker making that comment.
What did the speaker talk about before the president arrived?
I remember it being, you know, we're going to -- we were going to be welcoming, respectful. "The president is coming to talk with the House Republicans at our request. It's an opportunity for us to ask him some questions. Let's have a dialogue about the stimulus. Let's hear what he has to say."
So there was no talk of the fact that there are not going to be any votes coming from the Republican caucus for this.
No, that all -- as I remember it, that all came after that meeting.
Why did it happen? What happened after the meeting, and why? Why the coming to heads about decision making on any -- because, I mean, all of the big policies that were pushed through, there were very few, if any, on most of them, Republican votes.
Right. Well, it was disappointing that the administration was not willing to work with the Republicans on this, on this proposal. We went into it believing that there might be an opportunity to find some common ground. And then it just -- it seemed like it fell apart, that it was more: "This is what I'm proposing. Take it or leave it." And our biggest concern was the debt that we were adding, the amount of spending that would be in that bill, and this approach of just continuing the record borrowing, the record spending, another bailout, rather than really looking at pro-growth policies that we believe would help the free market and the entrepreneurs and encourage that entrepreneurial spirit in America, which is also important to economic growth.
The idea at that point, with that enormous amount of money that was going to be spent on the stimulus, was, okay, this is going to bring back employment. You and [Council of Economic Advisers Chair Christina] Romer got in a little bit of trouble when you put out that report, which said that the stimulus would bring [unemployment below] 8 percent. …
The research that Christie Romer and I did early on was very much targeted at how many jobs we thought this amount of stimulus would generate, and how many points it would shave off of the increase in unemployment. We felt the stimulus would generate something in the neighborhood of 3 million jobs -- that is, either jobs that otherwise would have been laid off or create new ones. And we thought that it would subtract a couple of points from the increase in unemployment.
Now, it's not that we thought unemployment wouldn't go up; we knew it was going up. We thought it would go up maybe a couple of points less if the stimulus of the magnitude that we ultimately passed was successfully implemented.
What we clearly got wrong was the level of the unemployment rate. We used the consensus estimate among economists at the time, and that was too low, because few people really saw just how deep this downturn was going to be.
But what we actually got right is confirmed by, say, the nonpartisan Congressional Budget Office, was what economists call the delta, the difference between where things would have been and where things actually ended up. …
There's been a lot of criticism, to this day, that the president and the economic team was naïve, because we thought we'd be able to come back to the well for more stimulus measures if things were worse than we thought. …
I don't think anybody saw the extent of partisan rancor that exists now, even four years ago. A lot of this criticism is 20/20 hindsight. It never occurred to me that the minority leader in the Senate, Mitch McConnell, would say, "Our number one goal is to defeat the president," as opposed to, "Our number one goal is to bring down the unemployment rate," or something.
And you can say it's naive to think that after an $800 billion stimulus we wouldn't be able to come back for more. But I think that there's a lot of 20/20 hindsight on that particular kind of critique.
So what about multiyear? [Economist Joseph] Stiglitz told us it should have been a multiyear thing.
So in the data, the average recession lasts 11 months. Stimulus itself is normally quite controversial, because the typical stimulus takes 18 months to pass and get out the door. And so by the time it is getting out the door, the recession is already over, so it becomes inflationary.
So there was a lot of discussion of how long should we be doing this. And the view was, let's take some of each. So there were some geared for one year, some for two years and some for three years, a 10-year infrastructure program. Truth be told, the president was always for enhancing infrastructure as a business development tool, and most of the economic team totally favored that.
But a 10-year infrastructure program not paid for is not really stimulus because it is not going to be spent until 2016. So again, I think it is a little unfair to portray it that way.
The other complaint is that basically the stimulus plan was handed over to Congress, and what that did is it mitigated the ability to control, to create jobs, to make sure ... it would do the things you wanted to have done. What's your thoughts on that?
So the important thing is it wasn't really just handed over to Congress. We were working with them day after day. We had very good relationships, both with members of Congress and with the all-important staffs of the various committees.
So I think with the president-elect, very much the call that he made is, you're more likely to get this thing fast and in a bipartisan way, which was something we very much wanted, if we didn't just dictate but worked with them. And virtually all of our big priorities showed up in the final legislation. It was perhaps not as large as we would have liked, but that's because the crucial votes that we needed in the Senate said, "No, we're not going to quite go that way."
But I would certainly argue that the final bill was a very good bill, and it was smart in the sense that one-third of it was tax cuts. Well, that was there because they're fast; they tend to have bipartisan appeal. That's a sensible way to get money into people's pocket. A big chunk of it was aid to people who had been directly hurt, like more supplemental nutrition and unemployment insurance.
And then a piece certainly that we had pushed hard for was aid to state and local governments. We'd been looking at the numbers of how just this recession was taking a terrible toll on state budgets, and they were cutting services just incredibly. And we thought a good way to get money out there fast and in a useful way is to transfer it to state governments. And that's a hard one, because congresspeople tend not to like to just give money to states and say, "You go to do what you think is good with it."
So that was a case where I think the president very much pushed it in that direction.
So this is the Jan. 27 meeting where he comes up to Capitol Hill to meet with the Republican caucus?
And you're co-chair at that point, right? Of the caucus?
I'm vice chair of the conference, mm-hmm.
So tell a little bit more of that day. He walks in the room. What's it like? What does he do, your first impressions?
You know, he's the new president. This was the first time that many of our members on the Republican side were meeting the president. He was graciously and warmly welcomed by the conference, you know? We were very pleased that he would take the time to come and talk with us about the stimulus. And he spoke extemporaneously about the stimulus. He walked us through it [in] probably 15 or 20 minutes, just his thought process and why he was advocating these policies. And then he opened it up for questions.
And it was really during that Q&A, as the members stepped forward to the mic and asked some pretty, I think, appropriate questions about the amount of money that we were spending, the debt that we'd be taking on and the desire by the Republicans to enact more pro-growth policies and to look at the tax cuts and how we might be able to enact some policies that would encourage the small businesses in this country, because we know that they're the economic engine of America -- that was more the direction that we were wanting to go at that time -- and I don't ever remember him saying, you know, "OK, we'll take a look at that." It was more just defending his proposal as is.
... There's a big meeting in December , before he goes to the inauguration, where they decide on the stimulus number. ... How do they come to the numbers that they come to? Do they know that they maybe will only have one chance to do it? And do they get it right?
The issue of the size of the stimulus had been discussed with members of Congress very widely in the months even before the election. The basic issue was how weak was the economy? How large would the multipliers be? That is to say, for every dollar of stimulus, how much extra GDP would you get? How long was the downturn likely to be?
There were different views on all these questions. Those in the financial side, those who saw the problem as Lehman Brothers and thought that there was a little tremor to the economy, [said] you fix the banks, the economy goes back. They believe in free markets. Markets work well. We had a little bit of an accident. Let's not talk about too much in detail, but once we fix the banks, we're back and running.
From that perspective, all you needed is some short-term stimulus to tide you over until the banking system gets back to health. So you need a short-term, 18 months, 24 months, moderate in size. The normal restorative forces are pretty strong.
The other side saw the economy really facing a very severe problem. I was on the side of those who saw the economy facing a very severe problem, partly because I looked back at what the economy was before 2008. I thought the economy had been sick. I thought the economy had been on artificial respiration for several years, that the housing bubble had been keeping the economy going. You take away that artificial respiration and you have a problem. ...
What did you advise them as far as the stimulus?
... You would probably need 2 to 4 percent of GDP per year, ... [which] would be in the magnitude of $300 billion to $600 billion per year until it comes back. But that might not be enough given the severity of the problem.
We're filling a hole of consumption going down by 5 percent. We're filling a hole of investment in real estate going down. Who knows what's going to happen to the global economy? Trade figures had gone down more seriously than even in the Great Depression.
So the side here was on caution and that you needed to have a very, very big stimulus.
There's another side to this. The political side is saying, "What are you, nuts?" Why did they decide what they decide?
There was one more aspect to this, which was the design of the stimulus. Some kinds of [spending] have higher multipliers than others.
Unemployment insurance is a very good stimulus for two reasons: When you give people who are unemployed money, they spend it. Secondly, if there's no unemployment, you don't have to spend the money. You only spend it in tandem with the severity of the economic downturn. We call those automatic stabilizers. So that's a good way of stimulating the economy.
Tax cuts for rich people are very bad ways to stimulate the economy. They save a lot of it, and what they spend they often spend on vacations in Europe or someplace that doesn't stimulate the American economy.
Paying money to, say, Nepalese contractors working in Iraq doesn't stimulate the American economy. So the war spending was not very good for stimulating the economy today or obviously long-term economic growth.
What I saw as inevitable was the following: Unemployment was going to go up. States and localities are going to have tax revenues go down especially [because] many of them depend on property taxes. Property values had gone way down; they're not going to be able to raise taxes.
And they have a balanced budget framework, which means when the revenues go down, they cut back. That means you're going to be firing teachers, you're going to be firing healthcare workers, just at a time when we're going to need them even more.
So I said let's give a lot of money to the states and localities to make up for their shortfall caused by our bad macroeconomic performance in Washington. It's not their fault that the economy's going down; it's the fault of mismanagement in Washington, the Fed and the administration. So that was the second thing.
If we're going to give a tax cut, let's target to investment. Let's tell American corporations, if you invest in America, you'll get a tax cut. If you don't, your taxes are going to go up. So we provide incentives for more investment.
We didn't want to stimulate more consumption, because we've been overconsuming in America. That wasn't where we want to go.
If you had taken that kind of a program, it would have provided more stimulus per dollar spent and put us on a better course for the future. But that wasn't the direction that they took. What they did instead is basically say $800 billion over two years, Congress figure out where it goes.
What was the problem with telling Congress to do it?
They start compromising, and a third of it went to tax cuts, which didn't stimulate the economy very much. Some of it went to what they call shovel-ready investments that discredited the spending. It still stimulated the economy, but it discredited the program. ...
... President Obama comes in, is inaugurated. What are the expectations as far as Republicans in Congress about what to expect, the feelings about him and his team, especially when it comes to dealing with the economy and the economic crisis?
Right. Well, following President Obama's inauguration, we had heard a lot during the inauguration activities as well as during the campaign about him really wanting to be a uniter, not a divider, wanting to work across the aisle to do what was best for America. And I remember the first big issue that we encountered was the stimulus. And President Obama had proposed a $787 billion stimulus. I was new on the leadership team at that time, too.
So during those first days, [there was] a lot of discussion about, OK, so how are we as Republicans going to approach the new administration, and what are our views on the stimulus? And there was a real desire to find a solution, to see if there might be some common ground where we could work together to move something forward. And we decided to invite President Obama to come down and meet with the House Republicans, and "Let's have a discussion about the stimulus." And he accepted our invitation. He came down and met with all the House Republicans.
It didn't go quite as we had expected. The sense that we got really was President Obama saying: "This is my plan. This is my proposal." And instead of really looking for that opportunity to maybe work in a bipartisan fashion or find some ways that he might be able to incorporate some of our ideas, it was really more of President Obama trying to convince us that this was what we needed to do, and that we just needed to support his package.
Then around that same period, there was a meeting down at the White House where the Republicans and the Democrats were again discussing the stimulus, and that was when President Obama let it be known that he had won the election, and that clearly sent the message that, you know, we were in the minority and he was the new president, and he had the majorities in the House and Senate, and [he] really left us with the impression that he was going to do what he wanted to do.
Dec. 16, 2008, they have this big Chicago meeting all day long, and I guess Goolsbee and the vice president, everybody is there basically.
... So, going into 2009, the big debate was about the size of the stimulus. I think it was mid-December. I was not at the meetings with them, but certainly I was aware of the discussions happening.
Where I sit, I'm a little more Keynesian by nature, so I would have liked to have seen north of a trillion, as opposed to the 700 -- I think it was $89 billion, less/plus, only because I know it was called stimulus, but if you look at the $789 billion, you're only maybe talking about one-third was true stimulus. A third was gapping state deficits; a third was unemployment insurance and keeping some state and local employees -- police, fire, teachers -- onboard, so obviously that's critically important, but I'm not sure I would call that stimulus. When I think of stimulus, I think of growth.
And then, if you look at the third that was stimulus, it was really infrastructure, which a lot just doesn't happen overnight. I mean, I think the part of infrastructure, it's like a five-year plan. Some were truly shovel-ready, but as we know some were not shovel-ready. So I would have liked to have maybe separated it out and be a little bigger, but what I hear -- like I said -- I wasn't at the table, is that the idea of getting something with an 8 handle or larger was not going to happen.
Because I just think there wasn't the political wherewithal to do something of that type of size.
And who was making which argument? I mean, who were the political realists?
I'm not sure at the end. My guess is some people in the administration probably had a little more Keynesian tone to themselves, and some felt like, "You'll just never get this passed," maybe a little more practical approach. I think either way -- I don't know what the exact numbers are, but I think some people quote that it led to north of a million jobs being saved during that time, and it certainly stemmed the tide for state and local municipalities from having to, I would say, even cut to a more austerity budget than they already did. ...
The president is out there now campaigning, and he's a got big problem to some extent because of course the economy and the handling of the crisis is what everybody is focused on. There's a lot of anger, and there's a lot of frustration out there. Part of the anger and part of the frustration is this feeling that the banks got taken care of, but Main Street did not, that individuals did not get a plan that is designed to help them. Why are we at that point, and how difficult does it make the president's role in the re-election?
So I think the first thing -- and I'm sure the president will tell voters this time and again -- everything he did was about the average person; it's not about the banks. Even when we were doing things for the banks, it was about the collateral damage, all of the people that would be hurt if the banks went down.
And if you think about the things that he's done, from the Recovery Act to the various extensions of unemployment insurance and the extensions of the payroll tax cut to health care reform to financial regulatory reform, all of those things are designed to help this economy be stronger, more stable, and to create jobs.
So I think the thing that people can rightly say is, "I wish you'd done even more." But [if they] say that what you did was not aimed at job creation and aimed at dealing with the fundamental problem, I think that's deeply wrong. That was always the focus. That was always the thing that he cared most about.
So [presidential adviser Pete] Rouse eventually writes these memos about, I guess after the midterms, his annual memos that he writes, and he wrote that there was deep dissatisfaction within the economic team, and he talks about some of the problems that existed. What were the concerns about the way the team worked? And what do you believe to be the truth?
So what is certainly true is the economics team had [what] we often called the four economics principals: the secretary of the treasury; the head of OMB; Larry Summers, the head of the National Economic Council; and the chair of the Council of Economic Advisers. I think what's true is we were all strong personalities, and strong personalities with sometimes very different viewpoints. And I think we didn't hesitate to hash things out in a very forthright manner.
So that's the basic truth. And it's interesting. I mean, it's the way economists naturally tend to interact with one another. I've learned from my academic colleagues in different fields that their seminars aren't nearly as contentious as ours are, where we just don't hesitate when someone's come to your university to represent a paper, to say, "I think that's wrong, and here's why." And I think that was naturally how we tended to interact with one another.
I think for the most part there was a lot of mutual respect. It sometimes broke down, or sometimes people were mad, and sometimes it did feel like things weren't working quite well. I think the big picture is, for the most part we were incredibly successful, that we got through a lot of important policies, everything from health care reform to financial regulatory reform to the Recovery Act.
I think a time when it did feel somewhat dysfunctional was the fall of 2009. So we'd gotten through the worst. We'd done some extraordinary measures. But the figuring out what more needed to be done there in the fall of 2009 I think was not one of our better episodes, that there was a disagreement about should we do more stimulus? Should we do immediate deficit reduction? I'd say we'd all agree we need to do long-term deficit reduction, and we were all enthusiastic about setting up the bipartisan fiscal commission.
But that question of right then, do we push for another stimulus or do we start to immediately worry about the deficit, that one where we were kind of at loggerheads and we just kept fighting about it in front of the president --
And I remember one time when I think an interviewer said, "So do you ever lose your cool?," and he said, "Why, yes, I lost my cool yesterday with the economics team, where I finally just said: 'OK, I'm tired of hearing this time after time. I'm going to go away now.'"
So I think that was a time when we should have gotten our act together better. I think we did not serve him as well as we should have. I obviously wish we had done a very aggressive, another round of stimulus. And I wish I'd convinced everybody on the team and we could be a united front telling the president this is what needed to be done. I think we didn't necessarily do that as much as we should have, and that didn't serve him well.
Let's jump up to the end of 2009. So you're getting some numbers back that look halfway decent.
Better end-of-December-than-November numbers, you report to the president in December.
[President Obama] then goes out on his Main Street tour, and he's sort of talking about the fact that maybe the green shoots are showing up. He's in Allentown, [Pa.] It's a short-lived optimism. Explain what you thought at that point and sort of why it didn't turn out that way.
I think the important thing, again, if you think about the turnaround in the American economy -- so think about the end of 2008, beginning of 2009, real GDP [gross domestic product] is falling at just an amazing rate. In the fourth quarter of 2008, it fell at almost a 9 percent annual rate. That's just a huge decline. And by the third quarter, the fall of 2009, it's actually growing again. So that's just an amazing turnaround, and I think policy played a huge part in that. Things like the Recovery Act really were a big part of why we turned the corner.
Even so, one of the big debates in the fall of 2009 is, don't we need to do more fiscal stimulus; that we'd done the Recovery Act, it was sensible at the time, but then things turned out worse than we had anticipated, and even with the fact that we were starting to grow again, the unemployment rate was still terribly high. So we were having a very active discussion of other job-creation measures.
Two parts of it that other people complain about now: We talked to Professor [Joseph] Stiglitz a week ago, he being one of them [who was] saying that the numbers were not big enough, or maybe they were big enough, but they needed to be built in so that it would happen for two or three years in a row that you didn't have to go back to the trough, because the political reality was that you were never going to be able to go back. Was there a mistake made on that level?
I think perhaps. I mean, a natural way that an economist approaches a problem is to say, here's where I think the economy is going; this is what we need to deal with the problem. And if we're wrong, if it turns out the economy is headed in a much worse direction than we thought, then you'll go back to Congress, and you'll get another shot of aid for the economy.
And that, in an ideal world, has got to be the sensible way to do it, to say, let me make my best guess. Let's do what we think is right now, and if it's not enough or if it's too much, we can reoptimize.
And I certainly did not count on the kind of opposition that would come to more stimulus. I think that the usual presumption is, if you go to Congress, they're always happy to pass a tax cut or to pass more infrastructure and things. So that had certainly been the norm.
So this idea that we all should have known that we only got one shot, that certainly isn't what's been true in history. I mean, it is the case that that was very much the problem here, that when you go back and you say, "Well, what we did with the Recovery Act was good. It was helpful. It helped to turn the economy around, and it turned out the situation was worse than we thought it was, so we need more," Congress says: "Forget it. Obviously the fiscal stimulus didn't work; that's why you're coming back. So you can't have more." And that is deeply unfortunate.
You were fighting for more stimulus.
You were on the losing end of that.
Well, not really, in the sense that I was certainly fighting for this. Larry Summers was actually on my side as well. And actually, even though the president was -- we got some moderately or certainly better news that fall, the president was behind that. I remember he gave a speech at the Brookings Institution there in December that was basically calling for more aid to state and local governments, more extended unemployment insurance, some more infrastructure spending, a job credit for firms that actually hire people.
So a lot of the things that I had been pushing for he endorsed. They then kind of -- most of them did not come to fruition. Or they came to fruition in a much more watered-down form.
But I do think that that was -- the president -- nobody was sitting on their laurels. We were delighted to see things starting to turn the corner, but you have to remember, the unemployment rate was still 10 percent or above there in the fall of 2009, so we were in no sense saying, "Oh, problem's over, right?" The problem was still front and center in trying to think about how do we make more progress in bringing that down.
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