Size of the Stimulus

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.

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.

So this is the Jan. 27 meeting where he comes up to Capitol Hill to meet with the Republican caucus?

Yes, probably.

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.

... 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?

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. ...

Just this morning, I think it was [Mitt] Romney who once again brought forth that report that you and [Chief Economist and Economic Policy Adviser to Vice President Biden, 2009-2011, Jared] Bernstein put out early on about what the unemployment figures would be. Tell me about why the optimism of that moment went awry and how it has come to haunt the president now. What's your thoughts on that?

You know, that's a sad period in my professional career. What that report was was sort of an honest attempt to show the world what we were thinking. We were doing a Recovery Act; it was bigger than anything that had been done in history. We were trying to talk about what we thought it could accomplish, about how it would raise employment relative to what otherwise would have happened, and what it would mean for the unemployment rate.

And the frustrating thing, from my point of view, is our estimates about what it would contribute have turned out, I think, to be quite accurate. When others have looked at how many jobs were saved or created by the Recovery Act, we said it would be 3 million; most of the estimates are saying, yeah, it probably was about 3 million.

I think the trouble was the trajectory that we were headed on without the stimulus. And that's where we, like almost every other forecaster, didn't recognize, didn't get how severe this recession was going to be. We thought it was going to be bad, but it turned out to be even worse.

So it was -- we made a mistake in the baseline forecast, but our estimates of what policy has accomplished has actually turned out to be pretty accurate. It's just we in fact needed to do more.

I think what I find frustrating about people like Gov. Romney is that they have to understand that it wasn't that the Recovery Act didn't work, and it wasn't that it wasn't a useful program. It's that the economy, it turned out, was much sicker than we'd thought. And yet they still use that as sort of a cheap talking point.

And the analogy I like to use is, if you have an infection and you go to the doctor and he gives you an antibiotic, and that night your fever goes up, you don't say, "See, I knew that antibiotic didn't work." You'd probably say, "I was sicker than I realized, and it's a good thing I'm on that antibiotic." And that's exactly what happened with the Recovery Act. We were taking the right medicine. It turned out we were sicker than we thought.

And I think that's why I tend to focus on when we realized that, when the data started coming in that, "Whoa, this thing is worse than we thought; it turns out it's happening all around the world, not just here in the United States," that's the time to say: "You know what, Congress? We need another big chunk of money, because this thing was worse than we thought. We need to fight it even more than we're doing."

That, I think, that's the thing I'm sorry that we weren't able to then take that next step.

You were fighting for more stimulus.

I was.

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.

Let's jump up to the end of 2009. So you're getting some numbers back that look halfway decent.

Mm-hmm.

Better end-of-December-than-November numbers, you report to the president in December.

Mm-hmm.

[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.

So the first endeavor, the first thing you guys need to deal with then is the stimulus. Can you take us in a little bit to the debate: what was being said, what were the numbers that were being thrown around, what you thought needed to happen, and sort of where we ended up.

So again, in those three weeks before the Dec. 16 meeting, that's exactly one of the big issues we were hashing out. I'd say in the campaign, people have been maybe talking, "Maybe we need $200 billion or $300 billion of fiscal stimulus after what's happened with Lehman Brothers."

Then, by the time I was in Washington, well, the number had gone up to $500, maybe $600 billion. And one of the things that I did when I first got to Washington is to say, well, the Council of Economic Advisers, which I had been nominated to head, one of our roles in the administration is the forecast. So I started to work with anybody who would talk to me, so private forecasters, the Federal Reserve, the Congressional Budget Office, anything I could get my hands on, and sort of "What do smart people think about where we're headed?," and then to kind of say, "All right, now, let's get some very standard verifiable estimates of what fiscal policy will do," and kind of run the numbers and say, "For where we're headed, how big does it need to be?" And one of the things that occurred to me is this thing is not big enough, that when we're talking about $500 or $600 billion, that's just not going to cut it.

When I think back on one of the things I'm proudest of was one meeting early -- or not so early, but a couple of weeks into the transition, where we were kind of talking about something else, and I finally say, "I don't think this is big enough, and I really think it needs to be at least $800 billion." And I remember being so shocked when [Director of the National Economic Council, 2009-2010] Larry Summers said, "I agree with Christy." Like, whoa! And so, by the end of that meeting, [Secretary of the Treasury] Tim Geithner and [Director of the Office of Management and Budget (OMB), 2009-2010] Peter Orszag, who I think were a little more reluctant to go that large, were onboard as well.

So I think certainly a part of what we were doing at that Chicago meeting is kind of getting the president's blessing to go bigger than he and bigger than Congress had been thinking to go, at least in the $800 billion range.

Why were you so shocked at Larry Summers' reaction?

Well, Larry doesn't often agree with people, I think is the truth. Or it was, I was I guess thinking maybe there would be more of a fight than there was. And actually I was just impressed that maybe that he and I had come to the same realization at the same time and that there wasn't much discussion. I think maybe the other way to say it is, Larry never does anything quickly or just says yes. It usually comes with a long speech before it.

So anyway, ... then at the Chicago meeting, one, for the political folks to say, "Listen, we're talking about something bigger than you were thinking of," I think that was something. They're starting to sweat and say, "Can we really get this through Congress?" And then certainly I did raise with the president-elect $800 billion is as big as we think it just has to be, but if you went a trillion or $1.2 trillion, that would be even better. And I think there was at that point then a discussion that, boy, maybe we can get Congress to do $800 billion, but you hit that trillion mark, and it's going to be really, really hard. They're just not thinking that way.

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.

What's your response, you know, this attitude from the Democrats that are very clear about their belief that it was a political decision from the very beginning that anything that came out of the administration was just going to get no Republican votes?

So this is 2009. The Republicans were in the minority. We had lost. We'd had a big loss in 2008. And that was following earlier losses when we lost the majority in the House and the Senate. And from our perspective, we even introduced another proposal to show that we were interested in working on some kind of a package. And we put our proposal on the table. We wanted to be a part of a solution. And Speaker Boehner was very clear in wanting the Republicans to be a part of the solution, be at the table. That was part of the reason that we invited President Obama to come down and talk with us.

It was a new Congress. It was a new start. And we recognized that we were very much in the minority. Unfortunately, the stimulus, the president presented it as a take-it-or-leave-it: "This is what I've put together." And in many ways, he didn't give us a choice. We had serious concerns about the level of spending, the borrowing that was included in this bill. There had been no desire, no effort really, to include the Republican ideas in his package. And so we did take a very strong stand in opposition to make it clear that we did not believe that this was the best way forward.