What? Obey definitely did not agree.
He blasted the fund as an “absolutely horrendous mistake” that could sink the bill. He predicted Republicans would trash it as “more social engineering from Washington,” while Democrats in thrall to teachers unions would be just as hostile: “I cannot think of an operation that will do more to discredit this entire package.”
This blowback was not a surprise. Furman, Barnes, and Higginbottom had proposed the fund in a post-Christmas memo to Rahm. “May be hard to enact without significant consensus reached among congressional stakeholders,” they noted.159 “Some will say the President-Elect is using an economic crisis to jam a controversial reform agenda.” They recognized “the political imperative to develop a package that would actually pass Congress at a time when bailout fatigue is setting in.” Unity would be nice, but their party didn’t work like that.
So one evening, deputy budget director Rob Nabors and his colleagues went to Obey’s office to try to work out a deal with his old boss and some Senate Democrats; he let himself in with his old key. The members of Congress wanted to convert most of Obama’s school reform fund into a more flexible “stabilization fund” that states could use to patch holes in their budgets. Obey and Senator Tom Harkin of Iowa then hashed out a plan to distribute about $25 billion through existing programs for high-poverty schools and special education. They agreed to chip in $1 billion for Obama’s reforms.
That’s when Nabors finally spoke up. “We can’t go along with that,” he said.
Obey was livid, pounding his fist on the table. This was supposed to be a stimulus, not a backdoor effort to reinvent schools. He was trying to prevent brutal education cuts; he didn’t have time for trust-us-on-the-details reforms. “If you guys want to reform the hell out of the education system, do it when people aren’t drowning,” he snapped. And Nabors was Obey’s guy. How often had they fought together to steer education money to poor and disabled children?
“If my staff director was still here, he’d tell you to go to hell!” Obey bellowed.
Obey grabbed his coat to storm out of his office.
“Wait a minute, Mr. Chairman,” pleaded Phil Schiliro, Obama’s legislative director. “Let us check in.”
Obey, who enjoyed his gin-and-tonics, grumbled that if he wasn’t going to leave, he was going to have a drink. He poured one from his private stash.
After calling Emanuel and Arne Duncan, Nabors calmly outlined a deal: Obey could have his business-as-usual money, but Obama needed $15 billion for reform. The meeting broke up around midnight on a friendlier note, but this wouldn’t be the final skirmish. Not even the president could dictate terms to a crotchety old bull like David Obey.
“We all saw Schoolhouse Rock,” says one Obama aide. “We knew how a bill becomes a law.”
Obama delivered his first formal speech of the transition on January 8 at George Mason University, making an urgent case for what he now called his American Recovery and Reinvestment Plan. The speech was a cross between the professorial and inspirational Obama, explaining what he wanted to do and how it would change the world:
We cannot depend on government alone to create jobs or long-term growth.160 But at this particular moment, only government can provide the short-term boost necessary to lift us from a recession this deep and severe. Only government can break the vicious cycles that are crippling our economy, where a lack of spending leads to lost jobs, which leads to even less spending. … This is not just another public works program. It is a plan that recognizes both the paradox and the promise of this moment—the fact that there are millions of Americans trying to find work, even as all around the country there is so much work to be done.
It was a compelling defense of Keynesian economics, but hardly anyone noticed. Obama wanted to start a conversation with the public, but in a conflict-addicted party and a conflict-driven media climate, he couldn’t even control his own end of the conversation.
That’s because shortly after he finished speaking in suburban Virginia, Summers and Axelrod met with Senate Democrats in the Capitol. Axelrod shared his latest polling, noting that two thirds of the public had confidence in Obama. But powerful Democrats like Budget chairman Kent Conrad of North Dakota and Finance chairman Max Baucus as well as reliable liberals like Harkin spent most of the meeting picking apart Obama’s plans for $300 billion worth of tax cuts. They were all dismissive of his tax credit for firms that hire new workers, ridiculing the idea that a $3,000 check would motivate businesses to add employees when demand for their products was evaporating. Several senators were also skeptical of Making Work Pay. “Twenty bucks a week—how much of a lift is that going to give?” Conrad asked. Liberals were particularly concerned about Obama’s proposed tax breaks for businesses, like a “carryback” provision that would allow firms with large losses to claim refunds for taxes paid over the previous five years, a windfall for the big banks and home builders that had helped shred the economy. Harkin understood why Republicans were pushing carryback, but why was Obama?
“To me it looks a little bit like trickle-down,” he said.161
This was normal Democratic kvetching, not a vicious family feud. Summers told the senators: “Message received, loud and clear.” Obama had asked for ideas; he didn’t expect U.S. senators to behave like potted plants. And the transition team took their criticisms seriously. Even Furman and Treasury’s Gene Sperling, the hiring credit’s strongest advocates, agreed they ought to drop it after its hostile reception on the Hill. Sperling was such a fan of the credit that he had been teased at his wedding for peddling different versions to different presidential candidates, but it wasn’t worth a dispute that could delay the stimulus. “We had to let it go,” Sperling says. The Obama team also worked with the Senate to draft new tax credits for green manufacturing and college tuition.
Of course, the media did not emphasize this collaboration when the whiff of conflict was in the air. The day after Obama’s call to arms on the Recovery Act, the headlines were all about friendly fire: “Senate Allies Fault Obama on Stimulus.”162 “Democrats Make Clear They Will Guard Turf.” “Democratic Congress Shows Signs It Will Not Bow to Obama.”
Obama’s own party was doing McConnell’s work for him, slapping the stimulus with a “controversial” label. Every critical Democratic quote gave McConnell ammunition to use with colleagues tempted to burnish their bipartisan credentials by endorsing Barack Almighty’s first big initiative. “If you’re a Republican, you can’t be to the left of these Democrats who are saying there’s a bunch of crap in there,” a McConnell aide explained. “If they’re not embracing it fully, there’s no reason on God’s green earth you should.”
House Democrats weren’t embracing it fully, either. In early December, for example, Chairman Oberstar had proposed $45 billion worth of infrastructure for the Recovery Act. But when Obama’s proposal landed in the same ballpark, Oberstar upped his request to $85 billion.163 He saw infrastructure as the backbone of American prosperity, promoting long-term growth by making the U.S. economy more efficient, providing short-term jobs for U.S. workers with calluses on their hands, stoking demand for U.S. products like the iron ore mined in his district. He couldn’t stand watching China build better railways and Brazil build better ports. And when Summers visited House Democrats, the day after his tussle on the Senate side, Oberstar objected to his uncontroversial point that public works take a long time. “You’re wrong!” Oberstar cried. “You don’t understand how this works.” As Oberstar droned on about the intricacies of transportation projects—bidding processes, the difference between outlays and obligations, his summer job during college puddling concrete—Summers looked like he was back at a Harvard faculty meeting, trying not to roll his eyes while getting chastised by some wrinkly professor of medieval literature.
Democratic leaders did not want the circular firing squad to get out of hand. They really did support Obama’s agenda, and they knew their political fates were tied to his. At the next S
enate caucus meeting, Reid reminded his members there was “a new sheriff in town.” They could criticize Obama’s plans, but they should call Rahm or Schiliro before going public. At the next House caucus meeting, when Oberstar started carping again, asking why Obama wanted so many tax cuts when public works create more jobs, Pelosi unceremoniously cut him off.
“The only reason we’re talking about stimulus is that Barack Obama won the election,” she declared. “He promised tax cuts, so that’s going to be in the package.”
But the sniping continued. As Obama raced to pass the Recovery Act and stave off a depression, Democrats complained that it was too big and too small, too rigidly partisan and too accommodating to the GOP, too focused on short-term stimulus and too focused on long-term transformation. It wouldn’t pour enough concrete; it wouldn’t do enough about housing; it ought to be paired with deficit reduction. Obey, incapable of staying on anyone’s message, publicly mocked Obama as “the crown prince.”
Republicans accepted every gripe as a political gift.
And they were about to receive an even better gift.
Nobody Reads Footnotes
The day after Obama’s little-noticed speech, the December employment report brought more nauseating news. Another 700,000 jobs had disappeared, the equivalent of Detroit’s entire population getting laid off for the holidays. The way things were going in the auto industry, that didn’t sound so far-fetched. At a stimulus hearing, the former McCain adviser Mark Zandi warned that the economy was “shutting down.”164
The next day, the transition released happier news: the Romer-Bernstein report.165 It was a preliminary analysis of the Recovery Act’s potential jobs impact, the first macroeconomic evidence that the stimulus could help jolt the economy out of cardiac arrest. It was also the most politically damaging document of Obama’s first term—and the term wouldn’t start for another ten days.
Romer-Bernstein actually originated with Rahm. He was happy to stuff campaign priorities like solar panels and school reforms into the stimulus, but when it came to selling it, he preferred a simpler message: Jobs. He liked to say jobs would be Obama’s number-one priority—and number-two, and number-three. Now that he had a jobs number for the Recovery Act, he wanted an official report to enhance the credibility of that three million figure on the Hill. In essence, he wanted a talking point to help sell the stimulus. The report would end up providing the most enduring talking point of the Obama era.
“Rahm decided he needed to attach a jobs number to sell this thing,” snipes one Obama aide. “I thought that was the most damaging thing we could’ve done. It was 1990s thinking.”
Summers assigned the work to Romer, who did most of the big-picture analysis, and Bernstein, who focused on the specific impact on women and other demographic groups. They spent the bulk of their time crunching numbers and evaluating multipliers to try to nail down how much the stimulus would increase employment compared to the no-action baseline, the “delta” between what would happen with and without the Recovery Act. They spent less time assessing that no-action baseline, the economy’s expected trajectory without stimulus. Romer mostly followed forecasts from the Fed and two private firms. If anything, Romer says, their report’s no-action baseline was somewhat more negative than the Blue Chip consensus forecast, the usual starting point for White House calculations.
It wasn’t nearly negative enough. Page 4 of the report included a chart that has dogged Obama ever since. It predicted that without the Recovery Act, unemployment would peak at about 9 percent, but with the Recovery Act, unemployment would remain below 8 percent, and would fall to 7 percent by the end of 2010.
Most analysts believe Romer and Bernstein came close to the delta, their prediction of how much the stimulus would improve the economy.166 They just overestimated the baseline, the economy’s starting point. They worried at the time that they were being too optimistic; Bernstein had been quoted saying: “We’ll be lucky if the unemployment rate is below double digits by the end of next year.”167 But they figured their forecast would lack credibility if they strayed much further from the Blue Chip. They would have sounded like Chicken Littles.
“The fact remains that 8 percent was a conservative forecast at the time,” Bernstein says. “In hindsight, obviously, we just should’ve focused on the delta.”
Their report—just thirteen pages, barely half of that text—was cluttered with caveats: “It should be understood that all the estimates presented in this memo are subject to significant margins of error.” And later: “The uncertainty is surely higher than normal now because the current recession is unusual both in its fundamental causes and its severity.” Unfortunately, nobody remembers caveats.
Romer-Bernstein even included a humdinger of a footnote about the baseline: “Some private forecasters anticipate unemployment rates as high as 11% in the absence of action.” Unfortunately, nobody reads footnotes.
Before releasing the report, Romer shared it with the economic team, as well as some academic peers. Summers and Furman advised her not to put her name on it before she was confirmed, but she says her husband was the only reader who raised concerns about including the unemployment prediction. He reminded her that a fellow economist who had muffed an employment forecast based on an overly optimistic baseline once told them ruefully that forecasters should stick to predicting changes in unemployment, not levels of unemployment.
“Oh, for heaven’s sakes,” Romer replied. “If unemployment goes to 10 percent, we’ll have much bigger problems than this.”
Romer and Bernstein both say that no one else flagged anything amiss with their report. “Rahm loved it,” Bernstein recalls. “He said: Do more stuff like that!” The political team did exchange emails about the potential damage from the report’s suggestion that men would get more stimulus jobs than women, but no one seemed worried about putting the optimistic unemployment forecast in writing.
Republicans did not even make a fuss when the report was first released. But two weeks later, McConnell aide Derek Kan, who had a very un-Washington habit of actually reading reports, mentioned the 8 percent forecast in an email to Don Stewart, McConnell’s communications director. Stewart immediately raced over to Kan’s desk. “Are you telling me they’re predicting the unemployment rate?” he asked.
Looks like it, Kan said.
“Oh my God!” Stewart shouted. Economists all seemed to think the situation would be even worse in a year. Now Obama was promising instant relief? Stewart quickly started blasting the 8 percent figure out to reporters, and he never stopped.
“If I were doing this over again, I’d be more politically astute,” Romer says. “But those were our best estimates at the time. We weren’t trying to puff up confidence or do the reverse. We were trying to do an honest forecast.”
It was honest. It just wasn’t accurate. Several days after Romer-Bernstein hit the streets, the private forecasters at Macroeconomic Advisers downgraded their economic outlook.168 They told Romer they had collected hideous new data from Japan and Europe. The entire global economy was now gasping for air.
“That was my first inkling that, oh God, our forecast might be quite wrong,” Romer says. “It’s even worse than we thought.”
— EIGHT —
“Wow. We Can Actually Do It.”
The big-ticket items in the Recovery Act—state aid, middle-class tax cuts, extended unemployment benefits—would not even make it halfway to Obama’s goal of $800 billion.169 That left a lot of room for Change We Can Believe In. For the transition team, it was an exhausting but exhilarating time, a chance to chart a new path for the country while trying to stop it from collapsing. Obama’s wonks thought both goals were achievable, even if they weren’t always perfectly aligned.
One of the enduring criticisms of the stimulus has been that Obama exploited an emergency to do things he wanted to do anyway. It’s true. He thought they were good things to do. He had just spent a long campaign explaining why he wanted to do them. And he h
ad said throughout his transition that he expected the Recovery Act to create a footprint for future growth as well as an instant spark. Did his critics expect him to fill out the $800 billion with things he didn’t want to do? When did they want him to start keeping his promises and pursuing his vision?
“Administrations go fast. You don’t have that much time to change things,” says Brookings official Bruce Katz, a Clinton administration housing aide who led the Obama transition’s review team for HUD. “The narrative coming from the top was: ‘Let’s make sure we take advantage of this disruptive moment.’”
Investments in Obama’s long-range agenda wouldn’t always inject the swiftest short-term stimulus. But the economy clearly needed support for an extended period, so just about any investments would provide some stimulus. And in some cases, Obama’s priorities would be excellent stimulus. For example, aid to poor families with high propensities to spend would provide high bang-for-the-buck, while advancing Obama’s spread-the-wealth agenda.170 So the transition team secured hefty increases in safety net programs like food stamps, child care, rental assistance, and the Earned Income Tax Credit for low-income workers.171 It also subsidized the COBRA premiums that help laid-off workers keep their health insurance. Obama even gave seniors, veterans, and people with disabilities a one-time $250 check, because—well, why not? Economically and morally, it beat giving tax breaks to billionaires. It would drop more cash into circulation, helping people who needed help while nudging the inequality dial in a fairer direction.
The New New Deal Page 17