Wednesday, February 22, 2012

My sinister stimulus plan, in hindsight

Matt Yglesias talks about the now infamous conversation within the Obama administration regarding how big the stimulus should have been.

The find in question is that Christina Romer initially wanted to say to the president during the transition winter of 2008-09 that a $1.8 trillion stimulus was needed to fill the output gap, but Larry Summers—without disagreeing with her—decided that it would be poor bureaucratic politics to present such a large figure as the high-end range. His calculus was not merely that $1.8 trillion would be politically infeasible in terms of the U.S. Congress, he felt it would be infeasible in terms of the internal politics of the Obama administration, which according to Scheiber featured a split at the very beginning between a Romer/Summers desire to go big on stimulus and Geithner/Orszag concern about freaking out financial markets. Summers wanted to win the inside policy argument, and thought that heading in with a lower ask would make that more likely.

I'm not sure I've talked about this before. But as frustrating as the whole thing is, it was perfectly reasonable for Summers to think this way. However, I wonder if there was another route they could have considered.

What if Summers and Romer both agreed that they needed the same ~$1.8 trillion for the stimulus. But instead of Summers concluding that they wouldn't get that from Congress and even from some inside the administration and thus they should shoot fro a lower number, he and Romer go the complete opposite direct. They go to Obama and Congress and say they need a higher number than what they really need, say something like $3 trillion. Could they have gotten the $1.8 trillion they thought they needed if they would have primed Obama and Congress for a higher number and then negotiated down to the real number from there?

Obviously it's hard to say. And that strategy would run big risks, mainly that it would throw people who were already skeptical about the idea of stimulus off the fence entirely. Maybe the skeptics see that big of a number and just outright reject the idea completely. Then the economy and the administration is really screwed. Well, that is unless you are conservative and believe the stimulus was a waste. But if the strategy worked and you got them to negotiate down to the number they really wanted it's possible the economy would have been better off.

Yglesias concludes with a good reason why this probably wouldn't have worked. He thinks there just weren't enough people in the administration and Congress that though fiscal stimulus in the economic situation we faced was a viable option. I think that's correct. Running up a big deficit during an economic downturn is counterintuitive. Thus many people reject it outright without understanding the economic argument underneath the policy proposal. And what's worse, I'm not sure many more people have come to accept that policy as viable since then.

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