When the newly elected President Obama took his place in the White House early in 2009, so too arrived a vocal economic team at odds over the political and economic ramifications of increasing the size of a soon-to-be proposed stimulus.
In the eyes of some, a stimulus package too large could be problematic -- scaring investors and proving politically impossible. Others, most notably Berkeley economist Christina Romer, argued the government should do substantially more to help the economy recover from the financial crisis, according to a new article by The New Yorker's Ryan Lizza.
"What are you smoking?" said Rahm Emanuel, Obama's incoming chief of staff, after Romer, then the incoming chair of the Council of Economic Advisers, recommended a $1 trillion economic stimulus early on, according to The New Yorker.
Romer continuously said it was imperative to enact a massive stimulus to help fill the economy's $2 trillion output gap -- or the amount of goods and services that the economy was unable to produce because it was not in full health. "Mr. President, this is your 'holy shit' moment," she said at a Chicago meeting on December 16, 2008, a month before Obama's inauguration, according to Ron Suskind's book Confidence Men.
Romer's pessimistic view has been somewhat vindicated by recent data revisions that found the economy contracted substantially more during the recession than first thought. But Obama's team as a whole seems to have underestimated the recession according to the more timid earlier estimates anyway.
The economic team in January 2009 projected that even without a stimulus package, the unemployment rate would have fallen below 7 percent by the end of 2011, according to The Washington Post's Ezra Klein. Romer herself regrets predicting in January 2009 that the jobless rate would fall below 8 percent, according to WaPo. In its latest report, the Bureau of Labor Statistics reported the national unemployment rate to be 8.5 percent.
Some advisers concerned themselves with the administration's appearance. "There was the concern that we would look wacko lefty," said Peter Orszag, then the director of the Office of Management and Budget, according to Ron Suskind's book Confidence Men. Even though Romer reportedly argued for a $1.2 trillion stimulus, Larry Summers, then the incoming director of the National Economic Council, included only lower figures in his materials for the president.
Summers also argued the government didn't have the ability to bring the unemployment rate down to pre-recession levels. In a December 2008 memo, Summers wrote that an "excessive recovery package could spook markets or the public and be counterproductive," according to The New Yorker. The full memo, which was released by The New Yorker on Monday, is available here.
Summers and Romer weren't entirely at odds on the stimulus issue. In an early discussion, Summers said he agreed with Romer's statement that the stimulus should be "at least" $800 billion, according to Confidence Men. The final stimulus package wound up around $787 billion.
But Emanuel and David Axelrod, then a senior adviser to Obama, contended Congress simply would not pass a larger stimulus. "If we asked for $1.2 trillion, it probably would have created such a case of sticker shock that the system would have locked up there," Axelrod said, according to a separate New Yorker report.