The Escape Artists: How Obama’s Team Fumbled the Recovery, by Noam Scheiber (Simon and Schuster, 368 pp., $28)
During the George W. Bush years, a fact-resistant argument arose on the left about why Republicans kept winning elections: social issues such as abortion, it was said, so unnerved white working-class voters that they voted Republican no matter what—even if doing so worked against their own economic self-interest and aggrandized the rich. Thomas Frank’s 2004 book, What’s the Matter with Kansas?, is the locus classicus of this argument.
The actual record, however, tells a different story. Bush spent the short honeymoon of his presidency designing one of the biggest federal giveaways to the working class in history. Instead of delivering a clean cut to marginal income-tax rates, as he’d suggested he’d do in his 2000 campaign, Bush gave a fig to the rich in exchange for a load of goodies for Mom & Pop. He slowed the drop in the top income-tax rate to a half-point cut per year and trimmed the estate tax while cutting the lower-rate tax brackets sizably and all at once. Bush neutered the marriage penalty, upped the child tax credit to $1,000, and put rebate checks in the mail to millions of Americans. No matter. The Thomas Frank critique remains current on the left to this day.
Now in the Obama years, another dubious argument circulates in liberal precincts: the economy has failed to recover substantively from the Great Recession because the president’s $800 billion stimulus plan of 2009 was too small. Echoes of this view resound in the writing of Nobel Prize winners Paul Krugman and Joseph Stiglitz, the recent public statements of Bill Clinton, and any number of progressive blogs. In Noam Scheiber’s Escape Artists—a heavily researched, 300-page study of Obama’s economic policymaking—it forms the organizing principle and thesis.
While Escape Artists details how Obama’s advisors formulated each aspect of their economic plan—the stimulus package, the bailouts, the regulatory pushes, the extension of the Bush tax cuts, the “jobs bill”—it doesn’t have much of a point to make about these components. Scheiber keeps returning to the argument that the 2009 stimulus package was too small—and thus, the economy Obama must run on in this presidential election year remains in a weakened state. It is an exceedingly difficult case to prove. Obama’s budget deficits have shattered all previous peacetime records. As a percentage of GDP, the average deficit of the Obama years has been half again greater than the biggest of the Ronald Reagan years. And we are to believe that the Obama fiscal intervention wasn’t big enough?
For Scheiber, the key moment occurred in December 2008, a month before Obama’s inauguration, when Christina Romer, the incoming chair of the Council of Economic Advisors, suggested that a proper government response to the economic downturn had to be in the range of $1.8 trillion. Scheiber recounts how, in the internal hurly-burly that followed, various Obama advisors—particularly Larry Summers—decided that proposing any figure over $800 billion would both brand the new administration as wild-eyed (or “nonplanetary,” in the Summers argot) and fail in Congress. Ultimately the president, given two options for the stimulus package—one amounting to $600 billion and the other $800 billion—chose the larger one, and Congress acquiesced.
In Scheiber’s telling, the smaller stimulus rendered the administration’s Keynesianism insufficient and the economic recovery that ensued only sluggish: Romer was right. Escape Artists doesn’t bother with the arcana of economic theory, but it’s likely that Romer drew her calculations from an application of something known in economics as “Okun’s law,” after Arthur Okun, chair of the Council of Economic Advisors under Lyndon Johnson. (Romer’s syllabus from her course at Berkeley certainly puts Okun’s law in lights.) A common version of Okun’s law holds that every 2 percentage-point increase in GDP provides about one-half a percentage point’s reduction in unemployment. Government expenditures and personal consumption are, of course, components of GDP; if significantly increased, they will help create not only a jump in GDP, but a decline in unemployment.
Assuming Scheiber’s account is accurate, we can infer that in December 2008, Romer argued that a $1.8 trillion stimulus—say, a mix of government spending and non-marginal tax cuts, rebates, and the like—would create a proportional GDP increase. That is: at the trough of the recession in 2009, a $1.8 trillion addition to GDP would have represented a 14-percent boost. Thus, by the Okun’s law formula, unemployment would have dived by 3.5 percent. The 10 percent unemployment the nation suffered that year would have soon evaporated to only 6.5 percent, below even today’s 8 percent-plus rate.
The question that arises, though Scheiber doesn’t address it, is whether Okun’s law has any business being treated as a plaything of policymakers as opposed to what it is: a simple descriptor of the economy’s normal operations. Properly conceived, Okun’s law is not so plastic as to support the idea that a ginning up of GDP by whatever fiat government deems appropriate will produce the desired effects. Rather, the law is useful in pointing out the employment effects of the business cycle in the absence of governmental machinations.
The real story here is that Romer was so irresponsible as to misrepresent the government’s ability to manufacture an Okun’s-law effect on unemployment. Escape Artists could just as easily have been a tale of how Obama’s economic team prevented one of its top members from taking the economy (not to mention the deficit) to the edge of the cliff. Scheiber, however, writes in support of the Romer position and is thus forced into some strange assertions.
Perhaps the strangest is that all along, Obama has had a fateful weakness for fiscal conservatism. “Though he’d entered office with an activist agenda, he had always been a deficit hawk at heart,” Scheiber writes. As for budget director Peter Orszag, he had “come under the spell of dubious political-economic theory—one that elevated deficits above all else—and so the upshot of his considerable talents was to nudge Obama in the wrong direction.” Again, the presidency under discussion here is the one that sent federal spending soaring to a quarter of GDP (from below one-fifth) and has accumulated a deficit of $1.3 trillion a year.
The more credible conclusion to draw from the Obama economic policy is that in 2009, Keynesianism was given one last try to prove its legitimacy in the real world—and failed. Keynesianism had shuffled off the stage in the 1980s after its activist monetary and fiscal policy in the 1970s delivered stagflation—the intolerable simultaneous increase in prices and unemployment along with meek economic growth. The ensuing Reagan Revolution lightened the heavy hand of fiscal and monetary institutions on the economy in the 1980s, producing a collapse in inflation and unemployment and the resurgence of growth.
Recent history has been a bitter pill for Keynesians to swallow. First, their beloved theory took blame for stagflation, and then its repudiation solved the problem. After a long period in the wilderness, Keynesianism has once again proved ineffective. Thus the new liberal shibboleth, which Scheiber’s Escape Artists exemplifies: that Keynesian stimulus hasn’t failed under Obama because it hasn’t really been tried.