Larry Summers warned in 2009: Worrying about providing too much economic stimulus during an economic crisis is like worrying he would lose too many pounds. But Washington is about to make the same mistake again.
The last time Washington debated how much stimulus to inject into a moribund economy, the mantra inside the White House was: The more, the better. It was 2009, the nation was reeling from the mortgage meltdown and President Barack Obama’s top economic adviser, Lawrence Summers—a physical as well as intellectual heavyweight—kept telling colleagues that worrying the government would spend too much money was like worrying he would lose too many pounds.
Nevertheless, stimulus fatigue seems to be spreading on Capitol Hill, especially among Republicans, and negotiations over the next package seem to be going nowhere fast.
Meanwhile, if there are rifts over the details among Republicans, there are chasms between Republicans and Democrats. Republicans want to scale back the just-expired $600-a-month expansion in unemployment benefits that Democrats inserted into this spring’s CARES Act, while Democrats oppose liability protections for businesses that Senate Majority Leader Mitch McConnell has declared a prerequisite to any deal.
“There’s an incredible temptation to say: ‘OK, we did some stimulus, things seem to be getting better, let’s move on,’” says Jared Bernstein, an Obama White House economist who is now advising Joe Biden’s campaign. “But as we saw in 2009, it’s incredibly misguided.”his aide Jason Furman met for coffee with the left-wing gadfly James Galbraith, one of 387 economists who had signed a letter urging Congress to move “quickly and decisively” on a $400 billion stimulus.
Fiscal stimulus does increase budget deficits, and there was some concern inside Obamaworld, especially from budget director Peter Orszag, that too much deficit spending by a Democratic president and a Democratic-controlled Congress would send a dangerous signal to markets about Democratic profligacy. But depressions that ravage household incomes, crush business profits and scuttle tax revenues are much worse for budget deficits.
In retrospect, Bernstein thinks he and his colleagues may have overemphasized the statistical evidence that the worst of the cataclysm was over, while underemphasizing the desperate need to continue to support struggling families and businesses. The recovery was real, and it would continue throughout Obama’s presidency and well into Trump’s, but by historical standards it was somewhat tepid.
As Summers said, the virus has created an even deeper crater than the Obama team had to try to fill. When Obama took office, his team believed America faced a $1.8 trillion “output gap” between its pre-crisis and post-crisis trajectories, and the Recovery Act filled less than half of it. Bernstein sent me nonpartisan Congressional Budget Office projections suggesting that even after the initial coronavirus stimulus, America now faces a staggering $7.
Senator Paul recently accused his GOP colleagues of sounding like socialist “Bernie bros,” and Republican senators have made it clear they aren’t happy about the FBI headquarters provision, which seems unrelated to the pandemic, but would benefit Trump’s Washington hotel by ensuring the location could not be used to build a competing establishment.
Then again, not even the Democratic HEROES Act includes the provisions that Obama veterans consider the most important omission from the Recovery Act: “automatic stabilizers” that would ensure that stimulus keeps flowing as long as unemployment remains high without need for further congressional action.
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