About That Next Bailout: One Big Lesson from 2009

About That Next Bailout: One Big Lesson from 2009August 4, 2020

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.

“There’s not much danger that I’ll become anorexic,” Summers quipped.

In other words, the risks of undershooting during a crisis far outstripped the risks of overshooting. Obama agreed to go big, and in his first month in office, he signed an unprecedented $800 billion economic recovery bill—twice as large as a public request by hundreds of liberal economists, four times as large as Obama’s own campaign plan.

In retrospect, most economists agree, more would have been better.

Obama’s Recovery Act helped end the Great Recession and launch a decadelong recovery, but today even his former aides believe that the recovery was weaker and slower than it should have been because the stimulus was insufficient. There’s a broad consensus in the economics profession that despite the administration’s anxieties about undershooting, Washington still undershot.

And now, in an even more severe crisis, it may be poised to undershoot again.

“Once again, big picture, the risks of doing too little far outweigh the risks of doing too much,” Summers said in an interview. “This time, the hole is even bigger than it was in 2009, but I’m not sure that lesson has been learned.”

The coronavirus has already delivered a more devastating economic blow than the financial meltdown 12 years ago, reversing almost a decade’s worth of job gains in April alone, shrinking the economy at an unheard-of 32 percent annual rate in the second quarter. Early in the pandemic, Congress acted aggressively to pump stimulus into the dying economy. It passed four bipartisan relief bills worth $3.6 trillion, dwarfing the deficit spending from the entire Great Recession, actually increasing household incomes while helping to stave off widespread starvation and an instant depression.

Now Washington is considering a fifth package that could add at least another trillion dollars to the tab. But with unemployment still in double digits, expanded benefits to laid-off workers expiring at the worst possible time, and the virus still on the rampage, economists are warning that far more stimulus will be needed to lift the country out of the abyss.

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. There’s a tension between massive relief bills and President Donald Trump’s message that the recovery is already rocking—and Republican senators like Rand Paul of Kentucky, Ron Johnson of Wisconsin and Ben Sasse of Nebraska are starting to express ideological discomfort with Big Government spending bills at a time of record-shattering deficits.

“How long can we just keep throwing money at the problem?” asked one Republican staffer on the Senate side. He then answered his own question: “Not forever.”

The initial fiscal stimulus bills, along with a fusillade of monetary stimulus the Federal Reserve has deployed to prop up corporations, were designed as stopgap measures to blast cash into the economy until the virus could be contained. But the virus has not been contained, and the Fed’s lending powers are not designed to provide direct aid to ordinary Americans. Fed Chairman Jerome Powell, pushing the boundaries of traditional Fed rhetoric, has practically begged Congress to be more aggressive to prevent the recovery from faltering.

Two months ago, House Democrats took up his challenge, passing an eye-popping $3 trillion HEROES Act crammed with aid to cash-strapped states, communities and individuals. Senate Republicans as well as Trump administration officials declared the bill dead on arrival, ridiculing it as an over-the-top left-wing wish list, citing early signs of recovery to justify a wait-and-see approach. GOP leaders now say they agree that more relief is needed, and last week, they finally unveiled a $1 trillion proposal that can at least be the basis for negotiations with Democrats. But they didn’t sound overly enthusiastic about it, especially a provision demanded by the White House to authorize a new FBI headquarters, and Senator Lindsey Graham of South Carolina warned that half the divided Republican caucus might oppose any stimulus deal.

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. Democrats also oppose Republican provisions like expanded tax deductions for business meals and conditions that schools must commit to open in person to qualify for certain assistance, while Republicans oppose Democratic efforts to boost funding for food stamps, aid to states, and election protections. The White House has even objected to Democratic calls for increased funding for the Centers for Disease Control and Prevention.

After impressive job gains in May and June, unemployment claims are now rising again as new outbreaks create new restrictions, and polls show that most of the public wants government to do more to support the economy. But the urgency in Washington seems to be fading, and it’s not clear that Congress will manage to act before it goes home in August.

“We’ve seen what happens when there’s not enough stimulus, but for whatever reason you don’t get the sense that people’s hair is on fire,” says economist Heather Boushey, president of the left-leaning Washington Center for Equitable Growth.

Democratic veterans of the last stimulus wars have watched the new GOP approach to stimulus with a combination of rage, dread and eye-rolling amusement. They’ve grumbled as some of the same Republican leaders who denounced any fiscal support for Obama’s economy as deficit-busting recklessness poured taxpayer dollars into Trump’s economy without qualms. But now that qualms are emerging, they worry that another premature pivot from stimulus to austerity will produce even more pain for families and businesses—and they’re baffled that Trump doesn’t seem to fear the political consequences of an understimulated economy.

“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.”

Shortly after Obama’s election, 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. Furman had two messages for Galbraith: It needs to be even bigger, and you need to say so publicly. The economy was imploding fast, and Furman was worried that unless advocates outside Obamaworld started floating much more aggressive spending demands, the president’s eventual proposals would sound extreme.

Galbraith agreed that the stimulus needed to be much bigger—he was thinking $900 billion for the first year alone—but he was amused that the incoming power brokers were so eager to be outflanked. It felt like the establishment was trying to gin up an insurgency.

“The push was: We need you to be out there, the bigger the better,” recalls Galbraith, a University of Texas professor whose father was the New Dealer John Kenneth Galbraith. “They thought it could help create space for a number they could actually get.”

The rationale for emergency stimulus during a sharp downturn is simple: When the private sector contracts, only the public sector can expand into the void. Otherwise, businesses will slash their payrolls and investments, which leaves ordinary people with even less money to spend, which forces businesses to lay off even more workers and buy even less equipment, and so on down the drain. The godfather of stimulus, John Maynard Keynes, suggested that even if the government merely pays people to dig holes and fill them back up, it can help break this vicious cycle of fear. And a broad range of studies have shown that more effective forms of government stimulus, especially aid to lower-income families that are the most likely to spend it, can have a “multiplier effect” that promotes a virtuous cycle of renewed confidence.

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. As Summers warned in a memo to Obama, “insufficient fiscal impetus could put the recovery at risk, with catastrophic consequences.” With the economy losing nearly 800,000 jobs a month, the Obama team ultimately agreed to pursue a gigantic short-term stimulus to try to avoid a depression while signaling concern about long-term fiscal discipline to try to reassure markets.

Some liberals still criticize Obama for failing to fight for even more than he got, but the size constraint was the Senate, where three Republicans and six moderate Democrats whose votes were needed to pass the bill threatened to kill it if the price tag exceeded $800 billion. As Furman puts it: The White House was in the deep end of the pool.

“We needed to act quickly, and the politics didn’t support anything bigger,” Furman says. “We also figured that if we needed more, we’d just go back to Congress and get it.”

That was a huge miscalculation.

The Tea Party movement began agitating against Obama and the national debt almost immediately after the stimulus passed, and the president found that even stimulus measures that seemed relatively uncontroversial—aid to states to avoid teacher layoffs, tax cuts to encourage businesses to hire workers, repairs for crumbling bridges and other infrastructure investments—ran into ferocious Republican resistance in Congress. One routine bill to extend unemployment benefits was delayed for months after the death of West Virginia Senator Robert Byrd denied the Democrats a filibuster-proof majority. Fox News and conservative talk radio were on fire about a new era of porky socialism, and even many congressional Democrats were desperate to change the subject from Big Government and big spending.

Obama’s rhetoric shifted, too, gradually focusing less on the economic nightmare he had inherited and more on the “green shoots” sprouting in the monthly economic data. There was an unofficial White House ban on “spiking the football” or “dancing in the end zone,” so the president and his team tempered all talk about progress with acknowledgments that people were still in pain. But after the Great Recession ended in 2009 and job growth resumed in 2010, they did start to accentuate the positive, with talking points stressing long-term fiscal responsibility over short-term stimulus. Especially after Republicans took back the House on a Tea Party platform, Obama wanted to show he got the message.

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. Bernstein remembers one time when he talked up green shoots on C-SPAN, a caller asked whether he was smoking green shoots.

“There’s such a powerful temptation to see a phantom recovery in every optimistic data point,” Bernstein says. “And even real green shoots need to be watered, or else they shrivel.”

A variety of econometric studies have concluded that the Recovery Act and several smaller under-the-radar stimulus measures over the rest of Obama’s first term helped save millions of jobs and avoid much worse outcomes. But several studies also found that the outcomes could have been better if the government sector had not contracted overall in the aftermath of the Great Recession, in sharp contrast to its expansions after previous recessions.

The main problem was that stimulus at the federal level was offset by drastic layoffs, service reductions and tax increases at the state and local level, an anti-stimulus that could have been prevented with more federal aid to states and communities. As a result, the Obama economy didn’t rapidly bounce back with the kind of “V-shaped recovery” that recession-fighters yearn for. It slowly climbed back with years of steady but unspectacular 2 percent annual growth.

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 $7.4 trillion output gap, more than one third of annual gross domestic product; the Committee for a Responsible Federal Budget estimates the gap at $5.2 trillion. Either way, if the economy falters again, that yawning gap will grow.

University of Chicago economist Austan Goolsbee, another former Obama aide, says the crises of 2020 and 2009 are not identical twins, or even siblings, but cousins.

The problem in 2009 was a classic collapse of demand caused by a financial panic that was triggered by a real estate bust. The problem in 2020 is an out-of-nowhere contagious disease that forced businesses to close and consumers to stay indoors. The stimulus bills of the Obama era combined emergency relief designed to stanch the immediate bleeding with longer-term investment designed to build a more resilient economy. This year’s stimulus bills have been pure relief, designed to tide Americans over for a few months under the assumption that the economy would quickly V-curve back to normal once the pandemic was under control. In 2009, the Republican opposition adamantly opposed any government support for the economy under Obama, even though he had just taken office; in 2020, the Democratic opposition has strongly supported stimulus under Trump, even though it’s an election year.

The most striking difference may be the attitude of the president, who has exhibited none of Obama’s hesitation about spiking the football even though the economy is nowhere near where it was before the pandemic. Perhaps because the crisis hit long after he arrived in the White House, or just because he enjoys bragging about his own economy, Trump consistently downplayed the magnitude of the crisis even after the sudden loss of 20 million jobs, while hyping the partial recovery of 7 million jobs as a spectacular comeback. Goolsbee told me that Trump’s chest-thumping celebrations during an ongoing disaster reminds him of a 2014 game when a defensive lineman for his beloved Chicago Bears, losing by 25 points in the fourth quarter, blew out his knee celebrating a meaningless sack of a backup quarterback.

“It just looks idiotic to celebrate when things are still awful,” Goolsbee said.

Trump’s political brand is all about strength and winning, so it’s natural for him to put a positive gloss on a tough situation—and after successfully portraying 5 percent unemployment as a catastrophe in 2016, it’s not necessarily idiotic for him to think he can portray 12 percent unemployment as an accomplishment in 2020. But it does complicate the stimulus debate, because normally a president up for reelection would be pushing for as much as possible. His message that economic rejuvenation is already happening has undercut the argument that additional economic relief is needed, at a time when some anti-government Republicans are already grumbling about drunken-sailor spending.

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. In Capitol Hill negotiations, Republican leaders have proposed a slimmed-down deal that would merely extend unemployment benefits and provide some funding to schools before Congress leaves for its August recess, but Democrats have insisted on something bigger.

Politically, it’s an odd situation. In 2009, stimulus quickly became unpopular—partly because it followed a massive taxpayer-funded Wall Street bailout, partly because Republicans were united in opposition. But in 2020, polls by the liberal group Data for Progress show that 69 percent of the electorate believes government should be spending even more, while only 5 percent believes it’s spending too much. Nevertheless, the Democrats—including Trump’s opponent in November, Joe Biden—are pushing much harder than the president and his party for more stimulus, even though another lesson of 2009 is that the public ultimately holds the incumbent president responsible for the state of the economy.

“We learned the hard way that a bad economy is bad for the incumbent, and everything else is noise,” says Dan Pfeiffer, Obama’s White House communications director. “This is Trump’s economy! It’s bananas that the Republicans aren’t clamoring to do more to fix it.”

Democrats are certainly clamoring to do more than Republicans want to do; the HEROES Act is three times larger than the GOP proposal, and some Democrats believe the recent bad news on the virus and the economy illustrate the need for an even larger package. Even Orszag, the most ardent budget hawk in the Obama White House, wrote an op-ed last week calling for more aggressive stimulus, warning that “as governments withdraw fiscal support, the economic picture is going to look worse than commonly appreciated.”

The two parties agree that the next round of stimulus should include a second round of $1,200 checks for individuals, more money for schools and additional funding for public health. As Goolsbee says, the first rule of virus economics is that you can’t fix the economics until you stop the virus, and congressional Republicans have privately mocked White House suggestions that there’s no need for more money for testing or contact tracing. The big differences between the parties revolve around the Democratic push for far more aid to states and the poor, which were found to be the most powerful forms of stimulus in the Obama era, but also fund public employee unions and welfare programs aligned with the Democratic Party.

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. If the big economic lesson of 2009 is that more stimulus is better, the big political lesson is that getting Congress to approve more stimulus is hard, and many Democrats worry that if Biden is elected, Republicans will start making it impossible in 2021. House Speaker Nancy Pelosi ultimately decided that automatic stabilizers would make the HEROES Act price tag too exorbitant, even though much of her caucus supported them.

“We ought to have a more predictable environment, where government support depends on the condition of the economy and not just the political process in Congress,” says Rep. Suzan DelBene of Washington, a member of the moderate New Democrat Coalition.

The likely alternative is more undershooting. Even President Franklin D. Roosevelt, after the early stimulus of the New Deal, pivoted toward spending cuts and balanced budgets in 1937, a shift that initially hobbled the recovery from the Great Depression, before the all-out mobilization for World War II created the ultimate federal stimulus. The politics of stimulus is always tricky. Evidence of economic improvement fuels the argument that more stimulus isn’t necessary. Evidence of continued economic pain fuels the argument that the previous stimulus isn’t working. In an instant-gratification political culture, it’s hard to make the case for repeated emergency actions, even when the emergency stubbornly refuses to end.

Most economists believe the bipartisan stimulus bills early in the Covid crisis basically did what they were supposed to do, which was to get enough public money into private hands to prop up the economy for a few months while the virus was vanquished. The problem is that the virus wasn’t vanquished, so it’s understandable that there’s less enthusiasm about repeating such an expensive process with no guarantee of a different outcome. Unlike the Recovery Act, which poured money into solar power, electronic medical records and other infrastructure designed to improve America in the long run, the CARES Act was only designed to stave off short-term deprivation. It seems to have done so successfully, but as Goolsbee puts it, we didn’t fix the furnace, so we’re just successfully burning money to stay warm.

There’s a clear comparison between the fight to revive the coronavirus economy and the fight against the virus itself. Early government efforts to contain the virus with lockdowns and mask mandates inspired Tea Party-style protests, but they also produced immediate improvements in public health statistics. Those improvements, however, only increased the political pressure to ease restrictions before the statistics justified it. Now the statistics have turned ugly again, and there doesn’t seem to be much political will for renewed lockdowns, especially when the president keeps insisting, as he did in his coronavirus briefing last week, that “we’re doing very well all over the country.”

The basic problem is that the most effective measures to fight the virus, like the most effective measures to support the economy, require an acknowledgment that things aren’t going very well, requiring the government to act in a big way. Presidential rhetoric can frame reality, and Trump’s base usually embraces his framing, but reality is still reality.

“The real lesson of 2009 is that the substance matters more than the optics,” Pfeiffer says. “There’s no communications strategy that can explain away double-digit unemployment.”

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