President Obama’s decision to waste (at least) $60 B

President Obama’s decision to waste (at least) $60 B

Yesterday The New Yorker’s Ryan Lizza published an analysis of President Obama’s first two years of decision-making on economic policy. Mr. Lizza also released a 57 page memo sent to President-elect Obama by Dr. Larry Summers (later NEC Director) on December 15, 2008. Mr. Lizza reports that the memo contained input from Dr. Christina Romer (later CEA chair) and Dr. Peter Orszag (later OMB Director).

Together the memo and article provide insight into the formerly private thinking of President Obama and his advisors. Their approach to fiscal policy is quite different from my own, most especially the confidence they express in their estimates of the effectiveness of government spending to accelerate economic growth.

Even more interesting is that given this approach to economic policy, the memo and story describe a President who chose to ignore his policy advisors and to waste tens of billions of dollars of taxpayer money so he could have an inspiring talking point and help his partisan Congressional allies get their pork. That’s disturbing even if you accept the pro-stimulus approach to fiscal policy.

Three quotes in the Summers memo describe a tension in the design of the stimulus proposal.  Here is the first (p. 7):

Constructing a package of this size [“considerably larger than $500 to $600 billion”], or even in the $500 billion range, is a major challenge. While the most effective stimulus is government investment, it is difficult to identify feasible spending projects on the scale that is needed to stabilize the macroeconomy. Moreover, there is a tension between the need to spend the money quickly and the desire to spend the money wisely. To get the package to the requisite size, and also to address other problems, we recommend combining it with substantial state fiscal relief and tax cuts for individuals and businesses.

Here is the second (p. 12):

Peter Orszag and OMB career staff, together with NEC staff, have worked with the policy teams to identify as much spending and targeted tax cuts as could be undertaken effectively in six priority areas: energy, infrastructure, health, education, protecting the vulnerable, and other critical priorities. The short-run economic imperative was to identify as many campaign promises or high priority items that would spend out quickly and be inherently temporary. The long-run economic imperative, which coincides with the message imperative, is to identify items that would be transformative, making a lasting contribution to the American economy.

Here is the third (p. 12, emphasis in the original):

[I]t is important to recognize that we can only generate about $225 billion of actual spending on priority investments over next two years, and this is after making what some might argue are optimistic assumptions about the scale of investments in areas like Health IT that are feasible over this period.

I’ll interpret:

  • The advisors selected their core spending priorities by “identify[ing] as many campaign promises or high priority items that would spend out quickly and be inherently temporary.”  They started their spending decision process by fulfilling campaign promises.
  • They could identify $225 B of spending they thought met their criteria.  Even that number included optimistic assumptions on how much they could spend quickly for Health IT and other areas.
  • From a macro standpoint they felt they needed a bigger aggregate number, so they moved to lower priority items. The President chose a (hoped for) big macro effect over a smaller bill that used taxpayer money more efficiently.

Mr. Lizza then describes the President pushing back on his economic advisors:

At a meeting in Chicago on December 16th to discuss the memo, Obama did not push for a stimulus larger than what Summers recommended. Instead, he pressed his advisers to include an inspiring “moon shot” initiative, such as building a national “smart grid”—a high-voltage transmission system sometimes known as the “electricity superhighway,” which would make America’s power supply much more efficient and reliable. Obama, still thinking that he could be a director of change, was looking for something bold and iconic—his version of the Hoover Dam—but Romer and others finally had a “frank” conversation with him, explaining that big initiatives for the stimulus were not feasible. They would cost too much, and not do enough good in the short term. The most effective ideas were less sexy, such as sending hundreds of millions of dollars to the dozens of states that were struggling with budget crises of their own.

Mr. Lizza suggests the President cared more about messaging and “inspiring ‘moon shot’” spending while his advisors focused on strengthening the economy. Note that Mr. Lizza’s description of Dr. Romer’s advice on the effectiveness of aid to states contradicts the Summers memo.

Mr. Lizza then reports that on February 1, 2009, the President’s advisors asked him to tell Democratic Congressional leaders that the package must not exceed $900 B.  Here’s more from Mr. Lizza:

Senators would likely amend the bill to add about forty billion dollars in personal projects—some worthy, some wasteful. At the same time, Obama hadn’t abandoned his dream of a moon-shot project. He had replaced the smart grid with a request for twenty billion dollars in funding for high-speed trains. But including that request was risky. “Critics may argue that such a proposal is not appropriate for a recovery bill because the funding we are proposing is likely to be spent over 10+ years,” the advisers wrote.

To find the extra money—forty billion to satisfy the senators and twenty billion for Obama—the President needed to cut sixty billion dollars from the bill. He was given two options: he could demand that Congress remove a seventy-billion-dollar tax provision that was worthless as a stimulus but was important to the House leadership, or he could cut sixty billion dollars of highly stimulative spending. He decided on the latter.

If Mr. Lizza’s reporting is correct, over the objection of his economic advisors President Obama replaced $60 B of “highly stimulative spending” with a slow-spending but “inspiring” $20 B for high-speed trains and $40 B in pork for his Senate Democratic allies. And this is starting from a point at which he knew that his advisors thought that not more than $225 B of the $826 B total was high-quality, fast-spending, efficient stimulus.

p.s. This post shows why you don’t release to the public memos written to the President by his senior advisors. Presidential advisors are supposed to protect the advice they give to the President. The decision to give Mr. Lizza access to so many confidential memos to the President was either blindingly stupid or shockingly disloyal, and it damaged the institution of the Presidency.

(photo credit: Trey Ratcliff)

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