Think Again: Obama’s New Deal

“Obama’s Stimulus Package Was an Epic Failure
That Haunted His Presidency.”

No. U.S. President Barack Obama’s $787 billion stimulus bill was certainly a political failure. Obama signed it during his first month in office, cutting taxes for more than 95 percent of American workers, while pouring cash into health care, education, energy, infrastructure, and aid to victims of the Great Recession. It was textbook Keynesian economics, using public dollars to revive private demand, but within a year, the percentage of those who thought it had created jobs was lower than the percentage of Americans who believe Elvis is alive. Republicans mocked it as “Porkulus,” a bloated encapsulation of everything wrong with the Obama regime, and it helped launch their Tea Party-fueled political revival. The media breathlessly chronicled its silly expenditures, like costumes for water-safety mascots; silly-sounding legitimate expenditures, like a brain-chemistry study of cocaine-addicted monkeys; and fictitious expenditures, like levitating trains to Disneyland. Democrats got so weary of the nonstop ridicule that they stopped using the word “stimulus.”

Nearly four years later, Obama’s economic recovery bill — and the tepid economic recovery that followed it — is at the heart of the debate over his campaign for a second term. To his Republican challenger, Mitt Romney, the stimulus was a big-government boondoggle that blew up the national debt without putting Americans back to work, a profligate exercise in tax-and-spend liberalism, crony capitalism, and airy-fairy green utopianism. Obama doesn’t use the s-word today, but he does argue that the bill, formally the American Recovery and Reinvestment Act, saved the country from a second Great Depression, ending an economic nightmare in the short term (the Recovery part) while laying the groundwork for a more competitive and sustainable economy in the long term (the Reinvestment part). Meanwhile, disgruntled liberals complain that the stimulus was far too small, because Obama was far too timid, and that jobless Americans are still paying the price for the president’s spinelessness.

When it comes to the Recovery Act, the facts are on Obama’s side.

For starters, there is voluminous evidence that the stimulus did provide real stimulus, helping to stop a terrifying free-fall, avert a second Depression, and end a brutal recession. America’s top economic forecasters — Macroeconomic Advisers, Moody’s Economy.com, IHS Global Insight, JPMorgan Chase, Goldman Sachs, and the Congressional Budget Office — agree that it increased GDP at least 2 percentage points, the difference between contraction and growth, and saved or created about 2.5 million jobs. The concept of “saved or created” has inspired a lot of sarcasm — Obama joked after his 2009 Thanksgiving pardon that he had just saved or created four turkeys — but it simply means 2.5 million more people would have been jobless without the Recovery Act. The unemployment rate might still be in the double digits.

Of course, as Obama’s critics on the left and right correctly point out, the 8 percent U.S. jobless rate is still terribly high. And there’s no way to run a double-blind study of an alternative U.S. economy without the stimulus, so there’s no smoking gun to prove the stimulus launched a recovery. But the ballistics certainly match. The economy shrank at a Depression-level rate in the fourth quarter of 2008, and job losses peaked in January 2009. After the stimulus bill passed in February, however, output had its second-biggest quarterly improvement in 25 years, and employment had its biggest quarterly improvement in 30 years. The recession officially ended that June. A Washington Post review of Recovery Act studies found six that showed a positive economic effect versus one useful study (by prominent Republican economist John B. Taylor) that concluded the stimulus failed — and critics noted that Taylor’s data just as easily support the conclusion that the stimulus was too small.

Keynesian stimulus has since become a political football, but before Obama took office, just about everyone agreed that when the economy slumps, government can boost growth and create jobs by injecting money into the economy, whether by taxing less or spending more. In early 2008, every Republican and Democratic presidential candidate proposed a stimulus plan — in fact, Romney’s was the largest. And Republicans still use Keynesian pump-priming arguments to push tax cuts, military spending, and other stimulus they happen to support. Of course, the most powerful argument for aggressive stimulus has been the experience of European countries like Britain and Spain that have turned back toward austerity and stumbled back into recession.

Republicans have ripped the Recovery Act’s food stamps, unemployment benefits, and other aid to the less fortunate for fostering a culture of dependency, but with a few exceptions (more generous tuition grants for low-income students and tax credits for low-income workers), the handouts were temporary. And there’s no doubt that they made an extraordinarily painful time less painful, lifting at least 7 million Americans above the poverty line while making 32 million poor Americans less poor. As a result, the poverty rate increased only slightly during the worst downturn since the 1930s. Homelessness actually declined slightly, largely because an innovative Recovery Act experiment in “homelessness prevention” helped house 1.2 million Americans in crisis. If half of them had ended up on the streets instead, the country’s homeless population would have doubled.

Politically, it’s awkward for the president to argue that without the stimulus, the bad economy would have been much worse. It sounds lame to point out that recessions caused by financial meltdowns tend to be unusually long and nasty. But it’s true.

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Not really. In early January 2009, the incoming president’s transition team did release a politically disastrous report warning that the jobless rate could hit 9 percent without the Recovery Act, while predicting it would stay below 8 percent with the Recovery Act, a gaffe that launched a thousand talking points after unemployment reached 10 percent despite the Recovery Act. The report was cluttered with caveats about “significant margins of error” and such. But nobody remembers caveats. The authors, economists Christina Romer and Jared Bernstein, even included a humdinger of a footnote about the pre-stimulus baseline: “Some private forecasters anticipate unemployment rates as high as 11% in the absence of action.” But nobody remembers footnotes. We remember that unemployment still hasn’t gotten below 8 percent, because Republicans have never stopped reminding us. And the media have repeatedly cited the report to dismiss the Recovery Act as a failure by the administration’s own standards.

Clearly, the 8 percent prediction was a mistake — an understandable mistake, a marketing mistake, a mistake well below Obama’s pay grade, but a mistake. The Romer-Bernstein report was not nearly pessimistic enough. Unemployment passed 8 percent before the stimulus money even started to flow. But that’s no reflection on the stimulus. Romer and Bernstein correctly predicted that the Recovery Act would reduce unemployment by a couple of percentage points — what they underestimated was the pre-stimulus baseline. They knew things were awful, but they had no idea just how awful. Hardly anyone did back then. The Bureau of Economic Analysis initially pegged growth for the fourth quarter of 2008 at a horrific -4 percent, but that was later revised to a beyond horrific -9 percent; at that rate, the United States would have lost more than an entire Canada’s worth of output in 2009.

Even at the time, Obama and his advisors understood that the Recovery Act would not restore full employment by itself; as Vice President Joe Biden told me in his quirky way, it was never supposed to carry the whole sleigh. The White House expected the Wall Street bailout, the auto-industry bailout, and its fledgling plan to aid struggling homeowners to provide additional support for the economy. Obama’s top economic aide, Larry Summers, has been savaged for keeping Romer’s warnings that $1.8 trillion would be needed to close the output gap out of a key memo to the president, but even Romer agrees that’s a bum rap. The memo did warn that an $850 billion stimulus would close “just under half of the output gap,” insufficient to return the unemployment rate to its “normal, pre-recession level.” As one aide told me, whatever you think of Obama, he knows how to multiply by two.

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Yes and no. While Republicans have been trashing the stimulus as big government run amok, more liberal critics led by New York Times columnist (and Nobel-winning economist) Paul Krugman have dissed it as ludicrously small. And it’s true: More stimulus would have closed more of the output gap and replaced more of the 8 million jobs lost in the Great Recession. More tax cuts would have injected more money into the economic bloodstream. More public works would have created more jobs for laid-off construction workers. More aid to states would have prevented America’s governors from offsetting the Recovery Act’s impact by raising taxes, laying off teachers and other public employees, and slashing Medicaid and other services. Overall, their spending cuts and tax hikes pulled almost as much money out of the economy as the stimulus pushed in, and public-sector employment has shrunk during the Obama presidency.

Even so, the common belief among liberals that pumping inadequate stimulus into the economy was Obama’s original sin is ahistoric and unfair. The Recovery Act was still massive — the latest estimate is $831 billion, larger than the entire New Deal in constant dollars — and it wasn’t Obama’s fault it wasn’t bigger.

In September 2008, a mere $56 billion stimulus package died in the Senate, with two Democrats voting no. And after the wildly unpopular bank bailout, there was even less congressional appetite for big spending. By late November, as the market’s death spiral created a grudging consensus that Congress needed to act, 387 predominantly left-leaning economists — many of whom later trashed Obama for skimping on stimulus — signed a letter calling for a package of just $300 billion to $400 billion. Even by January 2009, House Speaker Nancy Pelosi, the heroine of the left, was reluctant to approve anything above $600 billion. The president was way out in front of his Democratic blockers.

Presidents do not have magic wands, and Republicans had decided to oppose the Recovery Act en masse. So unless Obama wanted to start his presidency with an epic failure during an economic emergency, he needed to round up 60 votes in the Senate. Democrat Al Franken was still embroiled in a recount in Minnesota, so Obama needed at least two Republicans to support the stimulus. The three moderate GOP senators — Olympia Snowe and Susan Collins of Maine, and Arlen Specter of Pennsylvania — along with conservative Democrat Ben Nelson of Nebraska all agreed that none of them would vote yes unless all of them were satisfied. And all insisted that the stimulus had to be less than $800 billion. Congressional sources confirm that at least half a dozen additional centrist Democratic senators also drew an unpublicized line in the sand at $800 billion. Everyone who was in the room during the congressional horse-trading agrees that Obama got as much as he could have. “There simply wasn’t any room for anything bigger,” then-Senator Byron Dorgan, a Democrat from North Dakota, told me. “That’s representative government.”

Some of Obama’s progressive critics acknowledge that he couldn’t have gotten more stimulus in February 2009, but they complain that he should have gotten more out of Congress once it became clear the initial jolt wouldn’t restore a vibrant economy. It’s true that some of Obama’s advisors vastly overestimated the ease with which they could go back to Capitol Hill. Even Summers, who doesn’t make admissions like this often, acknowledged to me that he had been wrong and his rival Krugman, who had warned that inadequate stimulus would give stimulus a bad name, had been right. “At the time, I didn’t agree,” Summers said. “That was a mistake.”

Obama did end up squeezing another $700 billion of stimulus out of an extremely reluctant Congress, through a dozen separate bills. It wasn’t easy. Snowe and Collins were the only Republican senators to support an extension of unemployment benefits. Republicans also filibustered a bill to save teaching jobs; Snowe and Collins finally agreed to a shrunken version. (Specter did too, but he had already switched to the Democratic Party after GOP backlash over his stimulus vote.) It took more than two months for Obama to finagle two Republican votes for a $42 billion bill to cut taxes for small businesses. “What could be more Republican than that?” asks former Sen. George Voinovich, an Ohio Republican who defied his party leaders to back the bill. “Instead of doing what was right, partisan politics always came first.”

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Wrong. This is the biggest misconception about the American Recovery and Reinvestment Act, and it’s understandable, because it was marketed as a jobs bill. But it was about reinvestment as well as recovery, long-term transformation as well as short-term stimulus.

For starters, the Recovery Act was the biggest, most transformative energy bill in history, financing unprecedented government investments in a smarter grid, cleaner coal, energy efficiency in every imaginable form, “green-collar” job training, electric vehicles and the infrastructure to support them, advanced biofuels and the refineries to brew them, renewable power from the sun, the wind, and the heat below the earth, and factories to manufacture all that green stuff in the United States. In 1999, President Bill Clinton proposed a five-year $6.3 billion clean-energy bill that was dismissed as unrealistic and quickly shelved. A decade later, during his first month in office, Obama poured $90 billion into clean energy with a stroke of his pen, leveraging an additional $100 billion in private capital. The entire renewable-energy industry was on the brink of death after the 2008 financial crisis, but thanks to the stimulus, Obama has kept his promise to double the generation of renewable power during his first term.

The stimulus was also the biggest and most transformative education reform bill since the Great Society, shaking up public schools with a “Race to the Top” competition designed to reward innovation and punish mediocrity. It was a big and transformative health-care bill, too, laying the foundation for Obama’s even bigger and more transformative reforms a year later; for example, it poured $27 billion into computerizing America’s pen-and-paper medical system, which should reduce redundant tests, dangerous drug interactions, and fatal errors by doctors with chicken-scratch handwriting. It included America’s biggest foray into industrial policy since FDR, the biggest expansion of anti-poverty initiatives since LBJ, the biggest middle-class tax cut since Ronald Reagan, and the biggest infusion of research money ever. It sent $8 billion into a new high-speed passenger rail network, the biggest new transportation initiative since the interstate highways, and another $7 billion to expand the country’s existing high-speed Internet network to underserved communities, a modern twist on the New Deal’s rural electrification.

Critics often argue that while the New Deal left behind iconic monuments — the Hoover Dam, Skyline Drive, Fort Knox — the stimulus will leave a mundane legacy of sewage plants, repaved potholes, and state employees who would have been laid off without it. But it’s creating its own icons: the world’s largest wind and solar plants, the country’s first cellulosic ethanol refineries, zero-energy border stations, a bullet train that will connect Los Angeles to San Francisco in less than three hours. It’s also restoring old icons: the Brooklyn Bridge and the Bay Bridge, the imperiled Everglades and the dammed-up Elwha River, Seattle’s Pike Place Market and the Staten Island ferry terminal. It’s creating an advanced-battery industry for electric vehicles almost entirely from scratch, financing factories that are supposed to boost the U.S. share of global capacity from 1 percent when Obama took office to about 40 percent in 2015. Its only new government agency, ARPA-E, an incubator for cutting-edge energy research modeled on the Pentagon’s DARPA, is already producing breakthroughs that will help accelerate the transition to a low-carbon economy.

Its main legacy, like the New Deal’s, will be change.

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No. Experts had warned that 5 percent of the stimulus could be lost to fraud, but investigators have documented less than $10 million in losses — about 0.001 percent. “It’s been a giant surprise,” Earl Devaney, the legendary federal watchdog who oversaw the stimulus as head of the Recovery Accountability and Transparency Board, told me. “We don’t get involved in politics, but whether you’re a Democrat, Republican, communist, whatever, you’ve got to appreciate that the serious fraud just hasn’t happened.”

The Porkulus attacks are particularly brazen, because the usual definition of “pork” is an earmark for a specific project inserted by a specific legislator, and the Recovery Act was the first spending bill in decades with no earmarks. There were a few quasi-earmarks, most notably the $1 billion FutureGen clean-coal project inserted by Senate Majority Whip Dick Durbin of Illinois, but they paled in comparison to the 6,376 earmarks stuffed into President George W. Bush’s last transportation bill. Most of the supposedly wasteful spending singled out by Republicans was never in the stimulus (like “mob museums”), was removed from the stimulus (like “smoking cessation funds”), or wildly distorted something in the stimulus (like an alleged $248 million outlay for “government furniture,” which was actually a project to build a new Department of Homeland Security headquarters that would have furniture in it).

Still … Solyndra! The California solar firm that went belly up after receiving a half-billion-dollar stimulus loan has become the Republican Party’s one-word response to any stimulus-related achievement. It’s supposedly a case study in ineptitude, cronyism, and the failure of green industrial policy. Republicans investigated for a year, held more than a dozen hearings, and subpoenaed hundreds of thousands of documents, but they uncovered no evidence of wrongdoing. “Is there a criminal activity? Perhaps not,” the lead Republican investigator, Rep. Darrell Issa, told Politico. “Is there a political influence and connections? Perhaps not.”

Solyndra was a start-up that failed. It happens. In early 2009, Solyndra and its revolutionary cylindrical solar panels were the toast of Silicon Valley, raising $1 billion from elite investors like the Walton family of Wal-Mart fame, Oklahoma oil magnate George Kaiser, and British mogul Richard Branson. Kaiser was an Obama fundraiser, but the Waltons were Republican donors; as Issa acknowledged, there was no evidence of any improper political influence. In fact, the Bush administration fully embraced Solyndra and tried to fast-track its loan. The loan program originally had bipartisan support; the goal was to help firms like Solyndra cross the so-called Valley of Death for innovative technologies with major start-up and scale-up costs. Some loans would go bust, but that’s why Congress provided loan reserves, enough to cover plenty of Solyndra-sized failures. Several independent reviews have found no danger that taxpayers will be on the hook for more losses.

Solyndra’s failure is often described as a failure of the solar industry, but in fact it’s just the opposite. Solyndra produced efficient but pricey panels; the company was essentially a bet that solar power would remain expensive. Instead, the price of solar has crashed by more than two-thirds since 2009, partly because of the stimulus but also because the Chinese government dumped $30 billion into its own solar manufacturers. In any case, the collapsing prices that doomed Solyndra reflect an industry on a roll; U.S. solar installations soared from 290 megawatts in 2008 to 1,855 megawatts in 2011, and 7,000 megawatts of new projects were proposed in the two months before Solyndra went bust — the equivalent of seven new nuclear reactors.

The latest bogus Republican attacks — obviously in response to accusations that Romney outsourced jobs at Bain & Co. — have accused Obama of outsourcing jobs in clean-energy industries through the stimulus. In fact, the stimulus insourced jobs. For example, it brought the U.S. wind industry back from the dead, creating manufacturing as well as installation jobs. In 2006, the United States imported 80 percent of the components in its wind turbines; after the stimulus, that fell to 40 percent. Yes, many of those new factories are foreign-owned, but they put Americans to work; it really doesn’t matter whose name is on the corporate polo shirts. The Spanish company Iberdrola delayed wind farms in Illinois and Texas after the global economy collapsed in 2008; the day after the stimulus passed, the company announced it would pour $6 billion back into U.S. wind projects.

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Yes. This kind of statement is usually intended as an insult; critics on the right and the left describe the Recovery Act as the essence of Obama-ism. It is, but not in the way they mean.

To Republicans, the “failed” stimulus is a classic Obama exercise in big-government liberalism, fiscal irresponsibility, and incompetence. But those are all bum raps. The Recovery Act included $300 billion in tax cuts, just as Republicans had requested; ARPA-E was its only new government agency, and most of its spending went to priorities (from highways to electric vehicles to unemployment insurance) that had always been bipartisan until they were associated with Obama. The stimulus did increase the deficit — that’s the whole point of Keynesian stimulus — but its impact on the long-term debt was negligible compared with the Bush tax cuts, the wars in Iraq and Afghanistan, and collapsing revenues during the Great Recession. And the Recovery Act really was an exercise in good government. Not only was it scandal-free and earmark-free, on time and under budget, but it also engineered a quiet bureaucratic revolution, harnessing the power of competition to award tax dollars to the worthiest applicants instead of just spreading cash around the country. The stimulus created dozens of competitive, results-oriented races to the top for everything from lead-paint removal to the smart grid to innovative transportation projects.

Yet somehow, to many liberals, the stimulus exposed the president as a spineless sellout, more interested in cutting deals than chasing dreams, happy to throw his base under the bus, and desperate to compromise with uncompromising Republicans. But progressive purity wouldn’t have gotten 60 votes in the Senate. And Obama isn’t a progressive purist. In reality, the Recovery Act provided early evidence that Obama is pretty much what he said he was: a left-of-center technocrat who is above all a pragmatist, comfortable with compromise, solicitous of experts, disinclined to sacrifice the good in pursuit of the ideal but determined to achieve big things. It reflected his belief in government as a driver of change, but also his desire for better rather than bigger government. And it was the first evidence that despite all his flowery talk during the campaign, he understood that bills that don’t pass Congress don’t produce change.

Ultimately, the stimulus was the purest distillation of what Obama meant by Change We Can Believe In. It was about saving the economy from a calamity, but also changing the economy to prepare America to compete in the 21st century. On the trail, Obama often talked about cleaner energy, better schools, health reform, and fairer taxation not only as moral imperatives, but as economic prerequisites for American renewal and leadership. He warned that the United States couldn’t afford to let the green industries of the future drift abroad; or fail to prepare children for the information age; or lose control of skyrocketing health-care costs that were bankrupting families, companies, and the country. And the Recovery Act took steps — in some cases, giant steps — in all those directions. Nearly four years later, the stimulus has become a punch line, a talking point in a political battle over big government, but it’s moving America toward that hopey-changey policy vision he laid out during his last campaign.

In the end, the stimulus didn’t live up to the hype, but it made things better. That’s the whole point of change.

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