The New New Deal

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Michael Grunwald. The New New Deal: The Hidden Story of Change in the Obama Era (Simon & Schuster, 2012).

In this book, Time senior national correspondent Michael Grunwald provides the most comprehensive account to date of the 2009 American Recovery and Reinvestment Act, commonly known as the “stimulus” package. He calls attention to the large gap between what the legislation actually does and how it has been perceived by the American people. I’ll say more about that in my next post, but here I’ll start with the economic situation the bill was intended to address.

When Barack Obama took office in January 2009, the country was experiencing the worst economic contraction since the 1930s. Since the economy began shedding jobs in February 2008, 3.6 million jobs had been lost, and the unemployment rate had risen from 4.9% to 7.8%. In the first four months of Obama’s presidency, another 3 million jobs would vanish. Even before his inauguration, his economic team rushed to prepare legislation to counteract the downturn and put the country back to work. Congress passed the $787 billion American Recovery and Reinvestment Act in February 2009.

The Obama administration based its economic plan on the widely held “Keynesian” assumption that the federal government can stimulate aggregate demand for goods and services by temporarily spending more than it receives in revenue. Economists still debate how much Franklin Roosevelt’s New Deal saved the economy, but even if World War II spending did more to end the Depression, that’s still evidence in favor of a fiscal stimulus of some kind. Obama’s Recovery Act was more than 50% larger, in constant dollars, than the entire New Deal.

Obama’s advisors wanted the stimulus to be “timely, targeted, and temporary.” The money should go to those who were most likely to spend it quickly. So assistance to low-income people, such as tax breaks, extended unemployment benefits and food stamps, was a higher priority than extending the Bush tax cuts, which had returned more cash to the top 1% than the bottom 80%. Obama proposed the “Making Work Pay” credit for low-income workers, a “refundable” credit that gave money even to those too poor to have any income tax liability. Aid to state governments was also high on the agenda, since they could immediately use it to save the jobs of public employees. These fairly obvious forms of stimulus accounted for about three-fourths of the spending.

The President also wanted to use the economic crisis as an opportunity to make some “strategic investments” to improve American competitiveness in the global economy. The investment side of the Recovery and Reinvestment Act included a wide variety of initiatives in the areas of energy, health care, education and infrastructure.

The administration wanted to shift energy policy away from just using up our fossil fuels as fast as possible (we are using 25% of the oil being consumed in the world, but have less than 3% of the world’s oil reserves), and toward conservation, cleaner energy and less environmental damage. The Recovery and Reinvestment Act raised fuel efficiency standards, provided support for developing electric vehicles, set efficiency standards for light bulbs and major appliances, and financed the weatherization of hundreds of thousands of homes. The Department of Energy funded thousands of clean energy projects to help develop the solar, wind and biofuel industries, areas where the U.S. had been falling behind.

Initiatives in the health care area included a big push for electronic medical records to bring health information technology into the 21st century, and comparative effectiveness research to identify the treatments most worth spending money on. The President’s biggest health goal, making health insurance available to all Americans, was addressed in the Affordable Care Act of 2010.

Educational spending was based on the assumption that every child could learn if schools set high standards, adopted evidence-based innovations, and related teacher compensation to measurable results. The Act included money for the President’s “Race to the Top,” a competition among states to qualify for funding by showing how actively they were pursuing such reforms.

Finally, the Act funded improvements in infrastructure, many of which also advanced the cause of energy conservation. These included high-speed rail projects in several metropolitan areas, a more efficient energy grid, and greater access to broadband communications.

After his first year in office, President Obama was able to get only some small additional stimulus measures through Congress. The Republicans were calling for major spending cuts to trim the deficit, and Obama accepted a three-year freeze in discretionary spending. He was able to get a small bill to prevent teacher layoffs, and another to give tax breaks to small businesses. In the lame duck session after the 2010 election, he cut payroll taxes, extended unemployment benefits again, and got extensions to some of the other stimulus measures that were due to expire.

In my next post, I’ll talk about the impact of the “New New Deal” on the economy and on the political situation. Spoiler alert: It turned out to be pretty decent economics but pretty bad politics, at least in the short run.

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