Beneath the Surface

Previous | Next

In my last post, I described the American Recovery and Reinvestment Act, as reported by Michael Grunwald in The New New Deal: The Hidden Story of Change in the Obama Era. Today I want to talk about the bill’s economic impact and political fallout.

The Recovery Act was first and foremost a short-term stimulus bill, so the biggest issue is its impact on job creation. President Obama signed the bill in February 2009, and the jobs outlook changed dramatically beginning in May. Net job losses had averaged 750,000 per month for the previous six months, but in the six months starting in May they averaged only about 300,000 per month. The economy didn’t actually start adding net jobs until early in 2010, but at least things were getting better instead of getting worse. More layoffs were being avoided or offset by new hires. The unemployment rate peaked at 10% in October 2009 and slowly began to fall. Economists generally credit the stimulus with saving or creating about 2.5 million jobs. In a labor force of about 150 million, that represents a reduction of about 1.7% in the unemployment rate, suggesting that it would have risen closer to 12% without the legislation.

Technically, the recession ended in June 2009, when the GDP began expanding again. The expansion was greatest in the states and industries that received the most stimulus money. The Center for Budget and Policy Priorities estimated that without the tax credits and other assistance to the poor, the poverty rate would have increased five times as much as it actually did. Grunwald says, “The leading independent economic forecasters…all agree that the stimulus helped stop the bleeding, averting a second depression and ending a brutal recession.”

The reinvestment side of the Act is also paying off, although the full benefits may not be seen for some time. The clean energy industry was struggling to get started in this country, since potential investors were put off by the high risks, the hefty startup costs, and the potentially long wait for results. The many projects funded by the Dept. of Energy allowed many promising ideas to be implemented. A company named Solazyme was now making and selling jet fuel produced by genetically engineered algae. By the end of 2010, the wind and solar industries employed almost 200,000 workers, more than the coal industry. Republicans maintained that federal investment would crowd out private investment, preferring instead low taxes on corporations and the wealthy to enable more entrepreneurship and job creation. (I think their argument would be more convincing if so much private capital weren’t already sitting idle.) Mitt Romney went so far as to accuse Obama of “killing solar energy by having the government play the role of venture capitalist.” Grunwald says that the truth is just the opposite: “The U.S. solar industry was on the brink of death before the Recovery Act, but it has expanded sixfold over the last three years.” The Act also had matching requirements that drew private capital into new industries rather than crowding it out.

Health and education also benefitted. The money that went into health information technology made it the fastest growing occupation, with over 50,000 jobs created. Comparative effectiveness research did identify more cost-effective treatments, such as a $50 drug that was just as effective as a $2,000 drug for treating macular degneration. Three million more low-income students got Pell Grants to go to college, and overall tuition aid more than doubled.

The Recovery and Reinvestment Act was not without its failures, the most publicized of which was the bankruptcy of Solyndra, a solar energy company that received a $500 million federal loan. It was a bipartisan failure in that the loan had first been proposed by the Bush administration before being approved by the Obama administration. One of Solyndra’s problems was that competition was bringing down the price of solar panels, and its panels were too costly. Another was that its Chinese competitors were getting even more government support than it was. Republicans charged but were never able to demonstrate undue political influence in the awarding of the Solyndra loan, but they did their best to characterize the entire loan program as an example of crony capitalism. To the contrary, Grunwald describes the stimulus program as a model of transparency and accountability, with a new independent oversight board and an online site where the public could follow the disbursements. The Office of Management and Budget was surprised by the nearly total absence of fraud in such a large spending bill. Knowing that loans to support risky new businesses wouldn’t all be repaid, Congress set aside $2.5 billion to cover losses, but less than that was needed.

Although Grunwald is largely supportive of the Recovery and Reinvestment Act, he is candid about its limitations. Recessions that are accompanied by severe shocks to the financial system take a long time to get over. Some of the fiscal stimulus was offset by spending reductions at the state and local level. Many projects took longer to get going than originally planned. For example, the home weatherization project was delayed by six months because Congressional Democrats wanted it covered by the Davis-Bacon law requiring federal projects to pay “prevailing wages,” although prevailing wages hadn’t yet been determined for such work. Other projects were long-term by their very nature, especially high-speed rail lines. I would add that some of the Obama administration’s “strategic investments” will have even more distant, less tangible and more controversial outcomes than commuter trains. Although the kinds of educational reform represented by Obama’s “Race to the Top” have a lot of bipartisan support, my hunch is that it will take a lot more than standardized testing and merit-based teacher pay to create environments in which disadvantaged children can learn.

Some of the limitations on stimulus were simply fiscal. At the end of George W. Bush’s presidency, forecasters projected a 10-year deficit of $5.6 trillion, in contrast to the $8 trillion surplus that had been projected when he took office. Running up more debt for the sake of fiscal stimulus was a tough sell. President Obama decided not to fight for a $450 billion transportation bill that could have helped revive the construction industry. He did fight for the American Jobs Act, known as “son of stimulus,” but by that time the Republicans controlled the House of Representatives and could easily block it.

The Recovery and Reinvestment Act itself was passed almost entirely without Republican support (no votes in the House and three in the Senate), despite the widespread calls for fiscal stimulus from groups like the Chamber of Commerce, Association of Manufacturers, the U.S. Conference of Mayors and the National Governors Association. The Republican caucus had become more conservative as swing-state moderates were defeated in the 2006 and 2008 elections. Republican leaders decided at the outset of the Obama administration not to accept the role of junior partner in any Democratic effort to improve the economy, even one that included almost as much in tax cuts as in new spending. They would condemn the stimulus as a waste of taxpayer money, hope it wasn’t too successful, and then run against the President’s “failed policies.” This strategy worked pretty well. Obama’s opponents ignored evidence of economic improvement and seized on any suggestion of waste. They made Solyndra the poster child for the entire bill. They ridiculed a study of primates undertaken to understand cocaine’s effects on the brain as “Monkeys Get High for Science.” (On the other hand, many Republicans who condemned the bill sought stimulus money for their own districts and took credit for the jobs that it created.)  The prospect that the government might help homeowners behind on their mortgage payments touched off an angry rant by CNBC commentator Rick Santelli, who called for a new Tea Party to oppose taxing the responsible to aid the irresponsible. With the election of many Tea Party candidates in 2010, further stimulation of the economy became impossible. Grunwald’s assessment: “The first two years of the Obama presidency were two of the most productive years in modern political history. Then in 2011, nothing happened….The recovery stalled while Washington was obsessing over spending and debt.”

Public perceptions of the “New New Deal” have not been based on very accurate or complete information. The economic benefits have been subtle, complex and poorly reported, while the opposition has been loud and simplistic. Obama himself said that the bill was “easy to caricature as a big-spending liberal agenda.” When he took office, the country was being engulfed by such a huge wave of layoffs that the stimulus could only reduce the damage, not reverse the trend right away. As Barney Frank says, “It would’ve been worse without me” doesn’t make a very good reelection bumper sticker. Before he took office, the President’s advisors projected that unemployment would reach 9% without a stimulus but remain under 8% with it. The truth turned out to be much worse: unemployment peaked at 10% with the stimulus but probably would have approached 12% without it. Critics could accuse the President of breaking his “promise” to hold unemployment below 8%, but that would have been quite an accomplishment considering that it was already at 8.3% in his second month in office, and rising rapidly. The President was unable to overcome the resistance to helping homeowners with their mortgages, and so he was blamed both by conservatives for trying and by liberals for not succeeding. He was also blamed for not singlehandedly achieving bipartisanship (I think that’s an oxymoron), since he was the one who had promised to change Washington. He didn’t even get credit for cutting taxes, since Republicans kept the debate focused on his proposal to raise rates for the wealthy rather than on his actual cuts for the working poor. The Making Work Pay tax credits were often unnoticed and underappreciated, since they came in the form of small differences in withholding (about $16 per week) instead of in a lump sum.

In the end, the President succeeded in improving the economy by getting a large stimulus bill passed, but he lost the battle for public opinion. The irony in this is that Barack Obama was thought of more as a “words guy” than a “deeds guy.” In office, he turned out to be better at legislating than selling his legislation to a skeptical public. Grunwald says, “Obama has the facts on his side, but so far, he doesn’t have the public on his side.”

Previous | Next

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.