The Bottom Falls Out for America

Here's a bit from a comment piece by Joshua Green at The Atlantic magazine:

Last week, the bottom seemed to fall out of the economy all at once. Second-quarter growth was revised downward. The Dow dropped below 10,000. Sales of single-family homes plunged to their lowest level in 15 years. The White House appeared helpless. Asked whether, in hindsight, the stimulus had been too small, White House spokesman Robert Gibbs demurred. ''Nobody had, in January of 2009, a sufficient grasp [of] the sheer depth of what we were facing,'' he said. ''I think that's true for virtually every economist that made predictions.''

But that just wasn't true -- one of the economists who foresaw the depth of the crisis, Christina Romer, even works in the White House. Her arguments for a larger stimulus went unheeded.

The faltering recovery and the credibility this has cost the the White House will probably lose the Democrats one or both houses of Congress, making the insufficiency of the stimulus easily the most consequential error for an administration that has done a lot right. To appreciate how it happened, it's necessary to understand the twin imperatives that dominate White House thinking. They usually function in harmony, but on this issue clashed to devastating effect.

There's more. Go read the rest of the article.

Green diagnoses the problem of the Obama administration to be "too political saavy" and not sufficiently dedicated to principle and fact:

According to an account last fall in the New Yorker, Romer, an expert on the Great Depression, modeled the effects of stimulus packages of $600 billion, $800 billion, and $1.2 trillion, and concluded that the largest one would be necessary to fill the expected output gap over 2009 and 2010. Economists outside the White House agreed. But Romer's recommendation, deemed politically unfeasible, never got a proper hearing. Instead, two smaller measures were put forward, with Emanuel making the determination to go with a package of $675 billion to $775 billion. Politics trumped economics.

Last week, the Congressional Budget Office published an analysis of what the stimulus has done. It calculated that the package has lifted GDP by between 1.5 percent and 4.1 percent and reduced the unemployment rate by 0.7 to 1.8 percentage points. In other words, the stimulus has worked -- but not well enough to produce an adequate recovery.

The fact that Obama went for too small a stimulus is a tragedy for America. It has created this new worry about a "double dip" recession and the growing chorus that the US is into a "lost decade" like Japan. This could have been avoided if Obama had pushed hard for what was really needed, not for what was deemed to be politically expedient or possible. Politics trumped necessity. Obama finessed himself and is now in hot water as the economy stagnates.

I fully agree with Greens conclusion:

The White House insists that it could not have gotten a larger stimulus through Congress, a debatable claim. But by twice neglecting to try, it has staked its fortunes on a policy that has visibly fallen short on the issue of greatest concern, the economy. Because of the divide between the experts and the strategists, nothing is happening. Given the weak state of the economy, the White House cannot claim that the stimulus it settled for has sufficed. Unwilling to call for another one, it is left to look on silently and helplessly.