What Happened?

Atrios and Krugman linked this Romer-Bernstein chart on the Stimulus's effect on the economy. Obviously things have turned out worse, with the IMF forcasting 9% unemployment for 2010-11. Krugman blogs about what he believes Obama's economics advisors were thinking at the time. (Atrios just uses the chart to mock the Obama administration.)*

Now, I don’t have any inside information on what really happened; I do talk to WH economists, but they don’t offer -- and I don’t ask for -- any information on internal wrangling. But based on public reporting, like the Ryan Lizza article on Larry Summers -- which reads rather differently now that we know how things are really working out, or more accurately not working out -- it looks as if top advisers convinced themselves that even in the absence of stimulus the slump would be nasty, brutish, but not too long. That’s the assumption embedded in the now infamous Romer-Bernstein chart, above. So all policy needed to do was meliorate the worst, while we waited for the economy to recover spontaneously. From the Lizza article:

Summers did not include Romer’s $1.2-trillion projection. The memo argued that the stimulus should not be used to fill the entire output gap; rather, it was "an insurance package against catastrophic failure."

I don’t know why Summers etc. believed this.

Krugman is right and the stimulus should have been larger, but there were political considerations - did they have the votes? - and the European sovereign debt crisis didn't help the situation. Greece has become a convenient club for the heartless bastards in the Pain Caucus. Also, uninformed independent voters don't like government debt and the administration probably wouldn't have done a stimulus (porkulus to the rightwing) prior to their yearlong campaign to reform health care, had interest rates not already been at zero.

As Krugman would probably argue, the administration should have hit the slumping economy with overwhelming force precisely because interest rates were at zero and the Federal Reserve Bank had used up all of its conventional tools.

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*Which is why I don't like Atrios and rarely read Eschaton. That and the fact he was calling Treasury Secretary Tim Geithner "Timmeh." Look, yes Bernanke, Obama and Geithner et al. saved the financial system in ways that were more lenient on the bankers and more costly to the public than they needed to be. However, we were driving without a map and you can't really blame them for erring on the side of caution. The main thing is that the economy was in a tailspin and the governments of the rich nations coordinated successfully and stabilized the situation. However, as John Cassidy pointed out, the rescue of the financial system in the wake of the bursting of the housing bubble put the economy's inequities and unjust character in the spotlight:

The hardest part of his job, Geithner often says, is getting people to comprehend the inner logic of a financial-rescue operation, and the unpopular actions it entails. In fact, his problem may be not economic illiteracy but its opposite: Americans understand all too well what has happened. Financial crises have a way of revealing aspects of our economic system that otherwise remain obscured, such as the symbiotic relationship between Wall Street and Washington, the hidden subsidies that financial firms sometimes receive from the Fed and other government agencies, and the fact that the vast profits that firms like JPMorgan Chase and Goldman generate depend in part on an implicit guarantee from the taxpayer. When ordinary Americans are confronted with these realities, they get angry. "People just don’t get how these institutions got bailed out and their people are still making big bonuses," Mark Zandi noted. "It just does not compute. No matter what you say, you can’t persuade them it’s right."