Larry Summers on the insufficient stimulus

A wonkish post.

Ezra Klein with The Washington Post has a fascinating interview online with former treasury secretary Larry Summers. They talk about Keynes, regulation, financial crises, and politics. They also talk about the stimulus of early 2009. Summers says:

First, the administration proposed considerably more than Congress was willing to enact. Taking account of the addition of the AMT, the Administration’s Recovery Act proposals were cut back by about 20% in the process of passing Congress by very narrow margins.

Second, the President’s economic team advised that there was essentially no danger of excessive fiscal stimulus in 2009. I joked at the time that worrying about overdoing fiscal policy was like my losing too much weight and becoming anorexic — a conceivable possibility, but very far from the dominant risk. The President’s political advisers — rightly in my view — constrained the initial stimulus proposals to avoid sticker shock and rejection or great delay on Congress’s part.

Third, politics aside there were difficulties in moving spending rapidly in 2009. So-called shovel-ready projects often were not in fact ready to go. Almost everyone close to the process feels that Joe Biden and his team did a very good job of moving the stimulus money through the system and, as a consequence, money moved more or less on the schedule we projected in 2009. They would be the first to say that it would not have been possible to move vastly more money into quick trigger infrastructure projects. Of course it would have been possible to increase the tax cuts or assistance to state and local governments, but there were severe political limits in both those areas.

Fourth, we believed in the winter of 2009 that if, as seemed likely, more stimulus would ultimately be required, it could be passed through the Congress using the unemployment insurance extension for 2010 as a vehicle. This view proved incorrect.

All that makes sense, but a couple of salient points seem downplayed or missing entirely.

On his great blog Economist’s View, Mark Thoma raises the issue of overly rosy economic projections that left the door open for those who would later accuse the stimulus of failing:

This doesn’t explain the rosy baseline forecast for the economy that the White House put out, a forecast that has been a thorn in the side of the stimulus package ever since. Given the forecast, it didn’t look like the fiscal package did anything. Had the baseline forecast been more realistic (i.e. lower), the stimulus package would have looked better, and the case for more stimulus would have been much stronger.

Note also that it only seemed “likely” they would need more stimulus, they thought it might be enough. They’d wait and see and ask for more if it was needed. But it was nowhere near enough. Thus, politics or not, they appear to have underestimated the degree of the problem, and hence the size of the response that would be required. Summers seems to say they knew how much was needed, but couldn’t get it. I’m not so sure that they fully recognized the size of the problem they faced.

It’s interesting too that Summers neglects any mention of Christine Romer’s believe that the stimulus needed to be $1.2 trillion to fill (with multiplier effects) the estimated $2 trillion output gap. Summers never passed Romer’s opinion on to the President.

From a great piece by Ryan Lizza in The New Yorker in 2009:

Romer had run simulations of the effects of stimulus packages of varying sizes: six hundred billion dollars, eight hundred billion dollars, and $1.2 trillion. The best estimate for the output gap was some two trillion dollars over 2009 and 2010. Because of the multiplier effect, filling that gap didn’t require two trillion dollars of government spending, but Romer’s analysis, deeply informed by her work on the Depression, suggested that the package should probably be more than $1.2 trillion. The memo to Obama, however, detailed only two packages: a five-hundred-and-fifty-billion-dollar stimulus and an eight-hundred-and-ninety-billion-dollar stimulus. 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.” At the meeting, according to one participant, “there was no serious discussion to going above a trillion dollars.”