Memo Sheds Light on Debate Surrounding US Stimulus

Ryan Lizza’s new article on policy making in the Obama administration is out in the latest edition of The New Yorker. One of the documents the piece rests on is a December 2008 policy memo from Larry Summers, the former director of the National Economic Council, to President Obama on the size and composition of the stimulus; Mr. Ryan shared it with me to get my take, and some of what I said is reflected in his article.

The key thing I took away from the memo is that it does not read at all like the current story the administration gives for the inadequate size of the stimulus, which is that they knew it should be larger but had to face political reality.

(The memo is available at

Instead, the memo argues that a bigger stimulus would be counterproductive in economic terms, because of the “market reaction.” That is, Mr. Summers et al were afraid of the invisible bond vigilantes.

And to the extent that there is a political judgment here, it’s all in the opposite direction: if the stimulus is too big, we’ll have trouble scaling it back, but if it’s too small, we can always go back to Congress for more. That was deeply naïve — and I said so in real time.

Now, you can still argue that politics made a bigger stimulus impossible. But that was not at all the argument being made within the administration at the time. I’m not going to harp on this; it’s all water under the bridge, and none of the original team are even there at this point. Plus Mr. Obama has definitely toughened up — as Mr. Ryan also documents.

So consider this a footnote to the story of what went wrong.

Jared Bernstein on the Memo

Mr. Bernstein, an economist and senior fellow at the Center on Budget and Policy Priorities, makes the best case for arguing that Mr. Summers wasn’t really worrying about the invisible bond vigilantes. That’s still not how I read it, but again, it’s water under the bridge. One problem with interpreting the memo is that it does read like an imperfectly fused merge of stuff from several people; I told Mr. Lizza that I felt like someone doing textual analysis of the Bible, trying to identify which passages came from author S, which from author O, which from author R. The ones I agree with most look like R; the ones I dislike probably came from O.

Mr. Bernstein is right that the really, really key misjudgment was the notion that they could come back for more — a failure to understand the bitterly partisan nature of the situation. Mr Bernstein wrote on his blog, “On the Economy” on Jan. 23: “Larry was wrong, as was I and many others, that it would be easier to add than subtract. In fact, the evolution of that view is at the heart of the Lizza’s trenchant analysis, which at its core is an anatomy of the level of partisanship with which we are currently stuck. It’s fair to say that too few of us recognized that dynamic coming out of the gate.”

And this remains totally baffling and frustrating to me, because I thought it was dead obvious that they needed tangible success in the first round, or nothing more would be possible. And this, I have to say, goes back to Mr. Obama. He came into office believing, despite all the evidence, that he could transcend partisanship. This is the thing I worried about all through the primary; and his reluctance to give up on this vision arguably did major damage in those crucial first few months.

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Paul Krugman joined The New York Times in 1999 as a columnist on the Op-Ed page and continues as a professor of economics and international affairs at Princeton University. He was awarded the Nobel in economic science in 2008.

Mr Krugman is the author or editor of 20 books and more than 200 papers in professional journals and edited volumes, including “The Return of Depression Economics” (2008) and “The Conscience of a Liberal” (2007).

Copyright 2012 The New York Times.