Examining Obama's stimulus calculus

Like many observers, I'm baffled by Barack Obama's efforts to obtain 80 votes for his economic stimulus proposal in the Senate. Despite concerns from economists such as Paul Krugman that more than $1 trillion in stimulus is needed, Obama has proposed a $775 billion package under the assumption that the cost of the legislation will increase in Congress. He has also reportedly included a large proportion of tax cuts that Krugman and other economists think will be ineffective stimulus measures in order to try to attract additional GOP support.

While sympathetic observers like TNR's Noam Scheiber and TPM's Josh Marshall seem willing to assume that Obama is pursuing a brilliant behind-the-scenes strategy, I'm less sanguine. As I have repeatedly pointed out, the economy and other political fundamentals drive presidential elections. If the US gets caught in a Japan-style deflationary trap, it is extremely difficult to imagine Obama being re-elected. No amount of post-inauguration bipartisan goodwill will change that fact, as Matthew Yglesias correctly pointed out (see also Ezra Klein):

News reports over the weekend were talking about how Obama wants to see 80 votes in the Senate for his economic recovery package and I find that pretty puzzling... [I]t’s meaningless. If efforts at creating a strong recovery fail, the opposition will inevitable blame the governing party for the failure irrespective of who voted for what, whereas if efforts at creating a strong recovery succeed nobody will care by what margin it passed. You often find among political operators a tendency to overstate the extent to which little details matter politically when in fact it all tends to get swamped by the big picture.

This worldview is consistent with the approach to the economy taken by Bill Clinton, who passed a deficit reduction plan on a difficult party-line vote during his first year in office. It hurt his party in the 1994 midterm elections but the booming economy helped him defeat Bob Dole by a substantial margin in 1996. (Of course, whether Clinton's plan helped drive the expansion is a matter for debate, but the administration certainly seemed to believe that it did.) In this case, the downside risk of inaction is far greater than 1993 and the consensus that government action could have a stimulative effect on the economy is far stronger. For those reasons, a fundamentals-driven approach would suggest maximizing the size and effectiveness of a stimulus package that can get 60 votes to defeat a Senate filibuster. The compromises necessary to get 80 votes seem likely to represent an unacceptable risk to the economy.

By contrast, the evidence to date suggests that Obama wants to take a different approach, capitalizing on his emerging honeymoon to split the opposition party and pass his legislation on a relatively bipartisan basis. (The model here might be George W. Bush's 2001 tax cut.) According to this view, which was laid out by The Note last week, winning a big victory increases Obama's so-called political capital:

This is not about losing a vote. It’s about losing a weapon. The stimulus package is Obama’s first big legislative push, the one he absolutely cannot afford not to win, on his terms. Winning in style (think 75 or 80 Senate votes) enhances his power when the hard stuff begins.

In other words, the Obama people think the marginal benefit of 15 or 20 extra Senate votes for future legislative initiatives is worth the marginal cost of a smaller and less effective stimulus. I couldn't disagree more. As Jimmy Carter should have told Obama during the ex-presidents' lunch last week, a president presiding over a weak economy has a tough time getting anything through Congress and an even tougher time getting re-elected.

Update 1/13 11:40 AM: Scheiber offers some useful thoughts on the Plank:

I'm not sure I completely buy the analogy to, say, Jimmy Carter. I'd guess we're looking at a situation more analogous to Hoover/FDR, wherein the collapse under Hoover was so precipitous that it discredited the GOP for years and FDR was essentially given points for effort (and for not being a Republican) in 1936, even though we were still in a depression. I'd guess Obama could win re-election if the economy's still struggling as long as it looks like we're headed in the right direction and he seems basically competent and engaged. On the other hand, you could argue that our collective patience is much, much lower these days (for a variety of reasons--media, affluence, etc.), so I'm not sure I'd bank on this if I were Obama.

Second, I think Brendan may be slightly undervaluing those extra 15 Senate votes (I doubt it's going to be 20), given the ambition of Obama's agenda. Health care reform is going to be incredibly important--both substantively, politically, and to Obama's legacy--and rancor built up during the stimulus debate could easily poison that process. So I see the logic of wanting the cushion.

Three, I'm hardly convinced a $1.5 trillion stimulus package, or whatever, could pass the Senate by any margin, so you have to wonder if there's any point in trying. (Or, at least, it's hard to begrudge team Obama for wondering this...)

Having said all that, I still come down on Brendan's side, in that I think Obama should maximize the size of the stimulus rather than the number of votes he can pass it with (subject to his $800 billion minimum). The economic scenarios we're looking at range from bad to terrifying. Beyond the economic and social benefits of avoiding the terrifying scenarios, you'd have to think the political payoffs outweigh everything I've just mentioned.

My point is just that, for Obama, it's a much closer call than you might think.

Scheiber might be right that presidents are essentially graded on a curve for crises they inherit, particularly when the other party is tarnished by its role in creating the crisis, but the evidence is seemingly limited to the FDR case. As far as health care, I think there's certainly reason for Obama to be concerned about maintaining GOP goodwill, but the reality is that it will take a while to get any legislation through a Congress that already has so much on its agenda. By then, Obama's political standing with the electorate -- which is largely driven by the state of the economy -- may have a more significant effect on the GOP support he can attract than the bipartisanship of the Senate stimulus vote.

Comments

[David]

Paul Krugman may be correct that the right medicine is a gargantuan stimulus package. OTOH some believe that the stimulus will not work and will harm the economy.

I tend to hold the latter view. Until recently, most of us disapproved of earmarks -- where a Senator or Congressman could steer government money to a particular individual or project that may not have been in the interest of the country as a whole. Yet we're now told that earmark-type spending is good for the economy, and it should be done on a massive scale. One Bridge to Nowhere was bad, but 10,000 of them are necessary! (BTW I recognize that the stimulus bill will not literally consist of earmarks, but I believe much of the money is likely to be spent on the same sort of projects. Each Senator and Congressman will get a piece of the pie.)

In short, there's a good chance that Obama's stimulus package will make the economy worse. If that happens, Obama will benefit politically if he can point out that the stimulus had bipartisan support.

There's an alternative, nicer possibility. Obama may believe that both sides have some useful ideas, so that a stimulus package that includes some Republican ideas will be a better bill.

[Rob]

Brendan writes, "Of course, whether Clinton's plan helped drive the expansion is a matter for debate, but the administration certainly believed that it did."

It's a small point, but all we know is that the Clinton Administration said its plan helped drive the expansion. Whether the top honchos in the Administration actually believed that is pure speculation, because as Brendan often points out, we can't know what is in their heads. Since politicians claiming credit for positive developments not of their doing is a common phenomenon and the Clintonistas do not have an unblemished reputation for honesty, Sergeant Friday would have left it at "said." Just the facts, ma'am.

[bnyhan]

Fair enough, Rob - I've updated the phrase to "seemed to believe."

[Noumenon]

I also reject the idea that larger stimulus = more effective and smaller = less effective. I'm with Tyler Cowen that no one has any idea how or whether this is going to work at all.