As the Obama transition team watched the economy plunge, the knew their response must meet the president’s four pillars, Larry Summers’ three Ts, and get 60 Senate votes. (More)

The New New Deal, Part I: Making It Law

This week Morning Feature considers Michael Grunwald’s The New New Deal: The Hidden Story of Change in the Obama Era. Today we see the challenges of drafting and passing the American Recovery and Reinvestment Act. Tomorrow we’ll look at the challenges of making the stimulus bill work. Saturday we’ll interview Michael Grunwald and see how the ARRA’s successes became ‘The Greatest Story Never Told’ … until now.

Michael Grunwald is a senior national correspondent for Time magazine. Before joining Time, Grunwald was a congressional correspondent, New York bureau chief, and investigative reporter for the Washington Post, and a local and national reporter at the Boston Globe. He has received the George Polk Award for national reporting, the Worth Bingham Prize for investigative reporting, the Society of Environmental Journalists award for in-depth reporting, and numerous other journalism awards.

Four Pillars

Barack Obama was elected during the worst economic crisis since the Great Depression. Several of the nation’s oldest banks had collapsed. The stock market had plummeted. Lenders weren’t lending. Consumers weren’t consuming. Millions had already lost their jobs, and millions more soon would. Economist and Obama transition team member Christina Romer put it bluntly: “Depressions really, really suck.” Yet although most Americans knew the economy was bad, almost no one knew how bad it was. In December of 2008, we had not yet had what Grunwald calls “our ‘Holy s**t!’ moment.”

President-elect Obama and his transition team knew their first priority would have to be patching the gaping holes in a leaking economy. Yet he had campaigned on “Change We Can Believe In,” and he meant to keep the four pillars of that promise:

  • Green Energy – In his first policy speech in 2007, Candidate Obama said “The country that faced down the tyranny of fascism and communism is now called to challenge the tyranny of oil. The very resource that has fueled our way of life over the last 100 years now threatens to destroy it if our generation does not act now and act boldly.” The last phrase quoted FDR’s ‘Arsenal of Democracy’ speech, and just as the humming factories of World War II had lifted the U.S. from the Great Depression, President-Elect Obama believed green energy initiatives could help lift us from the Great Recession
  • Health Care – Candidate Obama saw health care as both a moral crisis and an economic crisis. Health care spending was one-sixth of our economy and on pace to be one-third by 2040, yet our life expectancy and infant morality outcomes were mediocre. Insurance costs squeezed businesses and workers, and rescission and cancellation often turned illness into bankruptcy. Research focused on individual drugs or treatments, tested against placebos, with almost no comparative data on whether a new drug or treatment was better than those already available. Reforming health care, the president-elect believed, was essential to economic recovery.
  • Education – Candidate Obama had attended a prep school in Hawaii and Ivy League universities, yet in Chicago he saw struggling schools that offered excuses instead of excellence: “these kids can’t learn” because gangs-drugs-parents-the-system. President-elect Obama saw “these kids” as “our kids” and was determined to provide schools that gave them a chance to thrive.
  • Community – Energy, health care, and education were all part of our national economic crisis, but Candidate Obama saw a deeper problem: the fraying of our sense of community. “I am my brother’s keeper. I am my sister’s keeper,” he said. While he recognized the productivity of market economies, he also recognized a role and a duty for government. New investment in infrastructure, from roads to rails to electricity to broadband connectivity, would both grow the economy and rebuild a shared sense of purpose.

These were the four pillars of change on which Candidate Obama had campaigned, and President-Elect Obama wanted his economic recovery plan to address all four.

Three Ts

But first that plan would have to prevent a Second Great Depression, and most economists agreed on how to do that. Triggered by a banking crisis, the economy now faced a death spiral. Families who had lost or feared losing their jobs were spending less, providing less revenue for businesses, forcing them to lay off more workers. With more workers unemployed and more businesses closing, tax revenues plummeted at the very time people needed more community support, leaving governments – federal, state, and local – with budget crises that could force yet more layoffs.

Both struggling families and struggling state and local governments had to balance their budgets. That left the federal government as “the spender of last resort,” the only economic actor that could intervene to stop the death spiral. But just spending money would not be enough. Larry Summers and other economists had studied government stimulus efforts in the U.S., Japan, and elsewhere, and identified three conditions for success:

  • Targeted – Government spending had to boost consumer spending in order to boost business revenues, end layoffs, and spur new hiring. Data showed that during an economic downturn, family spending decreased as a percentage of income for wealthier families. Simply, they could afford to save or pay down debt, while median- and lower-income families had to scramble to get by from month-to-month. Thus, jobs for the unemployed and assistance for the working poor would boost consumer spending more and end the death spiral sooner than tax cuts or credits for the wealthy.
  • Timely – Government spending also had to happen at the right time: before the bottom fell out of the economy and left any stimulus futile, and before consumer demand began to recover and left any stimulus likely to spur a burst of inflation.
  • Temporary – Thus government spending programs that were intended solely as stimulus needed to stop when consumer demand recovered. Ideally that meant built-in end triggers. Unemployment benefits end automatically when a worker gets a job, and assistance for the working poor tapers as they find jobs that pay better wages. Startup loans help innovative, risky, yet potentially transformative new companies get through ‘The Valley of Death’ until private capital and sales revenues make them self-supporting.

The Obama transition team agreed on the Three Ts, both in principle and in most of the details. There were a few quibbles, but the larger problem was how to find enough targeted, timely, temporary projects to fill out the $500-750 billion package most economists predicted would be needed to forestall a depression and create a recovery.

Sixty Votes

When the Obama transition team took that number to Capitol Hill, jaws dropped. House Speaker Nancy Pelosi had been considering a stimulus package of just $300 billion. President-Elect Obama was asking for more than twice that, on the heels of the $700 billion TARP program just rushed through to prop up the financial industry. Passing that had been fractious enough, and its failure to pass on the first vote had pushed the markets even further into crisis. The 2008 elections had given her a larger majority, but $750 billion was still a lot of money.

And then there was the Senate, where Democrats had only 58 seats, with Minnesota’s Al Franken was still locked in a recount. Without at least two Senate Republicans – really three, so no one could be pilloried by the Senate Republican Caucus as “the deciding vote” – no bill would pass. That assumed the new president could get every Senate Democrat to agree, including fiscal conservatives like Nebraska’s Ben Nelson. Indeed no one was sure whether Democratic stalwart Ted Kennedy, who had collapsed at the president’s inauguration, would be able to return to cast a vote.

As the economic news grew ever more grim in January, with new data showing a Second Great Depression was nearer than anyone had imagined, the ‘ideal’ size for a stimulus bill grew to over $1 trillion. But in the Senate, both the few Republicans whom the president had any hope of swaying and the conservative Democrats whose votes he could not lose, the number was “under $800 billion.” Grunwald reports that number was based not on data but emotion and the echoes of the TARP bailout.

Even had Congress been willing to reach for $1 trillion, Grunwald writes, there remained the problem of meeting the three Ts. There were plenty of ideas for how to spend money, but not enough would be targeted, timely, or temporary enough to work as depression-sparing stimulus. As one Hill staffer put it, “We can’t stuff that much pig through the python that fast.”

The American Recovery and Reinvestment Act did pass. Republicans denounced it as waste and cronyism, even as many progressives complained it was not enough. It was not waste, not cronyism, and not enough … but Grunwald doubts any bigger package could have met President Obama’s four pillars, Treasury Secretary Summers three Ts, and found 60 votes in the Senate.

And as we’ll see tomorrow … it did work.

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Happy Thursday!