Were We Inevitably Screwed?

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Ezra Klein has a monster analysis of the Obama administration’s response to the economic emergency. Klein walks through every alternative, every decision in which the administration might have taken a more aggressive response. In each case he argues, persuasively, that the political barriers were too imposing. Obama’s economists, like most economists, underestimated the depth of the crisis. When the stimulus was crafted, we thought the economy had shrunk 3.8 percent in the last quarter of 2008. In fact, we now know it shrank 8.9 percent. The administration believed it needed a stimulus of over $1.2 trillion to cushion the blow — the blow that turned out to be much harder than it knew at the time — but Congress balked at even that much, and wound up passing a stimulus of under $800 billion, primarily because moderate Democrats and Republicans in the Senate feared the symbolic power of a trillion-dollar appropriation.

There were indeed economists who correctly believed in 2008 that the crisis was far deeper than most forecasts predicted. But, as Klein notes, the notion that Obama could have persuaded Congress to spend even more than it wanted to spend on the basis of unsubstantiated hunches is fanciful. That those unsubstantiated hunches proved correct is beside the point.

So. We were screwed all along. Is there any possible way we could have escaped our fate? Actually, one possibility leaps out from Klein’s analysis: We could have elected John McCain president.

The reason for this is not that we could have avoided the Kenyan Socialism or even the regulatory Uncertainty held up by conservatives as the cause of the continued slump. (It’s a demonstrable canard.) Rather, it’s that a McCain presidency would, for purely political reasons, offer the possibility of greater Keynesian demand-side response.

Douglas Holz-Eakin, the chief economic advisor to John McCain in 2008 and the president of American Action Forum, a Republican agitprop group, offers a few tantalizing clues. First, he concedes that economic stimulus does in fact boost economic growth:

“The argument that the stimulus had zero impact and we shouldn’t have done it is intellectually dishonest or wrong,” he says. “If you throw a trillion dollars at the economy, it has an impact. I would have preferred to do it differently, but they needed to do something.”

Holz-Eakin, like most economists, but unlike the entire elected wing of the Republican Party since 2009, understands that economic stimulus does in fact stimulate the economy and is the proper response to a disaster like the one we’re experiencing.

The one truly large-scale response to the crisis that exceeded Obama’s response may have been an attempt to shore up the housing market. This bit, from Holz-Eakin, is also tantalizing:

In late 2008, when the economy was cratering, Holtz-Eakin convinced McCain that the way out of a housing crisis was to tackle housing debt directly. “What we proposed at the time was to buy up the troubled mortgages, pay them off and let people refinance at the lower rates,” he recalls. “That would have filled up the negative equity and healed bank balance sheets.”
To this day, Holtz-Eakin thinks the proposal made sense. There was one problem. “No one liked that plan,” he says. “In fact, they hated it. The politics on housing are hideous.”

The politics were, indeed, hideous. But they were horrible in a way deeply aggravated by the political circumstances of the moment. You had an all-Democratic government, led by a charismatic, young, black president. Any measures to alleviate the crisis struck millions of conservatives as a terrifying redistribution of wealth, a frightful and permanent unmooring of the nation from its tradition of liberty. This helped encourage the hyper-partisan response of Republican leaders, who abandoned the belief in Keynesian stimulus that they had previously endorsed in 2001 and 2008. (Yes, Republicans passed a stimulus bill in 2008. Their turnabout against stimulus was rapid and total.)

But what if we had a Republican president? Perhaps a President McCain might have designed a less sweeping and less effective stimulus than President Obama did. But Republicans would have gone along — after all, they did under Bush, and this time the justification was far stronger. It’s also likely that Democrats would have gone along, because they have shown themselves to be happy to support stimulus under Republican presidents. It also seems likely that, as the crisis deepened, President McCain would have fought for more stimulus measures, and these measures would not have been dead on arrival because there would not have been a right-wing backlash against the first one.

This argument also suggests that the best way to get more stimulus into the economy would be … to elect Mitt Romney. True, many Republicans have actually convinced themselves to believe the anti-Keynesian doggerel they’re spouting, and would try to carry out their agenda of immediate deficit reductions. But far more likely, the bulk of the Party would see the need to rescue the economy under a fellow Republican’s presidency, and sheer political expediency would trump all.