Ryan Lizza reports for the New Yorker that on December 15 2008, a few short weeks before his inauguration, president-elect Obama was presented with a 57-page memo on the depth of the economic crisis drafted by Lawrence Summers and other economic advisors.
The memo informed the president that if he enacted his campaign promises in the current environment, he would shoot a gigantic hole into the nation’s budget.
“Since January 2007 the medium-term budget deficit has deteriorated by about $250 billion annually,” the memo said. “If your campaign promises were enacted then, based on accurate scoring, the deficit would rise by another $100 billion annually. The consequence would be the largest run-up in the debt since World War II.”
Lizza’s reporting also mentions the huge divide between Peter Orzsag, the budget director who suggested the president scale back his agenda, lest he run up historic deficits, and Christina Romer, the incoming chairman of the Council of Economic Advisers who wanted to suggest stimulus plans as large as the $2 trillion hole in the economy.
But Summers argued against a stimulus that was too large.
He offered the President four illustrative stimulus plans: $550 billion, $665 billion, $810 billion, and $890 billion. Obama was never offered the option of a stimulus package commensurate with the size of the hole in the economy––known by economists as the “output gap”––which was estimated at two trillion dollars during 2009 and 2010. Summers advised the President that a larger stimulus could actually make things worse. “An excessive recovery package could spook markets or the public and be counterproductive,” he wrote, and added that none of his recommendations “returns the unemployment rate to its normal, pre-recession level. To accomplish a more significant reduction in the output gap would require stimulus of well over $1 trillion based on purely mechanical assumptions—which would likely not accomplish the goal because of the impact it would have on markets.”
Summers specifically warned that there could be a surprised public reaction to the massive spending and new govenrment, debt.
“This could come as a considerable sticker shock to the American public and the American political system, potentially reducing your ability to pass your agenda and undermining economic confidence at a critical time.”
The full 57-page memo will be made public by the New Yorker later today.