Economics

11 stunning revelations from Larry Summers’s secret economics memo to Barack Obama

A lengthy piece in The New Yorker looks at policymaking in the Obama White House. A key source for writer Ryan Lizza is a 57-page, “Sensitive & Confidential” memo written by economist Larry Summers—eventually to be head of Obama’s National Economic Council—to Obama in December 2008. Here’s some of what I learned about Team Obama’s thinking as the financial crisis was exploding, followed by quotes from the memo itself:

1. The stimulus was about implementing the Obama agenda.

The short-run economic imperative was to identify as many campaign promises or high priority items that would spend out quickly and be inherently temporary. …  The stimulus package is a key tool for advancing clean energy goals and fulfilling a number of campaign commitments.

2. Team Obama knows these deficits are dangerous (although it has offered no long-term plan to deal with them).

Closing the gap between what the campaign proposed and the estimates of the campaign offsets would require scaling back proposals by about $100 billion annually or adding new offsets totaling the same. Even this, however, would leave an average deficit over the next decade that would be worse than any post-World War II decade. This would be entirely unsustainable and could cause serious economic problems in the both the short run and the long run.

3. Obamanomics was pricier than advertised.

Your campaign proposals add about $100 billion per year to the deficit largely because rescoring indicates that some of your revenue raisers do not raise as much as the campaign assumed and some of your proposals cost more than the campaign assumed. … Treasury estimates that repealing the tax cuts above $250,000 would raise about $40 billion less than the campaign assumed. … The health plan is about $10 billion more costly than the campaign estimated and the health savings are about $25 billion lower than the campaign estimated.

4. Even Washington can only spend so much money so fast.

Constructing a package of this size, or even in the $500 billion range, is a major challenge. While the most effective stimulus is government investment, it is difficult to identify feasible spending projects on the scale that is needed to stabilize the macroeconomy. Moreover, there is a tension between the need to spend the money quickly and the desire to spend the money wisely. To get the package to the requisite size, and also to address other problems, we recommend combining it with substantial state fiscal relief and tax cuts for individuals and businesses.

5. Liberals can complain about the stimulus having too many tax cuts, but even Team Obama thought more spending was unrealistic.

As noted above, it is not possible to spend out much more than $225 billion in the next two years with high-priority investments and protections for the most vulnerable. This total, however, falls well short of what economists believe is needed for the economy, both in total and especially in 2009. As a result, to achieve our macroeconomic objectives—minimally the 2.5 million job goal—will require other sources of stimulus including state fiscal relief, tax cuts for individuals, or tax cuts for businesses.

6. Team Obama wanted to use courts to force massive mortgage principal writedowns.

The next step in the housing plan is responsible bankruptcy reform along the lines of the Durbin bill you cosponsored. This would allow bankruptcy courts to write down the principal of primary residences to the current market value. We recommend announcing this reform to begin immediately following the close of the enhanced Hope for Homeowners period.

7. Team Obama thought a stimulus plan of more than $1 trillion would spook financial markets and send interest rates climbing.

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.

8. Greg Mankiw, economic adviser to Mitt Romney, was dubious about the stimulus.

Greg Mankiw is the only economist we have consulted with who refused to name a number and was generally skeptical about stimulus.

9. But the Fed was a stimulus enabler.

Senior Federal Reserve officials appear to be of the view that a plan that well exceeds $600 billion would be desirable.

10. IPAB was there at the very beginning.

There are two possibilities for making tough decisions on the long-run budget, which could be done either separately or together: creating an executive-branch “health board” (which focuses on one part of the issue) and a Congressionally chartered commission (which could focus more broadly).

11. The financial crisis wasn’t just Wall Street’s fault.

A significant cause of the current crisis lies in the failure of regulators to exercise vigorously the authority they already have.

64 thoughts on “11 stunning revelations from Larry Summers’s secret economics memo to Barack Obama

  1. Obama has certainly provided plans for dealing with long-term deficits. Whether they are any good is a matter of thought, but he has provided more than a few.

  2. # 11 is frightening – as if the bureaucrats in DC don’t use their authority? The best thing is to simply cut their authority, period. In fact, before they can get any appropriations, they must show a decrease of 10% n regulations as measured by the number of regulations PLUS a 10% decrease in their operating expenses.

    When businesses are in trouble, they cut everywhere and they cut people.

    DC bureaucrats are growing in % and number. They must be stopped.

  3. Not stunning, just more of what has already become painfully obvious since the 2008 campaign and 2009 inauguration.
    Obama, in whatever room he chooses to grace with his presence as emporer and king, is always the most incompetent fool in sight. Obama’s entire administration must lie, cheat, and steal in order to advance their agenda because they know that if they were honest and fully transparent with the American people, they would be soundly rejected and possibly tarred and feathered.

    • Unless its a hoax (anyone snoops checked?) click on the link (57-page, “Sensitive & Confidential” memo) in the opening para and look at page 6.

  4. So now what ? As Paul Ryan has said about the Medicare debacle , this is not about politics , this is about mathematics . Trillion dollar deficits as far as the eye can see leaves a smoking black hole where the U S of A once was Taking nothing away from the article , I just don’t see any way out of the mess that Obama / Reid / Pelosi and their enablers have made . I say again it’s not politics , it’s mathematics

  5. Fred – they maybe sociopaths but the lot of them are Progressives and NONE of this surprises me. “Good intentions ” – NOT SO MUCH !!! Fascists – centralized command and control and as much power and loot to them as they can seize – the US Constitution be damned !

  6. No surprises: these are all items we were pretty much certain of at the time they happened. Wanted: Island with a T3 line, in international waters, with at least 1,000′ of elevation (none of this ’3′ over sea level crap’) and a small, secure harbor for a boat. See all of you there ;)

  7. Still, What this implies is to pay-off your corporations that donated campaign funds regardless of good economic practices or not.

  8. blatant fraud, deception, lies and deceit in this administration’s support of social justice is a small price for the populace to pay just ask them

  9. There was a time when this would have been a shock. Today, I am so cynical re: Washington and politics that it’s not a surprise at all. I’d bet the average progressive democrat doesn’t see a problem in the first place. What’s more, the msm will attack this as out of context and a ploy by radical conservatives to misrepresent “critical assistance America needs”. The whole episode is disgusting as we watch Obama wage class warfare while vilifying opposition. Welcome to the future.

    • What’s stunning is the complete fraud that has been perpetrated on the American people when anyone that promoted these same ideas or policies was given the Alinsky ridicule treatment…while behind the most “transparent” administration, just ask them, this is the reality. That intellectual dishonesty is….stunning.

    • @YU. Agreed. If anything here is ‘stunning’, it is the almost complete lack of coverage at this level of detail that is typically practiced by mainstream news. We (U.S. citizens) should all be assuming – all the time – that everything we see on the idiot box is either meaningless or wrong.

  10. Damn, the more we discover the more wretched it comes to be!

    Our Matchless American Experiment, the legacy gifted to us lucky few,
    the hope and aspiration of humans the world over: now all dead and gone
    And we don’t even know it!

    I truly envy the Americans who lived it!

  11. Number 11 is stunning. It appears very clear that regulators forced subpar lending via the Community Reinvestment Act and targets (with sanctions) established by Slick Clinton. Summers, to think too little regulation is a problem, is terminally stupid or uninformed…I think both. Parts of his memo certainly have wisdom, but he clearly was a net detriment to the country.

    I suppose he is at Davos now, looking for one more job to carry him to retirement. Incompetents in government usually do get promoted. Look at Obama.

    • I know white people who had a utility bill as their primary loan documentation and got a loan to buy a house in Houston. The Community Reinvestment Act was aimed at giving minorities equal access to borrowing and to eliminate discriminatory lending. It was not to reduce loan underwriting to nothing.

  12. They’ve always repeated the mantra’ spend and print money now for short term benefit, taxes to come later, might be painful.’

  13. Given the timing, history may how that it was only the Santelli/tea party movement that prevented a massive mortgage writedown – i.e. we all pay our neighbors mortgage. Maybe there will be similar memos out about cash for clunkers, the $7500 housing tax credit, etc.

    BTW there was a far more modest proposal circulating at the time led by Democratic and Republican moderates – give mortgage holders and potential buyers with equity and good credit the ability to refinance/purchase at treasury bill rates (4% or lower). Put more simply, have the government extend favorable credit terms only to those that have proven themselves financially responsible.

    Of course it wouldn’t have helped the less fortunate… (I’m using the liberal definitions of “helped” and “less fortunate” obviously…”) So the administration never even addressed the proposal.

  14. Why look at secret memos as to what Obama was going to do? Let’s look at what he’s DONE!

    Three years of Obama – the VERY BEST the Democrats have ever had to offer – has given us:
    
- $15 trillion deficit
    - 100% Debt to GDP
    - US in a depression
    - ruined economy
    - US credit rating downgraded
    - 20% real unemployment
    
- ignores the War Powers Act
    - gas/food/clothing prices skyrocketing
    - 5 wars, one with a record death toll
    - foreign policy disasters

    - raiding the public pension fund to avoid the debt ceiling

    - lost 800+ seats for his own party
    - Sends American troops to support the Lord’s Resistance Army in Africa
    
- poll numbers in the toilet
    
- 45 million Americans on food stamps
    - Over half the states suing to get out of Obamacare

    - 1 in 4 mortgages under water
    
- ATF gunrunning scandal unfolding
    - Solyndra scandal unfolding
    ANYBODY BUT OBAMA!

    • @Black Sabbath – Where do you get your: facts, news, perspective? Your list reads like that of a genuine nutcase. Every single item inflated to serve your personal agenda. Every item completely out of the context to which you seem to lead. What a waste of time.

      • Actually the only two numbers that are anything but fact are the number of dem seats lost and the 20% real unemployment. If you believe unemployment is really at 8.5% you really are a brainwashed moron as far as the seats go they are simply a vague number. People like you are why this once great country is dying. Good luck with your mooching.

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