Half A Loaf

Use cars salesmen and Henry Kissinger both know when going into negotiations the best tactic is to give an inflated high offer. The other side will attempt barter down the offer. The person making the offer gets most of the concessions he originally wanted. The Obama administration's idea is to start with half-a-loaf and then let everyone saw the loaf to pieces. Case in point is the stimulus.

Romer had run simulations of the effects of stimulus packages of varying sizes: six hundred billion dollars, eight hundred billion dollars, and $1.2 trillion. The best estimate for the output gap was some two trillion dollars over 2009 and 2010. Because of the multiplier effect, filling that gap didn’t require two trillion dollars of government spending, but Romer’s analysis, deeply informed by her work on the Depression, suggested that the package should probably be more than $1.2 trillion. The memo to Obama, however, detailed only two packages: a five-hundred-and-fifty-billion-dollar stimulus and an eight-hundred-and-ninety-billion-dollar stimulus. Summers did not include Romer’s $1.2-trillion projection.

The Obama administration ends up with a stimulus too small to achieve all of their policy goals. The White House feared being labeled tax and spenders. Obama cut middle class taxes and pushed a smaller stimulus to stop a potential depression. The result was being labeled a socialist.

Other result about the White House internal stimulus debate is Obama continues to listen to Lawrence Summers. The latter assured Obama to go after the smallest stimulus possible and stressed how this will keep unemployment under 10 percent. This is a perfect example of the blind leading the blind. The stimulus was needed but the one backed by Obama was too small.

Update: E.D. Kain has a good post on why the stimulus is was too small. I agnostic on his proposal on the federal government taking over Medicaid from the states. Kain's proposal would mean state governments would no longer fund Medicaid.