September 2, 2012 7:18 pm

‘The New New Deal’

Michael Grunwald has written an intensive analysis of Barack Obama’s Recovery Act

The New New Deal: The Hidden Story of Change in the Obama Era, by Michael Grunwald, Simon & Shuster, $28 (ebook $12.99)

 

Mitt Romney’s inveterate flip-floppery is most often associated with his positions on healthcare and social issues but it was only four years ago that he also believed in using fiscal stimulus to counter economic downturns. On this point he is not alone in having later changed his mind. Barack Obama signed a $787bn stimulus bill largely of his own design in February 2009, the second month of his presidency. But as the US economy continued shedding jobs for a year after its passage, American public opinion quickly moved from supportive to critical. When Mr Obama speaks at the Democratic National Convention this week, it would be surprising if he referred to the American Recovery and Reinvestment Act – and I would wager all the money in my pocket that he does not use the word “stimulus”.

It is easy to understand why the bill is unpopular. The economic recovery that began in July 2009 has been disappointingly weak. Republicans have continually flogged the stimulus package as a corrupt, wasteful, socialistic intrusion by the government. This is nonsense, but they have won the communications battle. Hawkish Democrats have also distanced themselves from it, while leftwing pundits have long complained that it was too small.

Conventional wisdom therefore holds that Obama’s best option is to focus on other issues rather than make the tricky, counterfactual case that things would have been even worse without the bill – much less argue that the bill was more sweeping and transformative than the public or media has recognised.

Yet this is exactly what the journalist Michael Grunwald argues in The New New Deal: The Hidden Story of Change in the Obama Era, his exhaustively reported and authoritative assessment of the Recovery Act.

Grunwald’s book really tells two stories, related but distinct. The first is about the political process – how the framework of the stimulus bill was designed by the Obama team during the lame duck period, negotiated in Congress and implemented over the past three years. The main theme of this story is Republican intransigence. This is a familiar tale, though Grunwald adds much colourful detail. Rather than negotiating for concessions in good faith, Congressional Republican leaders decided early on that they would not back anything with the president’s fingerprints on it. Given the circumstances, it is naive to think Obama could have negotiated a bigger package than the one he got.

But the second story – an intensive analysis of what the Recovery Act has accomplished to date and has yet to accomplish – is more interesting.

Remember what was actually in the bill. Slightly more than $600bn went towards poor and middle-class tax cuts, safety net spending (more unemployment assistance and food stamps) and aid to state governments with budget shortfalls. These are the most directly stimulative parts of the bill, bolstering demand and preventing lay-offs – and stimulate they did. Economists of differing ideological stripes generally agree that the economy would have as many as 3m fewer jobs now were it not for the stimulus.

The remaining sixth of the bill, which focused on longer-term investments, contains the “hidden story of change” that Grunwald refers to. More than $20bn, for instance, was for doctors to start digitising their antiquated method of record-keeping, and already there is evidence of progress. The stimulus also injected a staggering $90bn into green energy, with the department of energy essentially becoming “the world’s largest clean-tech investment fund”. The depth of Grunwald’s reporting is evident in his depiction of how the stimulus has helped reinvigorate the moribund domestic wind and solar industries, and is trying to create a new advanced battery industry.

The department of education was authorised to distribute billions more to states for their public schools but the schools first had to demonstrate meaningful reforms – leading to a virtuous competition for the funds. A similar competitive process was used for the new funds given to transport projects. Meanwhile, the bill itself has been an experiment in government transparency, with levels of fraud and waste much lower than anticipated.

Grunwald gets carried away a few times by his enthusiasm. His claim that the stimulus is “changing dozens of industries” may prove true, but is as yet exaggerated. And his response to criticisms that the energy department’s investments amount to industrial policy is too dismissive. There are fascinating projects being funded with stimulus money but in many cases we won’t know for some time how well, or even if, they will pay off.

Still, Grunwald’s fundamental conclusions seem right: the stimulus bill was indeed stimulative and had far greater consequences than the public realises. Not that Obama will say so.

The reviewer is a New York-based editor for FT Alphaville

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