Down a “road to hell” was where the United States was headed.1 Those were the words of Mirek Topolánek, the lame duck prime minister of the Czech Republic, addressing the European Parliament on March 25, 2009. The embarrassment was that he was not just another Central European conservative. He was speaking in his capacity as president of the European Council just days ahead of the London G20. The economic policies of the Obama administration would destroy confidence, the Czech pressed on. Surging deficits and giant bond sales would “undermine the liquidity of the global financial market.”2 They were fighting words. Everyone knew that conservatives on both sides of the Atlantic were suspicious of Obama’s administration, but a “road to hell”? Some wondered whether the translators could possibly have got it right. The New York Times reached for history. Perhaps as a survivor of decades of Communist tyranny, Topolánek had a particular allergy to state intervention. President Sarkozy didn’t care. He was furious. How could a jumped-up East European minnow be talking about America that way, and on behalf of Europe, to boot? In London Sarkozy upbraided the Czech about his inappropriate tone. On the back foot Topolánek offered a rather less trite and more disarming explanation. Far from being inspired by the horrors of Stalinism, the phrase had popped into his head after an evening spent listening to the heavy metal classic Meat Loaf’s “Bat Out of Hell.”3
Whatever the idiom they expressed it with, what stirred conservatives on both sides of the Atlantic in early 2009 was outrage at the first major legislative initiative of the Obama administration: what would become known as the “Obama stimulus,” the American Recovery and Reinvestment Act. Pushed with urgency by the Democrats, it passed the House already on January 28, 2009. At the new president’s insistence it was debated in the Senate in a special weekend session and voted through on February 10. A week later, on February 17, Obama signed the spending package into law. It was the largest measure of fiscal stimulus undertaken in the West in the wake of the crisis and the largest in American history. By the same token, it instantly polarized the economic policy arena on both sides of the Atlantic.
Obama’s team never doubted the need to act. Over the winter of 2008–2009 America’s economic situation was deteriorating fast. Jobs were hemorrhaging. Detroit was on its knees. There was a pervasive sense of crisis and a need for renewal. The political stakes were obvious. It was the drama of the financial crisis in September and October 2008 that had broken McCain’s campaign and handed a huge electoral victory to Obama. The atmosphere of hope and expectation that surrounded his inauguration was electrifying. Many projected onto the new president expectations of almost revolutionary change. Not only had Obama brought the advancement of African Americans to a new stage, evoking memories of Martin Luther King Jr. Coming into office in the midst of the financial crisis, he could not escape comparisons to FDR and his famous first “hundred days.” And as if King and FDR were not enough, the newly elected president invoked another era of Democratic Party optimism. He wanted to offer the new generation a Kennedy-style moon-shot mission.
Whatever the Obama administration did, it would have to be huge for the simple reason that the twenty-first-century American economy is huge. GDP in 2008 was c. $14.7 trillion. To have a meaningful impact the stimulus would, therefore, need to be enormous. The problem was that Congress had a hard time dealing with this elementary fact. As the controversy over TARP indicated, a proposal that the federal government should spend a trillion dollars on work creation was likely to cause indignation, panic or both. So the approach the transition team devised was cautious. They would propose $775 billion to the Democratic Party leadership and hope that the notorious log-rolling tendencies of Congress would take the final total close to $1 trillion.4 If Republican support could be bought with further tax cuts or more spending, the more the better.
Despite the radical expectations projected onto him, Obama was by inclination a bipartisan centrist. What he had not reckoned with was the sheer violence of the conservative hostility toward him. There was no possibility of bipartisanship. Whereas at least a minority of Republicans had voted with the majority of the Democrats to pass the Fannie Mae and Freddie Mac bailouts and TARP, in January 2009 in the House of Representatives not a single Republican voted for the American Recovery and Reinvestment Act, despite the tax cuts with which it was festooned.5 In the Senate only three did. It was a warning of the depth of partisan hostility the Obama administration would face. From the outset of his presidency, a large section of Republican opinion effectively denied the legitimacy of Obama’s leadership. At the grassroots this expressed itself in the “birther” conspiracy, doubting Obama’s status as a natural-born citizen. In Congress it manifested itself in a stance of absolute opposition. America’s right-wing think tanks mobilized in force to denounce the bailouts and to discredit the stimulus and the financial regulations to come. By the spring the wave of antigovernment indignation that dubbed itself the “Tea Party movement” would roil the base of the Republican Party and hog the television news cycle. In the background, billionaire “dark money” donors, led by the Koch brothers, stirred the pot.
In 2009 the Republicans were in a minority in both the House and the Senate. But their relentless guerrilla war and the drumbeat of their media outlets had real and immediate effects.6 Above all they shifted the balance within the broad-church coalition of the Democratic Party. The fact that the administration needed the Democrats to vote en bloc in favor of the stimulus gave leverage to so-called moderates—the Blue Dog Coalition and the New Democrat Coalition—free-market, antispending Democrats who were anxious to preserve their hard-won probusiness credentials.7 As a result, rather than bidding the stimulus up from $775 billion, the congressional “moderates” tended to whittle it down. The result was less substantial than the Obama team had hoped for and less than the US economy needed. The headline for the American Recovery and Reinvestment Act was $820 billion. In actuality it was more like $725 billion in new money, $50 billion less than where the Obama team had started.
Politics dictated not just its size but its shape. The president wanted big-ticket items of innovation. But Obama’s chief of staff, Rahm Emanuel, and his political team were always skeptical that the president’s infatuation with the environmental agenda and green growth would sell. What Capitol Hill wanted were tax cuts and spending programs targeted to please key constituencies. Ultimately, $212 billion of the stimulus went into tax cuts and $296 billion toward improving mandatory programs such as Medicaid (health coverage for lower-income groups) and unemployment relief. This left $279 billion for discretionary spending, of which the president’s priorities of green energy and improvements to broadband received $27 billion and $7 billion, respectively.8 Altogether, the stimulus would patch up or replace 42,000 miles of road and 2,700 bridges. But unlike in the era of the New Deal, there would be no eye-catching logos, no charismatic monuments like those left by the Works Progress Administration.9
Nevertheless, it was substantial. In absolute terms it was on a par with the spending of the New Deal. Though it was smaller in relation to a much larger national economy, the Obama stimulus was concentrated over a shorter space of time.10 In 2009 it placed America alongside the Asian states in the league of activists, outstripping any discretionary fiscal measures taken in Europe. And it worked. Despite the protestations of “freshwater” free-market economists and the complex economic arguments directed against “naïve” Keynesian “pump priming,” every reputable econometric study found that the Obama stimulus had a substantial positive impact on the US economy.11 Estimates by Obama’s Council of Economic Advisers put the number of jobs created at 1.6 million per year for four years, for a total of 6 million job-years.12 The multiplier was positive and above 1. This implies that the effect of government spending on the economy was not just positive. More private economic activity was stimulated than the government originally contributed. So the impact of the government’s spending was to shrink the government’s share in overall economic activity.
But if this was the case, if the stimulus worked, why didn’t the Obama administration ask for more?13 There were political risks in asking for a figure bigger than $1 trillion. But there were risks to undershooting as well. By 2010, America’s unemployment was still stuck above 10 percent. Foreclosures and forced sales were destroying entire communities. Millions of young people left schools and colleges without jobs. Men and women in the prime of life were shut out of the workforce. Many would not return. In the elections of 2010 and 2012 the Democrats fought on the back foot against the backdrop of a limping economy and resurgent Republican activism. They retained the presidency but lost control of Congress. Obama’s administration never built the constituency of Democrats-for-life that was shaped by Roosevelt’s New Deal. Given that they commanded majorities in both the House and the Senate in 2009, why did the Obama team not set the bar higher and pitch for an even larger number? If maximum force was the best approach to financial stabilization, why, when it came to fiscal policy, was the approach so penny-pinching?
Part of the answer is that the transition team did not fully grasp the scale of the tsunami that was descending on the US economy. From preparatory documents circulated within the transition team in early January 2009, we know that the worst-case scenario envisioned by Obama’s staff was for unemployment to reach 9 percent with no stimulus.14 In fact, even with the largest government-spending program in American history, unemployment topped 10.5 percent. But despite this underestimate, it is clear that the top macroeconomists in the Obama transition team did, in fact, realize that the stimulus ought to be bigger. On December 16, 2008, Christina Romer submitted a report intended for the president-elect arguing that to close the “output gap” by the first quarter of 2011 would require a discretionary stimulus of $1.7–1.8 trillion. Romer’s modeling was conventional. Her figures were sound. Her proposal was a trillion dollars larger than the figure the Obama team ultimately pushed through Congress. What decided the issue was politics, or rather the self-censorship of the economics team in the name of politics. Second-guessing the attitude of Chief of Staff Rahm Emanuel and his political operatives, Larry Summers, as head of the National Economic Council, was convinced that he and Romer would lose all credibility if they suggested anything even close to the figure she thought necessary. The results of Romer’s calculation were, Summers quipped, “nonplanetary.” He did not want to jeopardize the influence of the economics team by appearing naïve and “unsavvy.” The effect was to skew the argument from the start. No figure in excess of $900 billion, half of Romer’s baseline, was ever proposed. A similar deflationary calculus ruled out any dramatic and direct action on home-owner debt.
The great political might-have-been of the early Obama administration is why, alongside TARP and the fiscal stimulus, the White House did not start by pushing a comprehensive relief program for home owners.15 While the banks and lenders were bailed out, 9.3 million American families lost their homes to foreclosure, surrendered their home to a lender or were forced to resort to a distress sale.16 The measures that the administration did develop to offer mortgage rescheduling were derisory in their impact. In response to criticism, Larry Summers has subsequently insisted that the question of home-owner relief was a constant subject of debate within the administration.17 He convened regular monthly meetings with the Treasury and the other key agencies to challenge them to come up with better options. No mechanism that was effective, efficient and politically feasible emerged. There were basic obstacles. A program to help millions of distressed borrowers would have had to have been gigantic in scale. Forgiving loans on a substantial scale would have implied losses for the banking system at a time of financial uncertainty. And it would have caused a huge uproar in Congress, where the administration needed to husband its political capital, not so much with Republicans, from whom nothing was to be expected, but with the moderate congressional Democrats. It was a price that Summers, Emanuel and Treasury Secretary Geithner were not willing to pay.
What became evident in the spring of 2009 was that the historical memory that was most alive in the Obama administration was not that of FDR or JFK but that of the last Democratic administration, under Bill Clinton in the 1990s. It was the Hamilton Project’s vision that prevailed in the Obama camp. In the face of the crisis the Democrats would prove themselves not as bold or imaginative but as sound managers of the economy whose task it was to put right another era of Republican misrule. Though in 2009 no one dissented from the need for an immediate stimulus, the Obama team was profoundly committed to the legacy of their mentor, Robert Rubin.18 Summers, Geithner and Peter Orszag, Obama’s director of the Office of Management and Budget, were all veterans of the 1990s Treasury. Orszag and Rubin had argued in 2004 that government deficits would not only squeeze private investment but could set up a negative spiral of confidence and expectations and might trigger a sudden panic in financial markets.19 Faced with the huge deficits produced by the financial crisis of 2008, there was, thus, no contradiction between the maximum-force approach to bank stabilization and the cautious approach to fiscal policy. Concern for confidence in the financial markets was their common denominator.
Despite its notable scale, its effectiveness and the political controversy it stirred up, the Obama stimulus was hedged around by political compromise. Furthermore, despite the urgency with which Congress acted, the stimulus was bound to come too late. Spending programs take months, if not years, to be put to work. The discretionary spending component of the Obama stimulus did not begin in earnest until June 2009, at which point the labor market was close to bottoming out.20 The less commonly noted corollary is that the open-handed fiscal stance of the first year of the Obama administration was in large part an inheritance of decisions and nondecisions made in 2008, while the future president was still in the Senate.
In January 2009, as a result of the standoff between the Bush administration and congressional Democrats, the federal government was operating without a regular budget and was headed toward an unprecedented deficit in excess of $1.3 trillion. It was a political mess and a daunting fiscal hole, but, as far as the economy was concerned, it was precisely what was needed.21 Part of the reason why Congress had refused to approve the budget presented to it by the Bush administration a year earlier was because it thought it was based on hopelessly unrealistic economic forecasts. Even as the real estate crisis began to make itself felt, the White House projected a deficit of only $407 billion for 2009. The administration called for $3.1 trillion in spending, and at prevailing tax rates assumed that revenue would come to $2.7 trillion. Congress doubted both figures and was proven correct. Thanks to the recession, revenue between September 2008 and September 2009 slumped to $2.1 trillion. Meanwhile, spending soared to $3.5 trillion, including a $151 billion installment for TARP and a first tranche of $225 billion on the Obama stimulus. Fighting over TARP and the Obama stimulus made good political theater for all sides. The programs were significant in their economic impact. But the largest part of the fiscal stimulus of 2009 came as a result of the budget standoff of the preceding year and the collapse in tax revenue due to the recession.
Automatic stabilizers are the unsung heroes of modern fiscal policy. In the United States, no more than one third of federal government spending is discretionary. The rest is made up of mandatory expenditures required by existing “entitlements,” social programs such as unemployment and disability benefits, or retirement pensions. These tend to increase during a recession. Likewise, tax revenue flows into Treasury coffers at preexisting rates of taxation and contribution levels, driven not by political decisions but by the fluctuating fortunes of the economy. Dominated by these nondiscretionary flows, modern state budgets have a powerful stabilizing effect on the economy. As economic activity declines and the economy calls for stimulus, tax revenue falls, entitlement spending increases and the government deficit automatically expands.
Viewed in these terms, the effect of the crisis of 2007–2009 on the budgets of rich countries was spectacular. Whatever the politics of stimulus spending in Congress, the Bundestag or the House of Commons, the automatic stabilizers delivered a huge and timely stimulus. According to calculations by the IMF, if the US economy had been at full employment in 2009, the crisis-fighting policies adopted by the Bush and Obama administrations would have been enough to produce a deficit of 6.2 percent of GDP—this was the discretionary deficit. The actual general government deficit was 12.5 percent of GDP.22 More than half the support provided to aggregate demand was automatic or quasi-automatic. And this was typical of all advanced economies. According to the IMF’s calculations, of the vast increase in public debt in the developed world over the course of the crisis, just under half was due simply to the reduction in revenue produced by the contraction of the tax base. As profits, wages and spending all declined, this automatically generated a deficit and thus an offsetting public stimulus. This puts a rather different perspective on the fiscal policy battles at the G20. Though Germany, France and Italy steered clear of the kind of stimulus package launched by the Obama administration, let alone that trumpeted by Beijing, their deficits were widening too. As the private sector deleveraged and cut its spending, they too saw huge nondiscretionary deficits. Indeed, it would have taken a heroic and truly perverse act of austerity to prevent these automatic stabilizers from coming into effect. The net result was dramatic. Between 2007 and 2011, demand in the world economy was stabilized by the largest surge in public debt since World War II.
For macroeconomists this was a cause to celebrate the stabilizing properties of the modern tax and welfare state. For fiscal hawks it was a cause of deep concern. In the long run those debts would require higher taxes to service and repay them. This would pose major political challenges. And how would capital markets react? According to the script set out by conventional fiscal conservatism, one might have expected serious and immediate repercussions. Would the debt shock trigger the loss of confidence that Orszag and Rubin and so many others had warned about? How would savers be induced to hold trillions of dollars in government bonds? Would interest rates have to rise? Would this crowd out private investment? Would bondholders get jumpy? Would the bond vigilantes of the 1990s swing into the saddle, selling government bonds, driving Treasury prices down and yields up? In the spring of 2009, as the scale of the deficit became clear, business media reported that markets were up in arms. In light of “Washington’s astonishing bet on fiscal and monetary reflation,” the Wall Street Journal looked forward to a stern response from bond markets.23
So serious were the rumblings and so painful were the memories of the Clinton era that in May 2009 Obama asked budget director Orszag to prepare a contingency plan.24 The budget director’s response was drastic. In the case of a bond market panic, the administration should severely hike taxes. The report was intended to be for the eyes of the president only. When Rahm Emanuel leaked it to Summers it provoked a towering fury. Summers threatened to resign and demanded that in the future he must have complete control of all economic policy input to the president. For all his rumpled, academic persona, Summers had a keen eye for power and could sense a new agenda of fiscal consolidation forming within the administration. This was a threat to his personal position. But it also violated his instincts as a “new Keynesian” economist. Summers might have censored Romer’s stimulus proposal, but he did not believe in the power of the “confidence fairies.”25 To be talking about budget cuts in the early summer of 2009, when the United States was about to hit the trough of the most severe recession since the early 1930s, was wildly premature. If confidence was the issue, the best way to restore it was to engineer a solid recovery.
In the event, Summers and the other skeptics were proven right. There was no run against Treasurys. The bond vigilantes were a spook. America’s households were rebuilding their savings. Mutual funds were shifting out of risky mortgage bonds. Everyone wanted Treasurys. These were the kinds of systemic macroeconomic and financial mechanics that all too often escape fiscal hawks, who view the public budget like that of a private household. When the private sector is undergoing a shock episode of deleveraging, when the savings rate is surging as it was in 2009, what is needed to preserve the overall financial balance of the national economy is not for the state to cut its deficit too. Everyone cannot save at once without provoking a recession. As the proponents of “functional finance” have argued since the 1940s, the state must act as a borrower of last resort.26 In so doing it preserves aggregate demand and provides a flow of safe long-term bonds to financial markets. After the shock of 2008 the entire world was keener than ever to hold safe assets. A huge class of AAA-rated private label securities had shown itself to be far from safe, so the demand for Treasurys was huge. It wasn’t only Americans who wanted US government debt. As Treasury debt held by the public increased by $2.9 trillion between the summer of 2007 and the end of 2009, foreign buyers took more than half. Chinese holdings of Treasurys increased by $418 billion.
Among those who were selling were some of the hardest-pressed banks. They needed to shrink their balance sheets. But that adjustment was cushioned by the central banks. In the first phase of what became known as QE1, on March 18, 2009, the Fed announced that it would purchase $750 billion in agency MBS and agency debt, as well as $300 billion in Treasury securities. The Bank of England made a similar announcement on March 9, committing to purchasing first £150 billion and then £200 billion of British government bonds, or gilts. So, far from swamping the markets with their debt, in 2009 yields on top-rated government bonds actually fell.
In the eurozone things were more complicated. There too the automatic stabilizers kicked in and deficits ballooned. Debt issuance surged. But unlike in the UK or the United States, the ECB is barred from buying newly issued government securities. After Lehman, however, Trichet was in no mood to take risks. Though the ECB did not purchase newly issued government debt, what it did do was to repo sovereign euro bonds.27 As the eurozone deficits ballooned, the ECB operated what was known informally as the “grand bargain.”28 It supplied hundreds of billions of euros in cheap liquidity to Europe’s banks in the form of the so-called Long-Term Refinancing Operation initiated in May 2009.29 The banks then bought sovereign bonds. On average, the rate Europe’s banks paid to the ECB on the CTRO funding was only a third of the yield they earned on their bond holdings. All told, in the eurozone in 2009 the banks loaded up on 400 billion euros’ worth of sovereign debt.30 It was easy and apparently safe profit, and it was Europe’s most stressed banks, including Germany’s bankrupt Hypo Real Estate and Franco-Belgian Dexia, that were keenest to take advantage. Seeking to maximize their return, they put the ECB’s funds into the riskier peripheral bonds from Portugal and Greece that were offering a marginally higher yield. As in the UK and the United States, this helped to stabilize the government debt market, but there was a crucial difference. In the United States and the UK the central banks were pushing liquidity into the banking system. By contrast, in the eurozone, it was the balance sheets of the banks that absorbed the sovereign debt.
Fiscal stimulus was clearly necessary over the winter of 2008–2009. The automatic stabilizers were a welcome complement. Together they helped to revive the advanced economies in the worst crisis they had experienced since the 1930s. Thanks to general macroeconomic conditions and the intervention of the central banks, there was no run in the bond markets in either Europe or the United States. Nevertheless, already in the spring of 2009, anxieties about excessive deficits and the need for consolidation were to be heard on both sides of the Atlantic, and nowhere more so than in Germany.
At the G20 in London, Merkel and Sarkozy had taken a public stance on the need for financial consolidation. In large measure this was political theater. Given the shock to Germany’s export sector, Merkel’s government could not ignore calls for a stimulus package. Unemployment was surging, and in the coming autumn the CDU and SPD had an election to fight. Early in 2009 Angela Merkel’s grand coalition brokered a deal. Finance Minister Steinbrück reluctantly agreed to a modest emergency package of extra spending and tax cuts.31 Automatic stabilizers would take care of the rest. But the question of fiscal consolidation that had preoccupied Merkel’s grand coalition since 2005 could no longer be dodged. The SPD and CDU agreed that even as they administered the stimulus, budget balance at both the national and regional levels of government would be enshrined in a constitutional amendment.
This was not a resolution forced on Germany by panic in the bond markets or immediate financial necessity. German government bonds (Bunds) were for the eurozone what US Treasurys were for the dollar world, the safe asset of choice.32 Despite its gaping deficit in 2009, Germany had no difficulty selling debt. It was not markets but the cross-party consensus on fiscal consolidation that had emerged before the crisis that dictated a decisive and irrevocable turn toward austerity. It was a decision driven by a long-term vision of competitiveness and retrenchment, the lobbying of taxpayer and business advocates and the regional interests of the rich states of western Germany.33 It was a choice that would change the politics not just of Germany but of the eurozone as a whole.
On Thursday, February 5, 2009, at a spartan Bundeswehr barracks in the precincts of Tegel Airport in the northern suburbs of Berlin, Chancellor Merkel personally brokered the deal.34 Under pressure from ultraconservative Bavaria, the fiefdom of the CSU, the Länder collectively committed themselves to a constitutional amendment that would end all borrowing by 2020. Until 2019, the stragglers—Bremen, Saarland, Berlin, Sachsen-Anhalt and Schleswig-Holstein—would receive annual subsidies of 800 million euros. In exchange they would submit to the external review of their fiscal policy by a so-called Stability Council (Stabilitätsrat). Länder that refused to respond to the council’s advice would lose federal support. Germany’s federal government, for its part, agreed to bind itself by constitutional amendment to borrow no more than 0.35 percent of GDP under normal circumstances.35 There would be exceptions in case of cyclical shocks, but the cap was severe. It applied to investment as well as to current expenditure.
No heed was given to the consequences that this draconian new rule would have for one of the largest bond markets in the world. Government bonds were seen only as a liability, not as a safe asset for savers. Austerity rhetoric ruled. Prime Minister Seehofer of Bavaria was jubilant. Chancellor Merkel declared a Weichenstellung (a change in the setting of the points). The debt brake was a demonstration that German federalism worked.36 On March 27, 2009, in the Bundestag, Steinbrück made a typically vigorous defense of the constitutional amendment. It was a matter not of macroeconomics but of democratic autonomy, of “fiscal room for maneuver.” Since the 1970s, despite notional debt limits, annual deficits had resulted in a budget in which 85 percent of federal spending was consumed by debt service and nondiscretionary spending. Fiscal politics were “petrified and devoid of life” (“versteinert und verkarstet”).37 Restraint on debt would give back to voters and parliament the freedom to choose their fiscal priorities. The antidebt consensus did not go entirely unopposed. Peter Bofinger, the maverick Keynesian member of the Wirtschaftsweisen, the official expert advisory committee on the German economy, was scathing in his criticism. If the German federal government was issuing no new bunds, where were German savers to invest the 120 billion euros that they sought to put aside every year? Because the German corporate sector was also generating a financial surplus, they could not on balance invest their funds in German businesses. Rather than funding investment at home, Germany’s savings would out of necessity flow into investments abroad.38 This was the financial counterpart to Germany’s chronic current account surplus, a symptom as much of repressed domestic consumption and investment as it was of export success. When it came to the Bundestag vote on May 29, 2009, the majority was wafer thin—68.6 percent as compared with the two-thirds required—but the amendment passed. It would take another two-thirds majority to undo it.
It was a domestic matter first and foremost. But even before it had been carried in the Bundestag, the debt brake was being touted in Berlin as a major element in Germany’s foreign economic policy. The strong Deutschmark and the independent Bundesbank had made West Germany a model of conservative economic policy. The tough Hartz IV measures set a standard for “labor market reform” in Europe. Now the Schuldenbremse would become Germany’s latest instrument of conservative economic governance for export.39 For a politician of Merkel’s ilk, the problem of public debt, like the problem of inflation, was a problem affecting all advanced societies. It went back to the 1960s. It had built up over decades. Now was the time to make a stand. As Merkel headed to the G20 meeting in London she hailed Germany’s debt brake as a great achievement. As she told an audience at the German Chamber of Commerce: “We are going to have to try to transfer this to the whole world.”40
At the London G20, the clash between Merkel, Brown and Obama had enacted familiar transatlantic stereotypes. The Germans were frugal and skeptical about Anglo-Saxon free-market finance. The Americans and the British were freewheeling advocates of whatever it took to keep the capitalist engine spinning. But this was a distortion on both sides. The Germans had plenty of fiscal problems of their own and bankrupt banks to match. Meanwhile, the Obamians were never the full-blooded high spenders that others painted them as. If Treasury Secretary Geithner urged the rest of the G20 to do more, it was in large part in the hope that America might do less. There were Democrats in Congress who wanted to make a major second effort and to push for another round of stimulus. But they got no help from the White House.41 Inside the administration, Christina Romer cut an increasingly lonely figure in her demand for a bigger fiscal effort. On occasion she would get the backing of Larry Summers. But when she became outspoken in favor of a second round of stimulus, as she did over the winter of 2009–2010, Romer was brutally silenced by Obama himself.42
What began to prevail in Washington, DC, as in Europe from the late summer of 2009, were the fiscal politics of the precrisis period. The aim of fiscal “sustainability” returned to the fore. Geithner at the Treasury targeted a deficit of 3 percent by 2012, a huge tightening relative to the deficit of 10 percent of GDP in 2009. Even more aggressive was Orszag at the OMB, who ran in-house competitions for the best cost-saving ideas.43 All the Obama administration’s medium-term priorities tended to point toward streamlining government and trimming spending. The top political priority was health-care reform. Though this was tarred by Republicans as European-style socialism, given the bloated inefficiency of America’s publicly subsidized, profit-making health-industrial complex—which at 17 percent accounted for twice the share of GDP attributable to the financial services industry—the priority of the Affordable Care Act was to cut costs. Likewise, the thrust of Obama’s foreign policy was retrenchment. In 2009 the White House was persuaded to put more troops into Afghanistan, but only because it was simultaneously running down its Iraq commitment. America’s soldiers didn’t like it, but the age of major spending increases was over. Though the Obama stimulus crested in the second year of his presidency, this was offset in 2010 by cuts to other areas of federal spending and a crushing contraction in state and local spending. Though it suited no one to acknowledge the fact, between 2009 and 2010 Germany’s deficit was actually increasing more rapidly than that of the United States.44 Though the arguments were apparently more transparent, the politics of fiscal policy in the wake of the crisis were in their own way no less opaque than those that framed monetary policy.