David's Bookclub: The New New Deal
Michael Grunwald's The New New Deal is an important book in danger of being bypassed by events. The Washington policy elite is eager to turn its back on the stimulus of 2009-2011 to its perennial favorite occupation, worrying about the budget deficit. The liberal readership that ought to be the natural market for this book takes its cues from President Obama and his administration. And they, whatever their private feelings, don't want to talk much about a stimulus widely perceived by the voting public as a failure. It's telling that Grunwald, who wrote an early cover story for Time magazine hailing Obama as FDR Redux, could not score an interview with the president he so full-throatedly champions. Grunwald amusingly describes how he finally desperately put his request to the president at a White House Christmas party. Obama's answer: "You want to talk to Vice President Biden."
Over the first three years of the Obama administration, the United States committed nearly a trillion dollars to counter-cylical fiscal stimulus, if you include the payroll tax holiday that expires at the end of this year. Relative to the U.S. economy, that's more than the New Deal spent on the job-creation programs of the 1930s. Almost everybody has an opinion on the stimulus. How many, though, actually know what was in it? Before I read The New New Deal, I would have insisted I did. Only after finishing the book did I appreciate how under-informed I was.
The Obama stimulus amounted to the boldest episode in liberal activism since the 1960s, a tsunami of big, bold initiatives in areas ranging from education reform to green energy to anti-homelessness. From the late 1970s until 2009, the non-defense, non-healthcare portions of the federal budget had been hemmed and restricted. Suddenly, there were no limits at all. No, it was bigger than that: suddenly, agencies were pushed and challenged to spend more than it had ever occurred to them to ask for.
Economists will long debate the macro-economic effects of this eruption of federal funds. Grunwald accepts the optimistic assessment, but the macro-economy is not his main interest. Grunwald is more concerned with the micro: with following the stimulus money and seeing what it bought.
It was the biggest and most transformative energy bill in U.S. history, financing unprecedented government investments in a smarter grid; cleaner coal; energy efficiency in every imaginable form; "green-collar job training"; electric vehicles and the infrastructure to support them; advanced biofuels and the refineries to brew them; renewable power from the sun, the wind, and the heat below the earth; and factories to manufacture all that green stuff in the United States. …
The stimulus was also the biggest and most transformative education reform bill since the Great Society. It was a big and transformative health care bill, too, laying the foundation for Obama's even bigger and more transformative reforms a year later. It included America's biggest foray into industrial policy since FDR, biggest expansion of antipoverty initiatives since Lyndon Johnson, biggest middle-class tax cut since Ronald Reagan, and biggest infusion of research money ever. It authorized a high-speed passenger rail network, the biggest new transportation initiative since the interstate highways, and extended our existing high-speed Internet network to underserved communities, a modern twist on the New Deal's rural electrification. It updated the New Deal-era unemployment insurance system and launched new approaches to preventing homelessness, financing infrastructure projects, and managing storm water in eco-friendly ways. And it's blasting the money into the economy with unprecedented transparency and oversight.
Well, that's a big shopping list. Now what did the stimulus bring home?
The unnerving answer that emerges from the pages of the most impassioned defense of the stimulus likely ever to be offered is: not much.
Here's the final anti-climactic conclusion to the story of the smart grid, for example.
The grid was not the interstate highway system. It didn't make sense for government to take it over. And a smart grid will require much more than meters and wires. It's a complex merger of modern information technology that distributes 1's and 0's with aging infrastructure that distributes electrons. It's going to be a lot harder to build than Skyline Drive.
But Obama was right too. His people could do more to accelerate the modernization of the grid - and by harping on the issue, he made sure they did. Some of their ideas would die [in Congress], like a plan to pay states to accelerate transmission projects, and an elaborate scheme to subsidize oversized lines. But some of their ideas would end up in the Recovery Act, like matching grants for smart grid projects, and new transmission lines for federal power agencies.
Will our grid be appreciably smarter in 2013 than it was in 2008? In a word: no.
Grunwald has some success stories to tell. It is true that the worst economic crisis since the 1930s did not lead to a noticeable spike in homelessness, and stimulus dollars deserve some of the credit.
But the single largest chunk of federal stimulus spending - the almost $90 billion in direct federal investment in new energy technology - seems to have gone up into the ether leaving little behind. The main reason? A concurrent change in the economy that administers a sharp lesson on the consequences of trying to out-plan free markets.
The Obama years coincided with the natural gas fracking revolution. As the price of gas tumbled, utilities substituted gas for coal as a fuel. In 2005, coal fired one-half the country's electricity; today, coal provides only one-third. Since gas emits only half as much carbon dioxide per unit of energy as coal, the substitution of gas for coal has caused US greenhouse emissions to decline sharply.
Cheap gas has also rendered government-preferred energy sources like solar even more uneconomic than they were beforehand. Meanwhile, the green-energy revolution's dual mandate - both to curb carbon emissions and to create new jobs - has engineered policy incoherence into the project from the very start. Green energy is not very labor intense, and the labor most needed is highly skilled labor that was already in high demand even in the worst weeks of 2009.
Even the most market-ready of alternative electricity technologies, wind, remains abjectly dependent on tax credits for its competitiveness. The Obama administration trumpets the fact that 75,000 Americans now work in various ways for the wind industry. At the same time, it warns that half those jobs will be lost if the wind tax credit expires, a sobering measure of the industry's continuing non-competitiveness.
On the automotive side, the stimulus
[P]rovided $7,500 rebates for early adopters [of electric cars and trucks], funded a forty-fold increase in the number of charging stations, and created an advanced battery industry from scratch.
Subsidizing firms, however, is a very different thing from creating an industry.
As Obama told the CEO of [one of the advanced battery makers]: We're just getting you started. You've got to make this sustainable. Stimulus-funded failures naturally attracted far more attention than the routine failures of businesses that receive run-of-the-mill subsidies and tax breaks ever do.
Grunwald makes that latter point as if he were identifying some systematic bias or unfairness. But the point is wrong - or, rather, misconceived. "Routine failures" generate plenty of attention from the people whose money has been lost. When government investments fail, the attention is universal because the loss is universal.
A private investor in electric cars knows that he must compete against future improvements in conventional motors, against hybrids, and against other changes that have nothing to do with transportation altogether. (For example: if aging baby boomers decide to move closer to work, they may discover they can save more simply by operating their existing vehicles less rather than by paying tens of thousands for a new electric car, no matter how efficient.)
A government investor, however, thinks in a very different way: with a view to reshaping the market rather than working within the market. Because government's ambitions are so much larger, the consequence of a government investment failure is larger too.
If Grunwald's story has a moral, the moral is different from that which he imagines. To the extent that the Obama stimulus operated as a pure Keynesian fuel injection - putting more money into consumers' pockets, preventing or mitigating layoffs of state and local economies - it seems genuinely to have cushioned the free fall of 2008-2009.
Some of the individual social service programs contained in the stimulus did some real human good, especially the expansion and reform of unemployment insurance.
But there's a reason that direct government investment and employment went out of style after the 1930s, and the arguments against such investment have only got stronger as the U.S. economy has become more sophisticated. The problem with the "New New Deal" is the same as the problem with the old "New Deal" : what works as emergency aid does not work as an economic growth strategy. Which is not to deny that some government investments can bear fruit. Of course some can: it's a very unusual investor whose success rate is literally zero. But most don't, and the Obama administration's record seems unlikely to improve on that of other governments that have succumbed to the same fatal conceit.
The market-oriented Obama adviser Larry Summers gets much critical treatment in the pages of Grunwald's book. Yet it is his warnings that stand up better than the more vaulting ambitions of some of Grunwald's more preferred protagonists.
A stimulus package, he argued, should be timely, targeted, and temporary. … [S]timulus should spur short-term growth without unnecessarily expanding long-term deficits ….
One more adjective could be added to Summer's list: circumspect. Stimulus should not be an attempt to improve upon market results, to correct for market failures to value what some in government believe should be valued. That kind of hubris always ends badly. In arguing the opposite in such minutely reported detail, Grunwald builds the case against the very stimulus he set out to celebrate.