STOCK MARKET WATCH -- Wednesday, 25 January 2012

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25. How Larry Summers' Memo Hobbled Obama's Stimulus Plan

http://www.commondreams.org/view/2012/01/25-2

The Obama administration's economic blueprint was fatally flawed: it led to a weak stimulus and premature deficit reduction
by Dean Baker

Those still wondering why the Obama administration surrendered so quickly on the drive for stimulus and joined the deficit reduction crusade, got the smoking gun in an article by the New Yorker's Washington correspondent Ryan Lizza. Lizza revealed a 57-page memo drafted by Larry Summers, the head of the National Economic Council, in the December of 2008, the month before President Obama was inaugurated.

The memo was striking for two reasons. First, it again showed the economic projections that the administration was looking at when it drafted its stimulus package. These projections proved to be hugely overly optimistic.

They showed that even without stimulus, job loss would peak at around 5 million in the 4th quarter of 2009. They projected that the economy would then begin to add jobs at a fairly rapid pace, regaining all the lost jobs by the end of 2011. In this non-stimulus baseline scenario, the unemployment rate never rose above 9.0%, which it would hit in the winter of 2010.

In reality, the economy had already lost almost 7 million jobs by May of 2009, the month when the first stimulus dollars were going out the door. The job loss didn't stop until February of 2010, at a point where the economy had lost 8.5m jobs. Even with the benefit of the stimulus, the economy is still down by more than 6m jobs from its pre-recession level.