Martin Feldstein Now Skeptical of the Stimulus Package
Initially Martin Feldstein was a supporter of the stimulus package. However, he is now opposed to the current pile of pork that has come out of the House of Representatives.
As a conservative economist, I might be expected to oppose a stimulus plan. In fact, on this page in October, I declared my support for a stimulus. But the fiscal package now before Congress needs to be thoroughly revised. In its current form, it does too little to raise national spending and employment. It would be better for the Senate to delay legislation for a month, or even two, if that’s what it takes to produce a much better bill. We cannot afford an $800 billion mistake.
Start with the tax side. The plan is to give a tax cut of $500 a year for two years to each employed person. That’s not a good way to increase consumer spending. Experience shows that the money from such temporary, lump-sum tax cuts is largely saved or used to pay down debt. Only about 15 percent of last year’s tax rebates led to additional spending.
In other words the Bush tax rebates failed…so lets do it again. Repeating Bush’s mistakes is not a very sound strategy for getting the economy back on track.
Instead, the tax changes should focus on providing incentives to households and businesses to increase current spending. Why not a temporary refundable tax credit to households that purchase cars or other major consumer durables, analogous to the investment tax credit for businesses? Or a temporary tax credit for home improvements? In that way, the same total tax reduction could produce much more spending and employment.
Postponing the scheduled increase in the tax on dividends and capital gains would raise share prices, leading to increased consumer spending and, by lowering the cost of capital, more business investment.
This seems somewhat reasonable. A tax credit on purchasing a new car, for example, will lower the cost of purchasing said car. And basic economic theory tells us that when the price of something goes down the more people will buy.
On the spending side, the stimulus package is full of well-intended items that, unfortunately, are not likely to do much for employment. Computerizing the medical records of every American over the next five years is desirable, but it is not a cost-effective way to create jobs. Has anyone gone through the (long) list of proposed appropriations and asked how many jobs each would create per dollar of increased national debt?
This also makes sense. Computerizing medical records is not a bad idea, but it doesn’t strike me as a way to get new jobs created in the economy quickly, which is what we need. Perhaps computerizing medical records should be encouraged and maybe the federal government can play a role, but it strikes me as yet another item in this stimulus package that is there more out of pork barrell politics than an actual desire to raise employment this year.
And we are reminded that once again, incentives matter,
The plan to finance health insurance premiums for the unemployed would actually increase unemployment by giving employers an incentive to lay off workers rather than pay health premiums during a time of weak demand. And this supposedly two-year program would create a precedent that could be hard to reverse.
Wouldn’t that be ironic, a plan designed to help the unemployed actually goes about leading to more unemployed people. And how do you go about telling the person who has loses their job in 23 months that the following month they wont get all the nice benefits people who were unemployed a few month previously enjoyed? My guess is that this aspect of unemployment benefits will quickly become permanent which will mean an permanent shift upwards in spending.
Now maybe that is something to consider, but the idea that this is a temporary increase in spending is not true. Further, we still have to consider the longer term fiscal imbalances facing the U.S. government. These imbalances are enormous and failure to take them into consideration could make them very, very difficult to deal with.
Think of this possible scenario: You just watched your 401k or equivalent retirement fund take a big hit. But in 9 years the economy has recovered and your 401k has been growing and you are starting to feel good again about retiring someday. But wait, Medicare now needs money. Where to find it? Why look, those 401k’s are nice and ripe for the picking.
A large fraction of the stimulus proposal is devoted to infrastructure projects that will spend out very slowly, not with the speed needed to help the economy in 2009 and 2010. The Congressional Budget Office estimates that less than one-fifth of the $50 billion of proposed spending on energy and water would occur by the end of 2010.
We can add another person to the growing list who have noted this problem. Oh, and another we can add to this list? Christina Romer, President Obama’s head of the Council of Economic Advisers. Her paper, with her husband David Romer, looks at changes in tax rates and concludes that using tax rate changes for counter-cyclical policy isn’t too effective. If this is indeed the case, as her research supports, then it is even more true for spending. Why? Changing tax rates is relatively simple compared to building bridges, repairing roads and building new buildings. The latter all have to go through the bureaucratic/regulatory process which in some cases can take quite sometime. There will need to be a bidding period, bids evaluated, various types of impact studies, and so forth, and then if things work really fast 6 months later work actually starts.
And Feldstein isn’t totally opposed to fiscal stimulus. His view is that if we are going to do it, lets do it right.
The problem with the current stimulus plan is not that it is too big but that it delivers too little extra employment and income for such a large fiscal deficit. It is worth taking the time to get it right.
I’m more skeptical than this. I think that even taking some extra time to get it done still wont result in timely stimulus to the economy, at least for the spending aspects of the bill. Things like extending unemployment benefits, tax relief and such will get into the economy quickly, but all spending aside from that really wont have any stimulative impact at all. We should cut that part fo the bill out.
But, as Rahm Emmanuel said, you can’t let a good crisis go to waste when trying to implement your political objectives.
“You never want a serious crisis to go to waste,” Emanuel declared last week.
“It’s an opportunity to do things you could not do before. If there’s a silver lining, it is: you can do big, bold things — throw long and deep.