Martin Feldstein calls for trillion dollars of stimulus and closing tax loopholes

[oldfart]

Martin S. Feldstein, a professor of economics at Harvard, was chairman of the Council of Economic Advisers from 1982 to 1984, under President Ronald Reagan.

Source link: http://www.nytimes.com/2013/12/09/opinion/saving-the-fed-from-itself.html?ref=opinion&_r=0

To get the economy back on track, President Obama should propose, and Congress should enact, a five-year fiscal package that would move the growth of gross domestic product to above 3 percent a year and focus on direct government spending on infrastructure.

Although the mission of the military has been reduced with the end of the wars in Iraq and Afghanistan, there is also substantial need to replace and repair the equipment of the armed forces. Some of this aid could also extend to state and local governments.

The total price tag over five years would have to exceed $1 trillion to achieve the needed rise in the economic growth rate. The lack of “shovel-ready” projects is not an excuse for not pursuing this strategy or for diverting the funds into income transfers and other low-impact spending of the kind that made the 2009 stimulus so ineffective. It would be better to spend a year or two preparing for the right kind of spending.

It would be irresponsible, however, to add another trillion dollars to the national debt without higher revenues or lower spending. Doing so would frighten financial markets and business executives, reducing private spending and offsetting the stimulus’s benefits.

The key, therefore, is to combine a major short-term fiscal stimulus with long-term deficit reductions that would cause the ratio of debt to gross domestic product to begin declining by the end of this decade. Slowing the growth of Social Security and Medicare and raising revenue by limiting the subsidies that are built into the tax code could shrink future deficits to less than 2 percent of gross domestic product, enough to put the debt-to-G.D.P. ratio on a path back to the 40 percent level that we had before the recession.

Emphasis mine. If you don't know who Martin Feldstein is, I suggest you move on to another thread more attuned to your worldview.

The chances of Feldstein's proposal is nil. He is proposing the sort of "grand bargain" Obama offered in 2010 without success. Not only would it be opposed by virtually every Republican on ideological and "make Obama fail" grounds, it would be a non-starter with business interests. Add to that the fact that many progressives have found a backbone and would oppose cuts in Social Security and Medicare, period.

It also would be bad economics. In theory this proposal is pretty much what a lot of economists thought would work in 2009 and 2010, but the persistently bad economy has raised doubts about this approach. Cutting deficits without raising taxes is by definition de-stimulus. If tax increases are off the table, then Feldstein would presumably oppose his own stimulus proposal and accept permanent secular stagnation.

So what do folks want to discuss?

Is Marty to be drummed out of the conservative club?

Who now is the spokesman for "conservative" economic policy?

Post-Feldman, what IS conservative economic policy? R & R and A & A?

Apart from the politics, does Marty's proposal make good economic policy?

My answers are that the first two questions are political, and I play for the other team. I am interested in conservatives' answers but hesitate to speak for conservatives.

My observation regarding the third is that there is not now, and never has been, a consistent and coherent conservative story for what is happening to the economy. There have been mutually inconsistent stories about how Keynes was wrong, what monetary policy ought to be, what creates inflation, and what creates growth. Conservatives have shifted ground as theory after theory has proven wrong rather than examine the fact that they never really had a model that was consistent with traditional economic theory or economic history.

Finally, I think that Marty's proposal is not good policy. It could be made into good policy, so it has usefulness as a starting point. As Larry Summers has argued at the IMF summit, we probably have been in a secular stagnation a la Alvin Hansen for the last thirty years, the "natural" (in the Wicksellian sense) real interest rate is negative, inflation too low, and the economy is perpetually very close to a classical liquidity trap if not in it. America and Europe are the new Japan. Abandoning monetary stimulus is moving in the wrong direction, and this is the object of Marty's proposal. Promising an end to stimulus (lowering the deficit prior to full recovery) is also a prescription for stagnation. The only policy which makes sense would be a commitment to getting the real growth rate to 3% or higher, come hell, high water, or Merkel's nervous breakdown, which to Marty's credit is just an extension of his policy. Inflation will be a bit higher and that's good. Some structural issues will have to be addressed and that is good too. In America, this means either a dramatic increase in the minimum wage or (better) a robust public employment program.

So friends and neighbors, what say you?