The Outlook for the Economy

After a lengthy bill of indictment of the Obama Administration’s economic policies Martin Feldstein summarizes the state of the economy:

The economy will continue to suffer until there is a coherent and favorable economic policy. That means bringing long-term deficits under control without raising marginal tax rates—by cutting government outlays and by limiting the tax expenditures that substitute for direct government spending. It means lower tax rates on businesses and individuals to spur entrepreneurship and investment. And it means reforming Social Security and Medicare to protect the living standards of future retirees while limiting the cost to future taxpayers.

As the old Magic 8 Ball used to put it “Outlook not so good”.

16 comments… add one
  • sam Link

    “As for the “stimulus” package, both its size and structure were inadequate to offset the enormous decline in aggregate demand.”

    Oh yeah — I can just hear the chorus of hosannas from his corner had there been a bigger stimulus. And as for what you quoted, let’s just go the full Pawlenty and be done with it (it being the country).

  • Drew Link

    Mr. Feldstein is spot on. As I’ve been (beating my head against the wall) explaining for several years now, the business community, especially the small business community, views the current regime as having a policy that ranges from incoherent to hostile. They have reacted in perfectly rational and predictable fashion. The results are (and were) predictable.

    We need an agent of growth. We currently have an agent of Big Business – because they represent subsidy driven Big Contributions and Big Labor, which also means Big Contributions – and Big Government.

    The Left’s support of Obama, and its purported care for The Little Guy, has become a groteque and cruel joke.

    Glad I’m not unemployed. Icepick may actually have a point if the prevailing political environment is sustained. Its hopeless.

  • sam Link

    “Mr. Feldstein is spot on.”

    So you agree with him that the stimulus wasn’t large enough?

  • Drew Link

    “So you agree with him that the stimulus wasn’t large enough?”

    Attempt, hard as it may be, not to be trite, and focus on the thrust.

  • john personna Link

    No Drew, there’s something serious here. Feldstein wrote:

    As for the “stimulus” package, both its size and structure were inadequate to offset the enormous decline in aggregate demand. The fall in household wealth by the end of 2008 reduced the annual level of consumer spending by more than $500 billion. The drop in home building subtracted another $200 billion from GDP. The total GDP shortfall was therefore more than $700 billion. The Obama stimulus package that started at less than $300 billion in 2009 and reached a maximum of $400 billion in 2010 wouldn’t have been big enough to fill the $700 billion annual GDP gap even if every dollar of the stimulus raised GDP by a dollar.

    Does he just want his cake and to eat it too?

    Or is he saying that it should have been a bigger stimulus then, but we do have to knuckle down to savings now?

  • john personna Link

    (Maybe that interpretation would not be far off, that the stimulus window is gone, and now the semi-austerity plan we are on is the right one.)

    Crazy Republicans will tell you it’s all Socialism all the time, but in fact total government spending as a percentage of GDP peaked in 2009, and is now in a down-trend.

  • Drew Link

    C’mon, jp, surely you jest. There are two types of stimulus. Both result in short term deficit: spending or tax reduction. We chose spending, and we got what I (and all of the economists I respect) said it would: cronyism, marginal short term benefit, and being saddled with long term costs. We were right. We’ll never know what short term deficits and long term benefits might have accrued to a commensurate tax reduction policy. I posit it would have been a better outcome.

    Feldstien is just doing the math, and then correctly lamenting the waste that’s been laid, and attempting to prescribe a better policy posture going forward.

    BTW – I don’t think there is a chance in hell Team Obama will take his lead. That’s why – to coin a phrase – “Outlook not so good”.

  • john personna Link

    I disagree on two counts right off. First, I’m not sure that after years of tax cuts and easy money (interest rates) tax cuts still are stimulative. Second, the stimulus we are discussing was composed in part of tax cuts.

    Third, all of us here hated the structure of the stimulus, but the dynamics of it were far from simple. I had, for instance, those tax cuts designed to get GOP votes.

    Doesn’t it strike you as just a little bit ironic that it is treated as a Presidential package now, rather than a Congressional one?

  • john personna Link

    (Talk about having shot wads, we were lowering taxes and interest rates 2000-2008. Is there really any surprise that the combo had lost its mojo?)

  • sam Link

    Look, Drew, don’t be dense.

    Feinstein wrote:

    “As for the “stimulus” package, both its size and structure were inadequate to offset the enormous decline in aggregate demand.”

    That implies the possibility, at least in his mind, of a stimulus package adequate in size and structure to offset…etc. Simple logic dictates that, btw. For if you say his claim is true, then this must be false:

    The “stimulus” package, in both its size and structure, was adequate to offset the enormous decline in aggregate demand.

    Oh, and just for the historical record, one-third of the stimulus was tax cuts. It wasn’t all spending.

  • I think it’s important to point out that federal deficit spending does not ipso facto increase aggregate demand. That’s what the complaint was about the tax cuts of the early Aughts and the empirical evidence on the consequences of the various non-tax spending components of the ARRA is that it didn’t increase aggregate demand, either. What actually happened was that rather than state and local governments borrowing the federal government did. Little or no increase in aggregate demand.

    IMO that’s a significant problem with Keynesian stimulus in the U. S.: coordinated policy is impossible.

  • steve Link

    “We need an agent of growth”

    If only we had a president that would cut taxes, deregulate banks so that money could move more easily to where it is needed and maybe had a business degree so that businessmen would know they were understood. Prosperity forever.

    Steve

  • john personna Link

    Dave, in a downturn, with consumption falling in all sectors, how is deficit spending not additive to GDP?

    I find “spooky interactions” to decades future tax to be totally unconvincing, something cribbed from quantum pairing rather than rooted in human nature.

    Human nature as we know is now-biased with a strong recency tilt.

  • john personna Link

    (If you mean that GDP can expand without providing “stimulus” the i’d suggest the word is used to narrowly. It is about spending, velocity, and shaping the recent experience of those.(

  • how is deficit spending not additive to GDP?

    There are any number of ways. Debt-financed tax cuts can be saved rather than spent. Or used to pay off debt.

    Debt-financed spending by the federal government can replace spending that state or local governments would have engaged in anyway. Federal borrowing can be offset by less state or local borrowing.

    The last, BTW, is what is believed to have happened to reduce the effect of ARRA.

  • john personna Link

    I think you dodged there. My direct question was how one can deficit spend and not add to GDP.

    The saving alternative speaks to something else, opportunity costs, and not the “immaculate spending” idea I’m opposing.

    The second, that federal spending may be offset by state and local reductions, doesn’t really grip the argument either. There you are saying that if there isn’t really net spending increase, then there isn’t stimulus. No one has suggested that federal spending was wholly offset by local reductions.

    So I don’t see a real argument that we can have (net) deficit spending without an improvement to GDP, and therefore economic experience, and therefore animal spirits.

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