Reviving the Economy: Signs of Stimulus?-Economists Weigh In
Monday, May 25, 2009SUSIE GHARIB: Let's get back now to the question whether the Obama plan is really working and will all that stimulus money create genuine economic renewal? I turned to two prominent economists to get their analysis: Glenn Hubbard, dean of Columbia University's graduate school of business and former economic advisor to President Bush and Alan Blinder, economics professor at Princeton and former vice chair of the Federal Reserve. I began by asking Glenn is the U.S. economy on sounder footing because of the Obama economic plan?
GLENN HUBBARD, DEAN, GRADUATE SCHOOL OF BUSINESS, COLUMBIA UNIVERSITY: Well, we have stopped the free fall in the U.S. economy, which is a very, very healthy thing. And I think the passage of the stimulus package President Obama proposed does get some credit, at least, in changing the psychology here. It will be a while before we know how effective the stimulus package is, of course. I think credit there has to be shared with the Federal Reserve and the Fed's emphasis -- along with the administration's -- on getting financial markets working well is exactly the right thing.
GHARIB: Alan, what do you think?
ALAN BLINDER, ECONOMICS PROF., PRINCETON UNIVERSITY: Well, I certainly agree that we have to share credit with the Fed. A lot of things the Fed has had in motion for a long time and are starting to have some really significant effects on credit markets, which are all to the good. Most of the administration's programs, including the stimulus, are still pretty new. I mean, the tax cut part of the stimulus just started weeks ago, for example. And the spending on infrastructure is just beginning to dribble out. Eventually that dribble becomes a stream and then a river and then a flood, but we're not there yet for a few months. That's going to help as it comes online. But, frankly, relative to a month or two ago, the banking system is looking better. There seems to be some sort of resolution to the auto crisis, though it's not fully baked in the cake, yet. And, you know, in general you're starting to see some signs -- some significant signs I would say of improvement.
GHARIB: Glenn, let me go back to you. How are we going to know if the administration's plan is working? What are you looking at? Is it housing numbers, job losses, something else?
HUBBARD: Well, I think given the structure of the stimulus package, we'll know over the next several months in the response of consumer spending. And we already have seen some improvements in confidence that suggests that might have a positive effect. But the stimulus plan used up a lot of political capital in a relatively ineffective way, but we will know over the next six to 12 months. Housing is, to a first approximation, not really addressed in the stimulus plan.
GHARIB: Alan, we're 100 days into this stimulus package. How long do we stay patient and say, let's give time for it to work? And at what point do we say, it just doesn't go far enough.
BLINDER: Yeah, longer. I mean, in macroeconomics, we don't measure time in days, we measure in quarters. So you're talking about one quarter. Realistically, any stimulus package -- almost regardless of what's in it -- is going to have a negligible effect in one quarter. You've got to go two, three, four quarters through time to see how this plays out. So I would say -- we ought to be seeing some real signs of the effects of the stimulus by the third quarter. I think, also, we ought to be seeing the economy starting to grow rather than shrink by the third quarter. If that's happening, I'm going to start feeling much better about it. If that's not happening, I'm going to start feeling that maybe this wasn't enough or it's not working or we have to try something else.
GHARIB: Glenn, how do you feel on that? Do you think we need more stimulus? Do we need to do something else? If there is more money, where should the government put it?
HUBBARD: Well, I don't think any politically likely stimulus package that's effective is coming. I think the better route would be to continue to rely on the good work of the Federal Reserve and improvements in financial markets. I think continued emphasis on stimulus package might bring some unwanted policy, frankly and in some cases some industrial policy.
GHARIB: Now, one question that many people are asking and it's a new question. It's not about stimulus and it's not about recovery, but about the government's growing involvement in business. And some people say that's a bad development. Alan, what do you think?
BLINDER: You know, I think it's been foisted on the government. I don't see the Obama team coming in and saying, you know, I'd really like to grab hold of the banking industry, the insurance industry, the auto industry. And let's get government influence on those businesses. These businesses are falling into the government's laps. The government has had to rescue AIG, as we know, a number of banks, as we know, sort of rescue Chrysler and General Motors. That seems to be going OK right now, could be better, could be worse, but seems to be going OK. And I think we have to ask the counterfactual, would we have been better off with a laissez-faire approach to these and just let all of these companies fall by the wayside in this environment? I think the answer to that is easy and it's no.
GHARIB: Glenn, where do you stand on this debate about government involvement?
HUBBARD: Well, I would certainly agree with Alan's bottom line that the answer for laissez-faire in this environment is no. Having said that, while the government did inherit this, it needed to be involved. There would have been much more efficient ways -- both in the banking system resolution and in particularly in the auto sector -- to resolve the crisis.
GHARIB: Both of you have advised presidents in the past. In a few words, what advice would you give to President Obama on what he still needs to do to fix the economy? Glenn?
HUBBARD: Well, I think he has to focus on inspiring confidence and changing the pivot away from the free fall to optimism. I think by in large, he's doing a pretty good job with that. But I think he also needs to focus very squarely on getting financial markets and financial institutions working and there it's kind of a mixed bag, some policy successes and some, frankly, failures.
GHARIB: Alan, some quick advice for the president.
BLINDER: I think right now, for the next few months, it's about execution. It took a while for the administration to roll out all its policies. I don't know that they are all rolled out yet, but most of them, in terms of rescuing the economy, are now rolled out. Some of them have just recently been rolled out. And it's about execution. It's about executing the stimulus. It's about executing the foreclosure mitigation. It's about executing the TALF and the TARP and all of this stuff. It's really a question of getting it done.
GHARIB: All right, gentlemen, thank you so much. Alan, Glenn, we really appreciate your time.
HUBBARD: Thanks.
BLINDER: Pleasure.
