JEFFREY BROWN: As the debate in Washington moves to the Senate, we look at some key questions: What exactly is a stimulus plan supposed to do at a time of economic crisis such as we’re facing now? Does the enormous and, by any measure, historic plan on the table succeed at those goals? And, if not this, what?
We turn to two prominent economists for some answers: James Galbraith of the University of Texas at Austin; and Martin Feldstein of Harvard University.
Well, James Galbraith, address that first question if you would. What are the key things you want from a stimulus plan, given where we’re at now?
JAMES GALBRAITH, University of Texas: You want it to be large enough to make a difference. You want it to be sustained enough so that it continues to help the economy recover. And you want it to do some good, to do some practical good in the country.
It’s very useful if it helps to stabilize parts of the economy that are otherwise in severe danger of collapsing. And the one area that’s very important here is the expenditures on public services of state and local governments, which are very, very strongly affected by declining property tax revenues and the requirement that those states and localities balance their budgets if their revenues decline.
They have to cut spending. They have to cut their teachers, their fire, their police. Preventing that from happening is a very high priority right now.
JEFFREY BROWN: All right, let me start — Martin Feldstein, just pick up there. I mean, can we have an agreement at the outset on what we’re looking for?
MARTIN FELDSTEIN, Harvard University: Well, one difference is that I would say that it’s not enough to make a difference. I think that was Jamie Galbraith’s phrase in terms of the stimulus.
We’re looking at an enormous, enormous decline in consumer spending coming along and an enormous decline in home construction, so there’s a very big gap in the economy. And so that’s why we need to have a fiscal stimulus plan to fill that gap.
And filling a quarter of the gap or filling a half of the gap isn’t enough. It has to be more substantial or we’re going to continue to see economic decline.
Many tax cuts, spending delays
JEFFREY BROWN: All right. Well, let me stay with you, and then let's look at what is being debated now by the criteria you've both set forward. What do you see in what's being debated in Washington?
MARTIN FELDSTEIN: Well, it's a plan of about $400 billion a year for two years. Now, not all of that $400 billion is going to turn into additional spending. A lot of the tax cuts, we know on the basis of what happened with the tax rebate last year, are basically going to be saved. So they're not going to add to spending.
And in the spending programs, many of them are going to be stretched out over a long time. The water and energy program, only one-fifth of it will happen in the first two years, this year and next year.
So what we have, then, is something that's going to be much smaller than the size of the hole that's left by the decline in consumer spending and the decline in housing construction. That's what worries me about this plan.
JEFFREY BROWN: OK. Professor Galbraith, what do you see?
JAMES GALBRAITH: What the Congress has done with this bill is to move as quickly as it could do within the framework of programs that were already authorized but for which appropriations had not been made, which are not fully funded.
And so working really at very great speed, the Appropriations Committee and to some extent the Ways and Means Committee put funds into those existing channels, and that enables them to have a bill that's relatively coherent that can be on the president's desk within a few days.
But I completely agree that this is only a start. We are not going to fill the entire fiscal gap with a program which amounts to about between 2 percent and 3 percent of GDP at most. And what Professor Feldstein said about the relative ineffectiveness of the tax portions in the short run, I think, is also entirely correct.
So this is -- we are not going to return to normal on the basis of this first step. What I hope we will do is buy some time and begin to focus the attention of the Congress on the true scale of the problem.
And, by the way, we do not know how large the hole in the economy, how serious and deep the collapse is going to be. We are seeing phenomena that we have not seen in our professional lifetimes, that the country has not seen since the 1930s, a series of sort of interdependent collapses and, again, in housing and in commercial construction, in state and local government, in the industrial sector, and all of these things tend to feed on each other.
So what we need to have, ultimately, is an intervention that's on a substantially larger scale and one which is really big enough to make a difference. If it turns out that we then do succeed, one can begin -- one doesn't have to do everything. You can hold off and claw back some of the excess, but you need to -- we will be needing to move forward aggressively going forward from this.
More 'creative' steps are necessary
JEFFREY BROWN: You wanted to jump in on that?
MARTIN FELDSTEIN: See, what worries me is that we're talking about really big numbers. We're talking about adding $800 billion to the national debt. That means higher taxes in the future, higher tax rates, hurting the economy in the future. So we can't think of $800 billion as just, "Well, this is a down payment. We'll do this, and then we'll come back in a while and do some more, and then perhaps come back and do some more."
We've got to spend these tax dollars, these deficit dollars, in a constructive way and the most constructive way possible for helping to bring the economy back. And there are a lot of nice things in this bill that really don't do much of that.
So we shouldn't be wasting this money on a variety of things which really don't add to employment and additional national spending.
JEFFREY BROWN: But, Professor Galbraith, just to be clear, you're not seeing this as a waste. You're seeing this as just plugging some holes and you want to see some more, right?
JAMES GALBRAITH: I think this is actually quite an efficient bill. I don't think the funds are wasted.
But I do think that we are going to have to have some additional creative and imaginative steps, things that can operate on a fairly large scale, like increasing Social Security benefits or cutting the payroll tax basically wholesale and declaring a holiday in that area, which would put purchasing power into the economy that is proportionate to the scale of the decline that we're seeing.
MARTIN FELDSTEIN: But cutting the payroll tax, like the $500-per-person tax cut that the bill contains for two years, those are going to mainly go into additional savings. So if we really want people to spend, we ought to have incentives to spend.
So we ought to have something like an investment tax credit for businesses and a consumer durable and home improvement credit for households. Why not say, if you buy a car or if you buy a fuel-efficient car, you'll get a very substantial tax break as a result of that, if you put money into fixing up your home similarly?
Adding to the national debt
JEFFREY BROWN: You know, you both have experience here in Washington and, of course, this is a very political process. Professor Feldstein, you wrote in an op-ed today where you said it would be better to take more time and get it right. Now, that seems to go against what we've been hearing for quite a while, that we must act now. How much time politically do we really have?
MARTIN FELDSTEIN: Well, I advocated moving very quickly some months ago on the assumption that they would put together a package that really delivered a lot of stimulus, a lot of increased employment and GDP per dollar of deficit.
Now I think they have come up with, for whatever reason, a plan that doesn't do very much of that. And so I would say take another month, rather than say, well, let's spend $800 billion of increased deficit and then feel we have to come back and do very much more again.
So I am very worried about adding too much to the national debt. So whatever we add to the national debt, and whenever we have these deficit finance programs, I want to see that they have substantial punch, substantial bang in terms of increasing national spending, GDP, and increasing employment.
JEFFREY BROWN: James Galbraith, do you think we have time to wait?
JAMES GALBRAITH: I don't think we do, but I also don't think that there are any magic bullets, that there are any particular formulas that are going to give us massively more bang for the buck.
We're in an environment where, as Professor Feldstein said, many people do want to hoard cash. So the knock-on effects of the spending program may be relatively small.
They are obviously -- there are important direct effects. When the government spends a dollar, that adds to a dollar to the gross domestic product. That's an accounting fact.
I do think the payroll tax holiday is relatively effective because it goes to working families and it remedies -- it offsets the most regressive tax that we have.
MARTIN FELDSTEIN: Wouldn't you say the $500...
JAMES GALBRAITH: So a larger proportion of that is going to be sent...
MARTIN FELDSTEIN: Wouldn't you say the $500 does that?
JAMES GALBRAITH: Well, the $500 does move in the right direction, but...
MARTIN FELDSTEIN: But it'll be saved. So it...
JAMES GALBRAITH: ... actually it's slower to implement, and in many cases -- and in many cases, it will not be seen until the -- it may not be seen until income tax returns are filed in a year. Cutting the withholding on the payroll tax would be seen immediately.
So there are some differences here. And I think it's -- that's in general the right way to go if you want to get up to scale quickly, is what I think is a very important objective.
JEFFREY BROWN: Let me ask you -- I want to just ask you both for a real brief response here. Just it's back to the political economy, if you would. I mean, part of the news last night was that no Republicans voted in support of the bill. Now we're looking at the Senate.
Does it matter -- from where you stand, does it matter if this becomes a partisan issue here in Washington, how it's resolved? Professor Galbraith, you first.
JAMES GALBRAITH: Well, I think the Republican Party has taken its stand here. They're not standing with the president. The president, I think, has a great deal of moral authority in an urgent situation taking over from a failed administration and with the support of the American people.
And so the Republican Party can make its choices. In the House, frankly, they are marginalizing themselves by not cooperating with the administration's program.
JEFFREY BROWN: And, Martin Feldstein, what's your response?
MARTIN FELDSTEIN: I think in the Senate, the Republicans have a chance to make some really substantial improvements in this legislation, and I hope they will do that. I hope they won't simply say, "I'm here to vote no," but rather to say, "Let's sit down and improve this so that we -- for the dollars that are being added to the national debt -- have a bigger impact on employment and on the level of GDP."
Outrage over Wall Street bonuses
JEFFREY BROWN: And one more question. We heard the president express some outrage today over bonuses that were paid on Wall Street last year. Professor Feldstein, is that a political matter? Is it an economic matter at this point? How does that play into all this?
MARTIN FELDSTEIN: Well, it is both. It's a complicated thing that Wall Street has been paying very high bonuses for years, so it is an economic matter, but it can be turned into a political matter.
I don't think we want the government coming in and interfering in general with compensation or bonuses. But I think where the government is actually putting capital into individual businesses, where the government is bailing out those specific businesses, then it has a different kind of authority to be able to request limits.
Of course, if it says, "Here's a bank, and it's paying bigger bonuses than the government thinks," and it stops that, it's going to lose those employees to other financial institutions where the government doesn't have a say. So this is not an easy problem to solve.
JEFFREY BROWN: And, James Galbraith, a brief response on that?
JAMES GALBRAITH: Well, these firms came to the government for help. They got help. They have an obligation, I think, to be responsive to the president on this matter. There should be firm compensation limits.
And, frankly, if the top management leaves these institutions and retires on the many millions that they've earned in recent years, and if these institutions are then taken over by competent middle management with long-term perspectives who can help turn them around and really change the way they do business, it seems to me that that would be a very good thing.
So I think actually the firm compensation limits would be very good for the governance of our major financial institutions going forward.
JEFFREY BROWN: All right. We will leave it there. I want to thank you both very much, James Galbraith and Martin Feldstein. Thanks a lot.