JEFFREY BROWN: Jump-starting a deeply battered economy is clearly on the table now for the incoming president and Congress. The question is, how best to do it?
We’re joined by two economists who served past presidents and advised the candidates in this campaign.
Alan Blinder of Princeton, a former vice chairman of the Federal Reserve Board, he served as an economic adviser to President Clinton and recently to Senator Obama.
And Martin Feldstein of Harvard, he served as chairman of the Council of Economic Advisers under President Reagan and advised Senator McCain.
Well, Alan Blinder, why is a fiscal stimulus package needed? And what should be in it?
ALAN BLINDER, Princeton University: It’s needed because the economy’s sagging badly. It’s not at all performing the way it should. We’re certainly in a recession. And the question at this point is, how long and how deep is that recession going to last?
And that last remark is the — holds the answer to your other question. You need to do two things in this package.
You need to boost spending in the economy. It almost doesn’t matter what kind of spending, but we’d like it not to be wasteful spending, something that’s valuable in its own right.
And, secondly, you’ve got to do the kind of support for people that are going to be losing their jobs, losing their homes, losing their health care benefits, and a whole variety of other things that come with job displacement, because there’s going to be a lot of it.
JEFFREY BROWN: Martin Feldstein, let me ask you the same question. As a general proposition, what would you like to see in a plan?
MARTIN FELDSTEIN, Harvard University: Well, I think Alan Blinder was right on. I think the plan has to be big, it has to be quick, and it has to be focused on creating employment.
So the kinds of things that I read about that Congress is thinking about, $100 billion, that doesn’t begin to do the job. A talk about a tax rebate, well, we tried that earlier this year, but it ended up doing very little for spending and job creation. Most of that money just got saved or used to pay down debts.
So it’s very important that this be focused on things that will create production and employment in the short run quickly.
Stimulus needed now
JEFFREY BROWN: And let me -- well, when you say quickly, Professor Feldstein, does that mean we shouldn't wait or we can't wait until January 20th, we need to do something now?
MARTIN FELDSTEIN: I think we should not. I think we should not. I think President-elect Obama should say, "Look, I'm not only president-elect, I'm also a senator, and from that point I can introduce legislation. I can work with the team that I'm bringing together, have brought together, of economic advisers, and come up with a really substantial plan, a plan that, over the next year, $300 billion and, over the next two years, $500 billion, and focused on getting that money out quickly and on things that create employment."
JEFFREY BROWN: Now, Alan Blinder, you said that it almost doesn't matter what kind of spending, but flesh that out a little bit. I mean, some things on the table would include, oh, you know, big infrastructure projects, things like that. There's all kinds of ways to spend money. What are good ways and what are bad ways?
ALAN BLINDER: Yes, I would have been against the large-scale infrastructure spending six months ago, but the economy has turned so dark and it's so clear now that this is going to be a long and deep recession, not a shallow and short one, that there's actually enough time to get infrastructure spending, I mean, serious infrastructure spending -- not pork -- into this program.
I would start, however, with extending and expanding unemployment benefits. The time period should be extended. I'd like to see them made more generous. We should do that fast.
The same thing with food stamps. The same thing with the so-called LIHEAP program, which provides assistance for poor people to pay their energy bills, things like that.
By the way, if we could do it -- I don't think we can quite get this done in November -- this would be a great place to make a down payment on health care reform, by making sure that people that lose their jobs don't lose their health insurance. I think we probably can't get that done in November.
By the way, I think the most likely approach to this is going to be a one-two punch, where something hopefully happens in November, whatever the Democrats and the Republicans can agree on and President Bush won't veto, but then a bigger package probably comes in late January, early February with the new Congress.
Agenda, stimulus spending may meld
JEFFREY BROWN: Martin Feldstein, weigh in on the spending issue, and in particular, as Alan Blinder just mentioned, health care. We just heard in Judy's discussion all kinds of things are on the table for a new administration. Is it possible to think about combining the agenda, looking forward, with stimulus spending?
MARTIN FELDSTEIN: Well, health care is a really long-term issue. It's not something that you do to stimulate the economy. There are serious problems in the way we finance and deliver health care. But I wouldn't look to that as a way of stimulating spending.
So I think the key thing is stuff like equipment. There's a lot of equipment in public institutions, both federal and state, that could be renewed, that could be replaced.
The military has run down a lot of its equipment because of the wars in Iraq and Afghanistan. That's going to need replacing. This is the time to do it, when there's a lot of slack in the economy, and that's the kind of spending that can happen quickly.
JEFFREY BROWN: And what about on the tax side, Professor Feldstein? You mentioned earlier that tax rebates the last time didn't seem to do very much. What about this time?
MARTIN FELDSTEIN: Well, they didn't do well then, and they wouldn't do well now.
JEFFREY BROWN: Well, but I mean policy in general. Are there ways to use tax policy?
MARTIN FELDSTEIN: Well, I think raising taxes or holding out the specter that taxes are going to go up in a year or two is a downer for the economy, so that would be a mistake.
On the other hand, we're not in a position where we can afford a broad tax cut for the American public on a permanent basis, and a temporary tax cut just goes into people's savings or paying down debt.
And that's why I would say: Don't deal with tax cuts, tax rebates now. Focus instead on spending that's going to create jobs quickly.
Tax cuts may be risky
JEFFREY BROWN: What would you say, Professor Blinder, about tax cuts? I mean, we do have President-elect Obama coming in with a promise of a cut to everyone making under $250,000.
ALAN BLINDER: Right. I would just disagree slightly with Marty on that. And picking up what you just said, I think it would be a great idea to make a down payment on that personal income tax cut for the lower 95 percent and get it legislated as soon as possible and wait for the upper-income tax increases until later when the economy is stronger.
So I would keep the Obama revision of the tax burden intact, but emphasize the cutting first when the economy's in recession and recouping some of the revenue later when the economy's in better shape, better able to bear it.
JEFFREY BROWN: I want to ask both of you -- go ahead.
MARTIN FELDSTEIN: Yes, I think the trouble with promising to -- the problem with saying to higher income individuals, "We're not going to raise your taxes for two years," that's still a tax increase.
That's still going to have the effect of making them feel, "Uh-oh, my income -- my spendable income isn't going to be as high a few years from now. I'd better start belt-tightening now." So it has just the wrong effect, in terms of overall spending.
Lessons from history
JEFFREY BROWN: Let me ask both of you in our last couple of minutes here, just -- because you've both studied history, and we keep hearing about comparisons back to the depression era and other serious moments in our economic history, what should we avoid? What should not happen?
I mean, what have we learned that would be a big mistake at a moment like this where there are calls for action, starting with you, Professor Feldstein?
MARTIN FELDSTEIN: Well, in the 1930s, the central bank was inactive. It allowed banks to fail. We didn't have deposit insurance. We've remedied all of that. So some of the things that contributed to the downturn in the '30s are simply not going to happen this time.
But in the '30s, the various programs that were tried really didn't do anything. Until we got to the end of the decade and we started building up armaments for World War II, there really wasn't the kind of stimulus to bring the unemployment rate down to single-digit numbers.
So what we need to do now is to have a major spending program, which takes the place of the arms build-up that happened as we went into World War II.
JEFFREY BROWN: And, Alan Blinder, I heard you say earlier that we should avoid spending projects that get us -- that could become pork projects. Explain that a little bit. And what else should be avoided?
ALAN BLINDER: Well, I think the two bywords are "big" and "fast." And both of us agree on that.
I think infrastructure can be a part of that. It's not going to have major effects in three to six months. By the time you get to nine to twelve months -- then I'm afraid we're still going to be in a very weak economy then -- it starts to kick in with large amounts of spending, large amounts of employment.
Having said that, I think we need to put in some sort of safeguards, maybe analogous to -- wouldn't be exactly the same as the base-closing commission for military bases -- to make sure that we're putting in valuable infrastructure that we actually want rather than building bridges to nowhere. Bridges to nowhere are never a good idea, even in a recession.
JEFFREY BROWN: All right, Alan Blinder and Martin Feldstein, thanks very much.
ALAN BLINDER: Thank you.