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You Know It’s Bad When Even Feldstein Says We Need More Government Spending

October 30th, 2008 . by economistmom

In today’s GDP report we learned that the economy contracted in the 3rd quarter–its weakest performance in seven years (CNN-Money story here).  It’s another sign–as if we hadn’t had enough of these already–that the economy is in a recession.

How bad is it?

So bad that even supply-sider Martin Feldstein is acknowledging (in today’s Washington Post) what the GDP report shows: were it not for the strength of federal government spending –which increased by 13.8 percent (annualized rate) in the third quarter–the economy would be in much worse shape.  So Marty’s now calling for more deficit-financed, demand-side government spending–and get this, on infrastructure projects:

The only way to prevent a deepening recession will be a temporary program of increased government spending. Previous attempts to use government spending to stimulate an economic recovery, particularly spending on infrastructure, have not been successful because of long legislative lags that delayed the spending until a recovery was well underway. But while past recessions lasted an average of only about 12 months, this downturn is likely to last much longer, providing the scope for successful countercyclical spending…

The increased government spending should include not only money for infrastructure such as bridges and roads but also for a wide range of equipment. Rebuilding some of the military capacity that has been depleted by the wars in Iraq and Afghanistan could be done relatively quickly and should be part of the overall package…

I wonder how quickly these infrastructure projects could create new jobs, which is what we really need to be doing triage on right now.  Might they have a job for my laid-off friend from Chrysler?…

And how much new government spending?  Marty suggests probably a lot more than last time:

A fiscal package of $100 billion is not likely to be large enough to revive the economy. The fall in household wealth resulting from the collapse of the stock market and the decline of home prices may cut aggregate spending by $300 billion a year or more.

…and no more tax rebates, even though Marty had recommended them in the last round of stimulus, because Marty understands that if we were disappointed by the stimulative effect on consumer spending the last time, we’re bound to be only more disappointed this time:

Another round of one-time tax rebates won’t do the job. The rebates that Congress enacted this spring failed to stimulate consumer spending: More than 80 percent of tax rebate dollars were saved or used to pay down existing debt.

(Not that any of us have a problem with households using at least some of their extra income to pay down debt/save more, for their own longer-run sustainability.)

So, Marty Feldstein appears to have come a long way from his old supply-sider claims that permanent extension of the Bush tax cuts would be the most effective “stimulus” for the economy.  His current recommendation is clearly for good ol’ demand-side, Keynesian government spending.  Yet he can’t resist getting in a last dig at Obama and any tax increases–including those that might be used to even later offset the cost of today’s stimulus initiatives (emphasis added):

The president-elect should focus on developing a mechanism for identifying and funding spending initiatives that can occur quickly and that would otherwise not be done. While it would be good if some of the increased spending also contributed to long-term productivity, the key is to stimulate demand. Any plan to finance this spending by raising taxes, even if postponed, as Sen. Barack Obama has suggested, would hurt the recovery by causing affected taxpayers to cut their spending now.

Wait a minute now, Marty:  let’s not abandon all of your neo-classical growth principles just because we’re a little freaked out right now about the current state of the economy.  Over the longer run, I think you’d agree that we have to start looking at ways to increase, not decrease, national saving, because as you hint above in mentioning ”long-term productivity”, it would be good to not just “flail about” throwing money at the current crisis, but act swiftly yet thoughtfully–with a wise eye to the future.  What matters for the health of our economy is not just what the government decides to spend money on today, but on how the government expects to be able to pay for such spending going forward.  Eventually, we’ll still have to get back to ”living within our means.”

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