A Stimulating Discussion, Fiscally Speaking

In response to growing interest in a fiscal stimulus by both the President and Congress, this Wednesday the Hamilton Project released a paper framing the "If, When, How" of fiscal stimuli and organized a high-powered discussion panel. The panel, moderated by former Treasury Secretary Robert Rubin, included the very respected Prof. Martin Feldstein of Harvard, Hamilton Project Director Jason Furman, former Office of Management and Budget Director Alice Rivlin, and Moody's Economy.com Chief Economist Mark Zandi.

To get to the meat of the matter all of the panelists agreed that, if properly implemented, a stimulus in the range of $100 billion would be beneficial to the economy. (Furman would go a little lower than the others at $50-$75 billion, closer to Larry Summers' figures.) To justify this intervention, Feldstein and Rivlin pointed to falling home prices, rising foreclosures, the credit crunch, and financial institutions' general lack of confidence in current valuations because of their previous bad bets.

Zandi pointed to the fact that CA, AZ, FL, MI, and WI are already in recession and that these together make of 35% of U.S. GDP. Combine this with the fact that financial institutions have only written off one third of the $250 billion they are expected to lose and that rising gas taxes will effectively act as a $100 billion tax, and ouch!

While the loosening of monetary policy will be of assistance, Zandi contends that it will be less effective than usual as its primary conduit to the economy at large is through the currently turbulent housing market.

There was also agreement among the panelists over the rough outlines of how the stimulus should be delivered. The policy should be timely, targeted, and temporary. That is, implement it in time to forestall the depression, target those who will spend (generally the poor, but Feldstein contends that all Americans have such a marginal propensity to consume that it really doesn't matter who you give it to), and make sure that the stimulus doesn't become permanent policy. Feldstein and Furman agreed that a temporary growth in the food stamp program would give a quick and targeted kick to the economy (about 1% in annualized growth.)

So are we going to do this? Economists are always skeptical of the politics of fiscal stimuli since they are often implemented late and often hard to end. Well, Feldstein the economist was optimistic that a package could be arranged and Rubin the former political appointee was skeptical. I don't know the last time I saw an economist playing the optimist regarding a political situation. Can't say I know quite what to think.