I Am Pleased to See Martin Feldstein Wisely Calling for Large, Immediate Fiscal Stimulus to Boost Employment!

But the rest of his column leaves me puzzled…

Martin Feldstein calls for the U.S. to fight deficient aggregate demand by spending an extra trillion dollars on infrastructure over the next five years–and then to keep that program from worsening the government debt-to-GDP ratio by also enacting tax increases and spending cuts that would bring the debt down to its baseline level between, say, years five and fifteen, by, say, 2028.

With idle labor and slack capacity at their current levels, the best bet is that such a program would boost total real GDP by at least $2 trillion over the next five years–and actually raise the government’s debt five years hence by at most $333 billion because of the federal, state, and local taxes that would be paid on the added income from higher real GDP.

But there is no need to also find the political will to reach agreement on longer-run tax increases and spending cuts in order to keep this program from worsening the long-run debt outlook. The U.S. can now borrow and lock in a real interest rate on its debt of 1.66%/year by issuing 30-year TIPS–that means that the interest cost of financing the extra debt is only $5.5 billion a year. And an extra trillion dollars of infrastructure will boost U.S. national income in the long run by at least $40 billion a year–and the U.S. government will then collect $13.3 billion a year in extra taxes because of higher levels of income.

Thus Feldstein’s short-run program alone, without the hard-to-pass long-run component, would free up more than $7.8 billion a year of debt-amortization capacity: it would all by itself improve the long-run fiscal picture.

So why the focus on the need for a hard-to-pass long-run deal, and the unnecessary claim that it must be coupled to the short-run before what makes sense makes sense? It remains a mystery to me…

Also a mystery to me: just what is it that makes quantitative easing so risky? Keeping the U.S. economy in a situation of slack aggregate demand–yes, that is risky. But how is the Fed’s buying government bonds and holding them to maturity–even a lot of such bonds–risky? What is the risk? What might happen that would be bad, and couldn’t be neutralized?

Martin Feldstein: Saving the Fed From Itself:

THE Federal Reserve is pursuing a very risky monetary policy…. Ben S. Bernanke and… Janet L. Yellen… are correct that the American economy needs more stimulus…. They believe that the central bank… is the only game in town. But if Congress and the Obama administration could agree on a fiscal stimulus… the Fed would not have to take such risks….

While doing little to stimulate the economy, the Fed’s policy of low long-term interest rates has caused individuals and institutions to take excessive risks that could destabilize the economy… pushed up the values of everything from Iowa farmland to emerging-market bonds. Banks are lending to lower-quality commercial borrowers. Households are seeking higher returns by investing in real estate trusts and other high-risk products….

To get the economy back on track, President Obama should propose, and Congress should enact, a five-year fiscal package that would move the growth of gross domestic product to above 3 percent a year and focus on direct government spending on infrastructure… there is also substantial need to replace and repair the equipment of the armed forces. Some of this aid could also extend to state and local governments. The total price tag over five years would have to exceed $1 trillion….

It would be irresponsible, however, to add another trillion dollars to the national debt without higher [long-term] revenues or lower spending…. The key, therefore, is to combine a major short-term fiscal stimulus with long-term deficit reductions that would cause the ratio of debt to gross domestic product to begin declining by the end of this decade…

And Paul Krugman says: that trick never works!

Paul Krugman: My Favorite Martian:

There are three kinds of economists… liberal professional economists… conservative professional economists; and… professional conservative economists (aka right-wing hacks)…. There just isn’t enough money on the left, an asymmetry that gives rise to the well-known hack gap…. Among the conservative professional economists there is a sub-class one might call Republicans in their minds only: fairly reasonable economists living in a political fantasy world, who imagine that the modern Republican party is composed of people like themselves…. These economists are, you might say, like men from Mars, who have no idea how the political culture we actually have on planet earth works these days.

Martin Feldstein… in one sense he is a true Republican… furiously opposed to expansionary monetary policy… and remains so even though his original argument–that it would produce runaway inflation–has been wrong…. But he is sympathetic to the idea of fiscal stimulus–and today he calls for a bipartisan deal that would involve a trillion dollars of stimulus via infrastructure spending in return for long-run deficit reduction.

What can you say?… Republican leaders would never consider such a deal–they are in fact still committed to the view that spending cuts are expansionary…. [And,]obvious to anyone who hasn’t spent the past five years on Mars, that Republicans don’t care about the deficit, and never did–it was always just a club to be used in an effort to dismantle Medicare and Social Security.

I wish I lived on Marty’s planet. But I don’t, and neither does he.

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