Fiscal Stimulus: What should be done now

Nov. 20, 2008

Top economists affiliated with Harvard Kennedy School's Belfer Center for Science and International Affairs weigh in on what steps the President and Congress should take to stimulate the economy. Lawrence H. Summers and Martin Feldstein are members of the Belfer Center's Board of Directors, and Jeffrey Frankel is a faculty affiliate.

Lawrence H. Summers

(excerpt from the Wall Street Journal's CEO Council)

At the start of the year, former Treasury Secretary Lawrence Summers urged lawmakers to pass a fiscal stimulus program that's timely (enacted quickly), targeted (directed to the people who would spend it most) and temporary (to minimize the deficit impact). Congress and the White House concurred, enacting the $168 billion fiscal stimulus program in February that was designed to soften the threat of a recession.

Now, Mr. Summers says, "the situation has deteriorated very substantially from that point."

Speaking at the Journal's CEO Council conference Monday evening, he moved to the letter "S" and urged a stimulus plan that's "speedy, substantial and sustained over a several-year interval."

"I think we're going to need some impetus to the economy for two to three years," he said.

Full article here.

Martin Feldstein

(quoted from Bloomberg TV)

Martin Feldstein, the Harvard University economics professor, now favors a major government program that will directly inject money into the economy instead of depending on consumers.

"I hate to say it, because I'm a guy who doesn't like government spending and doesn't like fiscal deficits, but I don't see any alternative,'' he said in a Bloomberg Television interview Nov. 12.

(via the Washington Post)

Feldstein: "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.
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."

Full oped here:

Jeffrey Frankel

(excerpt from his weblog)

Frankel: "Fiscal stimulus today is appropriate, given the weak economy. The trick is to combine it with the minimum damage to future budgets.
I offer some recommendations to the new President regarding tax policy that address all three areas simultaneously:

1. Make clear the intent to let the Bush tax-cuts-for-the-rich expire in 2011 as scheduled. No, the Republicans can't legitimately claim that this would be a tax increase, because their budget projections (remember, the projections that said we were going to have a budget surplus by 2011) have always built in the assumption that these tax cuts would expire. This plan will help maintain some semblance of long-term fiscal responsibility and therefore help keep long-term interest rates low, which one hopes will have the Rubinomic extra benefit of promoting investment.

2. Give the 90% or 95% of American workers who don't make the highest incomes a tax cut now, as Barack Obama talked about in the campaign. This is good for incentives, good for distribution, and good for boosting demand which is what we need in the short run.

3. Take steps to raise future tax rates on fossil fuels, including gasoline. This would accomplish lots of objectives:
i. raise much-needed revenue in the future (or else help finance those reductions in tax rates on lower-income workers),
ii. enhance national security by reducing dependence on imported oil
iii. improve the trade balance
iv. reduce emissions of greenhouse gases, particularly in the future by sending the right price signal today
v. reduce local air pollution, traffic congestion, and traffic accidents."

Full post here.

For more information on this publication: Please contact the Belfer Communications Office
For Academic Citation:Fiscal Stimulus: What should be done now.” News, , November 20, 2008.