It has been more than two years since the financial and economic crash of 2008. Since then, many things have improved, and the U.S. economy is officially out of recession. But many Americans are still hurting. Unemployment remains high, and the housing market is far from settled. We invited economists and other astute financial observers from across the political spectrum to suggest what, if anything, the government should do to stimulate the economy.
Stimulus: neither needed nor free
By John H. Cochrane
Should the government do more to "stimulate" the economy? No.
Before fixing a car, it's a good idea to figure out what's not working. If the starter is broken, "step on the gas" is not the right answer. The same is true for the economy.
Why are we in the doldrums? Most answers to this question point to structural, tax and regulation problems. For example, one consequence of 99 weeks of unemployment benefits is that people tend to stay unemployed longer rather than take an unattractive job or move. That may be the right and humane policy, but it also means that unemployment will remain high, no matter how much stimulus we do. Looming healthcare, labor market regulation, and tax and regulatory uncertainty make it even harder for companies to hire. Congress has not even started debating what taxes will be Jan. 1. How can anyone plan?
"Inadequate stimulus" is an unlikely diagnosis for our problems. Banks are sitting on about $1 trillion in reserves, up from $50 billion before the recession. If they don't want to lend the first trillion, is giving them another half-trillion going to make any difference? The Fed did a great job of putting out the fire in the financial crisis. Alas, once the fire is out, more water will not make the house grow back.
More "stimulus" is not free. Additional "fiscal stimulus" -- borrowing and spending -- means higher taxes later on, which could usher in a low-growth lost decade -- or, worse, a calamity if investors decide not to renew loans to the U.S. Plus, it's unlikely that taking money from A and giving it to B makes us all better off anyway. Additional monetary stimulus, along with efforts to devalue the dollar, threaten the whole world financial and trade system.
We need to solve the nation's actual economic problems, most of them created by rampant government-induced uncertainty, rather than papering them over with more "stimulus."
John H. Cochrane is a professor of finance at the University of Chicago, Booth School of Business. His website is at http://faculty.chicagobooth.edu/ john.cochrane/research/Papers.
Federal spending is a necessity
By Joseph Stiglitz
The only solution to our current economic doldrums is large government spending. And if the spending is focused on high-return investments (in education, technology and infrastructure), the nation's debt-to-GDP ratio will actually be lowered. The question isn't whether we can afford to make these investments; we can't afford not to.
Even then, robust recovery won't happen until we write down the debts of the 1 in 4 homes whose mortgages are underwater, in a homeowner's chapter 11 program. We have allowed overburdened corporations a fresh start; why not poor Americans?
Nor will a robust recovery return until we get our dysfunctional financial system doing what it should be doing: providing credit, managing risk, running an efficient electronic payments system. The deservedly hated "bailout" may have kept the financial system from collapsing, but it also extended the government's safety mainly to rich and powerful banks. Smaller banks, focused on actually providing credit to small businesses, the lifeblood of any economy, were allowed to die. The Dodd-Frank regulatory bill was a step in the right direction, but it was a small step, with neither carrots nor sticks to ensure that banks go back to doing "boring" banking. They still are likely to make more money from credit schemes and predatory lending, from writing derivatives and credit default swaps (which may be viewed as gambling or insurance products but aren't regulated as either and are underwritten by taxpayers), and by imposing a tax on every credit and debit card transaction at a rate determined not by competitive forces but the exertion of monopoly power.
When Presidents George W. Bush and Obama went about pouring money into the banking system, they did it without a vision of what kind of financial system would best serve the country in the new century. Little of the stimulus money went to reshape the country, to make it more competitive, more dynamic, more respectful of the environment or less unequal. Had we had that vision, we could have structured what we did in the short run in a way that fostered a more robust recovery -- with more jobs and in a better position for long-term growth with a lower debt. It's still not too late, but we have wasted both valuable time and money.
Joseph Stiglitz, a professor of economics at Columbia University, won the 2001 Nobel Prize in economics and is a former chairman of the Council of Economic Advisers. His latest book is "Freefall: America, Free Markets, and the Sinking of the Global Economy."
Tax rebates will help fill the malls
By Brad Schiller
Jumpstarting an economy requires a policy option that generates quick results. The Federal Reserve is notoriously slow: There's a lag of 18 months or so from the time the Fed acts until the impact is felt. That's one reason the housing market is still sluggish nearly two years after the Fed started lowering interest rates. On the stimulus front, increases in government spending have even longer lags. Despite President Obama's vaunted "shovel ready" jobs, procurement and environmental-impact regulations create a lag of up to two years between congressional appropriations and shovels actually hitting the ground. Which is why Obama's program failed to create jobs fast enough to save Democratic incumbents.
That leaves tax cuts. But not just any sort of tax cut. Changes in tax rates will change consumer and investor behavior over time. But what the economy needs now is an immediate spending spree, not changes in long-term behavior. That's why doling out a tax cut at about $12 to $15 a paycheck, as Obama did beginning in April 2009, hasn't helped the economy much either. And that's why tax rebates -- cash in our hands now -- are the right choice.
Back in 2008, Congress doled out $100 billion in tax rebates of $300 to $600 per person. What did Americans do with those checks? Spent them, and quickly. In fact, many consumers spent their rebates before they got them, knowing in advance when they were expected. In the process, the U.S. went from negative GDP growth in the winter of 2008 to positive growth in the spring. Imagine what would have happened last year if Obama had spent $300 billion on tax rebates instead of that same amount on (delayed) infrastructure projects. Unemployment rates would be a lot lower, and more Democrats would still be in office.
It's not too late. The extension of the Bush tax-rate cuts is a no-brainer. But that will just avoid more job destruction; it won't create new jobs. Congress should take all of the unspent appropriations from Obama's first and second stimulus programs and covert them into tax rebates. Then watch the shopping malls and airports fill up, the "help wanted" signs go up, and the economy recover. Quickly.
Brad Schiller is a professor of economics at the University of Nevada-Reno and the author of "The Economy Today."
To create jobs, end the tax cuts
By Alicia H. Munnell
A lot of attention lately has been focused on whether to extend the Bush-era tax cuts for everyone, or whether to eliminate them for the wealthiest taxpayers. In fact, they should be allowed to lapse -- and not just for the rich. Tax cuts for the middle class should expire too.
This would accomplish three important goals. First, it would provide funds in the short run to help the unemployed. Yes, we have all lost money in our 401(k)s and maybe had our pay cut or our salaries frozen, but the unemployed have borne the brunt of this recession. Second, letting the tax cuts expire would cut the projected 2020 budget deficit by one third. Such a step would restore some confidence that the federal government can manage its finances. Third, it would reduce the divisive rhetoric of pitting the wealthy against the middle class.
In the last two years, the U.S. unemployment rate has risen from 6.2% to 9.5%, making joblessness the most urgent domestic issue. Six million Americans have been unemployed for more than six months. This country needs an immediate solution to unemployment. The president should propose that Congress use the revenue saved by ending the Bush tax cuts to create jobs for the unemployed and provide funding for state and local governments to prevent layoffs. The jobs could be created through subsidies to private sector employers or through direct support for persons to help in classrooms, provide care for the elderly, clean up parks and subways, or repair aging infrastructure. It is simply unfair for 10% of households to bear most of the burden of the financial crisis. And direct job creation -- not lower taxes -- will give the greatest momentum to the recovery.
Alicia H. Munnell, a professor of management sciences at Boston College, served on President Clinton's Council of Economic Advisers and as assistant secretary of the Treasury for economic policy.
Large deficits remain essential
By Robert Pollin
The federal government must continue to aggressively fight the recession created by Wall Street hyper-speculation and promote recovery through both spending measures and credit market interventions.
Austerity is not a solution. The federal government's deficit spending over the past two years succeeded in averting a 1930s-style depression. Large deficits are still needed now to prevent the economy's rickety floor from collapsing. Are the deficit hawks really prepared, for example, to preside over mass layoffs of teachers, nurses and police officers that would result without continued large-scale federal support for state and local governments?
Credit must be channeled to small business. Credit markets remain locked up, especially for small businesses, while banks are holding an unprecedented $1.1 trillion in cash reserves. The Federal Reserve's new "quantitative easing" is a halfway solution. It directly reduces interest rates for longer-term U.S. Treasury bonds only. It will not be effective at lowering interest rates and risks for private borrowers and lenders.
Two initiatives -- one carrot and one stick -- can deliver lower rates and risks to businesses. The carrot is an expansion of existing federal loan guarantees by $300 billion, which would roughly double what's annually available now. Small businesses should be the primary beneficiaries. The stick is a 1% to 2% tax on the excess cash reserves now held by banks, to push them to become more bullish on loans for job-creating investments.
These measures could generate about 3 million jobs as the $300 billion in loan guarantees turns into new business investments. Job creation would be significantly higher if a large proportion of the spending were for green activities such as retrofitting buildings to make them energy-efficient. Job creation per dollar of green investments is about 50% greater than the economy-wide average. The total costs for the program -- mostly from loan defaults -- would almost certainly be well below 1% of the federal budget.
Robert Pollin is a professor of economics and co-director of the Political Economy Research Institute at the University of Massachusetts-Amherst.
Uncertainty is killing confidence
By Ayse Imrohoroglu
The best way to stimulate the economy is to decrease the uncertainty that government policies have created for businesses.
Even though the recession was technically declared over in June 2009, there has been only slight improvement in job creation. The economy has shed more than 7 million jobs since late 2007, as companies have held on to their profits rather than using them to hire additional workers or add productive capacity.
Firms are doing this because of all the uncertainty they face in the marketplace. Businesses don't know what will happen to interest rates. They have trouble calculating what new workers will cost in light of potential new healthcare mandates and costs. They don't know what will happen to tax rates, which could rise dramatically. They are uncertain about increasing financial regulation and the possibility of a carbon tax. And as if that isn't enough, the soaring deficits and national debt raise very real questions about the federal government's long-term ability to meet its debt obligations.
For businesses, the instability has made it difficult to plan ahead with any confidence. So rather than pass temporary tax cuts or push for new business tax credits to get the economy growing again, the government would be wiser to clarify its long-term tax policies and to lay out clearly what new regulations will require of businesses. Less uncertainty in these areas would allow firms to start spending and hiring again.
Ayse Imrohoroglu is professor of finance and business economics at USC's Marshall School of Business.
Don't subsidize reserves; tax them
By Bruce Bartlett
It's unfortunately the case that sometimes you get only one bite at the apple. That's what happened to the Obama administration and fiscal stimulus. It had just one chance to enact a meaningful program, and unfortunately it didn't do enough.
While there is a strong case for additional fiscal action to stimulate growth and lower unemployment, realistically that was not in the cards even before Republicans gained control of the House of Representatives.
That leaves only the Federal Reserve with the freedom of action to stimulate the economy via monetary policy. Just recently, it announced a plan to buy $600 billion more Treasury securities in order to goose the economy. But there is already more than $1 trillion in excess bank reserves available for lending that banks are just sitting on. Many economists believe that the Fed's latest round of quantitative easing will simply add to that total without providing any additional stimulus.
What is desperately needed from the Fed is some action that will force the banks to lend and get the money that is sitting idle into the economy where it will finance consumption and investment. One idea would be to emulate Sweden and tax excess reserves rather than subsidizing them as the Fed now does by paying banks 0.25% per year on money that is not lent. Another would be for it to intentionally raise inflationary expectations because people tend to spend today when they think prices will be higher tomorrow.
The Fed has shown an admirable ability throughout the crisis to act in unprecedented ways. Its actions prevented a second Great Depression, but they have been insufficient to restore sustainable growth. Now that the Fed is the only game in town, however, it may be necessary for it to go beyond its comfort zone. The alternative could be a decade or more of stagnation of the sort we have seen in Japan.
Bruce Bartlett writes for the Fiscal Times and Tax Notes. He served in the administrations of Ronald Reagan and George H.W. Bush. His latest book is "The New American Economy: The Failure of Reaganomics and a New Way Forward."
Nail down some deficit remedies
By Mark Zandi
The elements of a better economy are falling into place. U.S. businesses are profitable as a group, and our banks are well capitalized. The question is no longer whether firms can invest and hire, but whether they are willing to. Those animal spirits so vital to a healthy economy remain tethered. Policymakers' immediate priority should be to boost the collective psyche and let those spirits loose.
Nothing impedes this process more than uncertainty about next year's taxes. Without action from Congress and the White House, we will all be paying more in 2011. Policymakers should quickly nail down a decision about the expiring tax code provisions, assuring that no one pays more in taxes next year.
At the same time, 15 million unemployed Americans face the frightening prospect of a cutoff in unemployment insurance benefits. If policymakers don't act within a few weeks, families all over the country will run out of cash right before Christmas.
The federal government's record budget deficits have us rightly spooked. The long-term consequences are dire if legislators cannot agree on the necessary spending cuts and tax increases. The fiscal commission convened to deal with these hard choices will soon make their recommendations. Instead of reflexively bashing their ideas to gain a negotiating advantage, policymakers should focus on those proposals they can agree on. Political vitriol will only increase the uncertainty, freezing firms and households in place.
It is hard to see how the next Congress will come to terms on major economic policy decisions. But that's OK: If legislators can only dot the i's and cross the t's on the epic policy changes made in the last Congress, and prepare the intellectual groundwork for deciding our fiscal future in the next one, confidence will revive and the economy will be off and running. The tough choices will then become a bit easier to make.
Mark Zandi is chief economist at Moody's Analytics. His latest book is "Financial Shock."