Fiscal Stimulus, Just Not This One

I have long admired economist Martin Feldstein for his independence, integrity and clarity of thought.  He was featured on NPR’s “On Point” program.  To my surprise, he made a case for a fiscal stimulus package, although he had grave reservations about the current proposals.  A couple of points:

  1. Feldstein argued that a monetary stimulus was insufficient because of the huge inventory in the housing market.  The primary mechanism by which monetary policy worked was for lower interest rates to spur home construction — given the current overhang of supply, lower rates will have limited leverage on economic activity.
  2.  Feldstein made convincing case that military spending should be a large component of any fiscal stimulus plan.  Assuming he is correct that Afghanistan and Iraq have depleted stocks of war material, this spending will have to be done sooner or later, so it might as well be accelerated.  This seems sensible — if spending is merely an acceleration of future spending, total Federal debt  over time need not be any larger than it would have been without a stimulus.  Feldstein also argued that money sent to the military can be put to work much faster; he gave the example of sorely needed new base housing for military personnel — no zoning boards, permit approvals, etc to slow the process.

I’m not so sure I’d be so ready to give up on monetary policies — even with the housing concern, lower rates spur consumer spending as do lower energy costs.  I think the military spending argument is eminently sensible.  In the broadcast Feldstein also argues for the military to take on a role in job training —  I disagree with this — I think it is dangerous to overextend and dilute the mission of our armed forces. 

One final interesting aspect of the broadcast.  Towards the end of the broadcast, the host, Tom Ashbrook, kept badgering Feldstein about his generally free-market views.  Ashbrook was clearly quite passionate, and essentially wanted Feldstein to denounce capitalism.  It will be a grave mistake if our conclusion from this crisis is that free markets don’t work.   Markets need governance, just like democracies need laws — it doesn’t mean these systems are failures, just that they need to operate within certain “rules of the road.”  You can listen to the entire broadcast through the “On Point” website.

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