Via Andrew, Martin Feldstein, the respected Harvard professor and former Reagan economic adviser, has a persuasive op-ed in the Taipai Times (???) today about why a second round of stimulus will be necessary:
[T]he US economy faces a US$750 billion shortfall of demand [according to Feldstein's calculations]. Moreover, the usual automatic stabilizers of unemployment benefits and reduced income tax collections will do nothing to offset this fall in demand, because it is not caused by lower earnings or increased unemployment.
Although the recently enacted two-year stimulus package includes a total of US$800 billion of tax reductions and increased government spending, it would be wrong to think that this will add anything close to US$400 billion a year to GDP in each of the next two years. Most of the tax reductions will be saved by households, rather than used to finance additional spending.
Moreover, a substantial part of the spending will be spread over the following decade. And some of the government spending in the stimulus package will replace other outlays that would have occurred anyway. An optimistic estimate of the direct increase in annual demand from the stimulus package is about US$300 billion in each of the next two years.The stimulus package would thus fill less than half of the hole in GDP caused by the decline in household wealth and housing construction, with the remaining demand shortfall of US$450 billion in each of the next two years causing serious second-round effects. As demand falls, businesses will reduce production, leading to lower employment and incomes, which in turn will lead to further cuts in consumer spending.
I agree that the stimulus probably isn't big enough to solve the demand shortfall, though Feldstein short-changes it a bit by considering only direct effects rather than multiplier effects, too. (That is, you buy something, then the person who sold it to you has more money, which they use to buy something, etc., etc.)
Relatedly, I think it's interesting to compare Feldstein's constructive critique of the administration's policies with his colleague Robert Barro's more polemical critique from yesterday. (Barro wrote, without elaboration: "I wish I could be confident that the array of U.S. policies already in place and those likely forthcoming will be helpful. But I think it more likely that the economy will eventually recover despite these policies, rather than because of them.") Now I realize that even though Feldstein and Barro are both conservative economists, the two men have different worldviews and think about the macroeconomy in different ways. (My sense is that Feldstein is more sympathetic to the basic Keynesian framework, which would be a relevant difference here. Please correct me if I'm wrong.)
Still, I can't help thinking part of what separates them on the question of Obama's approach is as much personal as anything else. Feldstein was a beloved mentor to Obama's top economic aide, Larry Summers, and by all accounts thinks very highly of him. It stands to reason that he'd want to be fair when evaluating the policies his student helped design. Barro, by contrast, was a longtime sparring opponent of Summers' at Harvard. It doesn't surprise me that he'd be a bit less charitable.
As I say, there may be important substantive differences here, too. But Barro's willingness to trash the Obama plan without offering any explanation has the whiff of politics to me (both personal and partisan).
--Noam Scheiber