Martin Feldstein, the Harvard economist, today in the Wall Street Journal offers an attractively succinct and common-sense assessment of the effect of Obama administration programs on the economy.
A stimulus was needed, Feldstein writes. The problems was that it had the wrong emphasis.
The result was an unnecessarily large increase in the national debt for a very modest rise in gross domestic product, with too much emphasis on redistributing income and preserving public-sector jobs and not enough on raising economic activity. Only about one-fourth of the nearly $800 billion will be used for government spending that adds directly to GDP.
Simply focusing on the right things would have had much more impact, Feldstein says.
The flaw in the stimulus package wasn’t, as some say, that it was too small. It was that it was poorly targeted. Instead, Congress and the president could have gotten more stimulus from accelerating the repairing and replacing of equipment in the civilian and defense sectors. Long-term reductions in marginal tax rates of the type used by Presidents Kennedy and Reagan would also have been better than temporary tax cuts that have no positive incentive effects.
Feldstein doesn’t offer a solution, except to suggest that administration needs to shift its focus. The Congressional Budget Office recently completed a paper showing the impact different job stimulus initiatives could have on employment.
The chart to the right is from the director of the CBO’s blog and shows which initiatives would have the most significant impact on employment. A big impact would be from reducing payroll taxes. This effectively reduces the cost of having an employee. In theory, this is good for the government, for while the company would contribute less in tax, this decline would be offset by an increase in personal income tax.
But, in a faint echo of Feldstein’s comments, the CBO director has a caution. We’ve already run up a big bill with the stimulus programs and those bills have a price.
CBO concludes that further policy action, if properly designed, would promote economic growth and increase employment in 2010 and 2011. Different policies vary in cost-effectiveness as measured by the cumulative effects on GDP and employment per dollar of budgetary cost and in the time patterns of those effects. Moreover, despite the potential economic benefits in the short run, such actions would add to already large projected budget deficits. Unless offsetting actions were taken to reverse the accumulation of additional government debt, future incomes would tend to be lower than they otherwise would have been.
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