Most of the current discussion regarding the Obama Economic Plan focuses on whether the fiscal stimulus should be somewhat larger or smaller ($650 billion to $800 billion seems the current range) and the composition between spending and tax cuts. President Obama stressed on Tuesday that trillion dollar deficits are here to stay for several years, and it looks like part of the arguing in the Senate will be about whether this is a good idea.
There is at least one key question currently missing from this debate. Is this Plan too much about a fiscal stimulus and too little about the other pieces that would help—and might even be essential—for a sustained recovery? The fiscal stimulus may be roughly the right size (and $100 billion more or less is unlikely to make a critical difference), but perhaps we should also be looking for more detail on the following:
1. Recapitalizing banks. Their losses to date have not been replaced by new capital, and it is currently not possible to issue new equity in the private markets. If you think we can get back to growth without fixing banks, check Japan’s record in the 1990s.
2. Directly addressing housing problems, including moving to limit foreclosures and reduce the forced sales that follow foreclosures. There is apparently some form of the Hubbard-Mayer proposal waiting in the wings, but we don’t know exactly what—and this matters, among other things, for thinking about the debt sustainability implications of the overall Plan.
3. Finding ways to push up inflation, presumably by being more aggressive with monetary policy. Deflation is looming—according to the financial markets, despite all of the Fed’s moves and recent statements, prices will fall or be flat over the next 3 to 5 years. This fall in inflation, from its previously expected level of around 2 percent per year, constitutes a big transfer from borrowers/spenders to net lenders/savers. The contractionary effect is likely to outweigh any fiscal stimulus that is politically feasible or economically sound. (We have more detail on this point.)
So perhaps the issue is not the absolute size or composition of the fiscal stimulus but rather the role of the fiscal stimulus relative to other parts of the Plan. Hopefully, it’s a more evenly weighted package, and just we haven’t yet seen the details. Still, it’s odd that the presence and general contours of these other important elements have not yet been clearly flagged.
Also posted on Simon Johnson’s blog,