Ask any economist about how the economy may change because of President Barack Obama’s speech tonight, and you are likely to get the same answer: Not much. But you will not find much agreement as to why.
Some think what he proposes will be a step in the right direction, but inadequate. A second group will think it counterproductive to the core. Others, who generally support government actions to speed or slow the economy, are pessimistic about how successful such efforts are when a large country like the United States works itself into a major financial crisis.
All these groups, if asked about the politics rather than the economics of the situation, would note that the president has little chance of getting through Congress anything of substance that he might propose.
Let’s begin with what is expected. Leaks indicate the president’s plan will include some $300 billion in lower taxes and increased spending. The lower taxes will be in the form of extending the current 2 percentage-point holiday for Social Security taxes paid by workers and perhaps similarly reducing some of the Social Security taxes paid by employers.
The spending will be for infrastructure construction and aid to state and local governments to avoid further layoffs. Employment at all levels of government is down some 600,000 over the past three years. At the state and local levels, the decline is some 200,000 from 2010 to 2011.
The president also may propose some tax credit plan for employers to hire the unemployed, perhaps modeled on one in Georgia. He may mention easier procedures to get patents, reducing regulation and perhaps approval of pending trade agreements.
A diverse group of economists who have the common characteristic of following John Maynard Keynes will likely approve of the package but argue that, like the $879 million stimulus package the administration got passed in 2009, the new proposal is too small. This group includes Nobelists Paul Krugman and Joseph Stiglitz, together with former Reagan adviser Martin Feldstein. Martin Wolf, who writes for the London-based Financial Times and who many, including me, consider the best economics columnist in the world, is likely to see things the same way.
A second group that centers on deep opposition to Keynesian efforts to micromanage the economy will likely criticize most of whatever Obama announces. This group, variously called “Rational Expectations,” “New Classical” or, more recently “Modern Macroeconomists,” includes Nobelists Robert Lucas and Edward Prescott and many prominent economists associated at one time or another with the University of Minnesota.
(A few years ago one would also have included Narayana Kocherlakota in this group, but he has been hewing to a careful centrist line since he took over as president of the Minneapolis Fed. Don’t expect him to commit the impropriety of commenting on matters like these outside of the Fed’s purview.)
A third group, which includes many centrist pragmatists like me, is likely to approve of most of the president’s proposals individually but be very skeptical of what they might actually accomplish in the current situation. I speculate this would be the opinion of Kenneth Rogoff, a moderate Republican Keynesian who, together with Carmen Reinhart, wrote a definitive work on what happens to economies after they go through financial crises. Recovery after such crises often takes eight or 10 years. And the larger the country is and thus the less it is able to benefit from prosperity in larger trading partners, the harder recovery can be. Given that both the United States and Europe are in this sort of crisis, prospects are not good.
I have not mentioned sundry monetarists, supply-side and Austrian economists. These have little weight among economists as a whole, but are prominent among the current set of Republican presidential candidates. It is safe to assume that all would sharply criticize any initiative Obama announces.
The divisions among economists mostly concern additional spending or continued tax reductions. Most would favor trade agreements or patent streamlining but would see these measures as minor indeed in a nation with the same number of people employed as at the dawn of the new century, even though the population has increased by 30 million.
Other skeptics may point out that what economists think doesn’t matter a whit. It will be exceedingly difficult for the administration to get any additional discretionary spending through Congress, and even extension of the FICA tax holiday may be tough. So Obama’s goal must be to rally his troops, try to win over some independents and put Republicans in a spot where he can criticize them as obstructionists in the 2012 campaign.
© 2011 Edward Lotterman
Chanarambie Consulting, Inc.