Refereeing the Recession: HKS Faculty Weigh In
by Stella Tsay on February 12, 2008 in HKS News, News
Three of Harvard’s most prominent economists have been weighing in across domestic and international news outlets on the potential recession and the government’s subsequent actions to combat it. Though they all agree the likelihood of a recession is high, and that it will probably be more severe than in 2001, nobody is willing to say it is inevitable. Yet.
Prof. Martin Feldstein, who serves as President and CEO of the National Bureau of Economic Research (NBER) and played a significant role in the passage of President George W. Bush’s 2001 tax cuts, has been slow to make the call. During a January 8 CNBC interview, Feldstein only conceded that this will be a year of significant decline in growth.
Many economists consider NBER as the country’s premier authority on judging businesses and whether or not the country is in a recession. Traditionally, NBER waits six months after the beginning of a recession to backdate the actual start of the downturn, but Feldstein has signaled that NBER is not ready to make that call in the current scenario. He has, however, approved of recent proposals by the U.S. Congress to pass a fiscal stimulus package on top of the Federal Reserve’s multiple interest rate cuts. He also believes that more cuts may be needed to maintain even a state of slow growth in the economy, as he told CNNmoney.com
Former Treasury Secretary and University Professor Lawrence Summers agrees that avoiding recession is not simply about fiscal and monetary policy but also about market confidence. In his Financial Times column, Summers argues that declining growth will be exacerbated by continuing pessimism, leading to more declines in growth unless specific measures are taken to mitigate the effects.
“Good policy is art as much as science, depending as it does on market psychology as well as the underlying realities,” he wrote on January 27.
Regarding these measures, Summers advocates a program of tax credits along with increased unemployment insurance and food stamp benefits. Feldstein, however, cautioned against extension of unemployment benefits, which he speculates will lead to disincentives to work. The passage of last week’s stimulus bill did not include unemployment or food stamp benefits.
Prof. Jeffrey Frankel, who teaches on capital formation and growth and who served on President Clinton’s Council of Economic Advisers from 1996 to 1999, agrees that incentives are important.
“The incentives for a lower-income working person to raise themselves out of poverty is impaired by higher marginal tax rates, and the phase-in of additional benefits would be helpful,” he told the Citizen, referring to the fact that most, if not all, of the Bush tax cuts have been geared towards wealthy Americans. While those additional benefits were not realized in the final version of the bill, it did provide tax credits to lower-income citizens who do not pay taxes but earn at least $3,000 a year.
Though he has always been a vocal critic of the Bush administration, Frankel has expressed cautious optimism about its actions over the past few weeks.
“I have to give the Bush administration credit,” he said. “After seven years, it’s a pretty radical departure for them in the way they’re doing business. Paulson has admitted there are serious problems, which the administration usually hasn’t done … and they’ve been more bipartisan in their negotiations.”
Few disagree with the sentiment that this bipartisanship is in part due to the 2008 election season. Former Congressman and Interim IOP Director Jim Leach notes that an economic downturn always favors the party out of power, even when the administration isn’t necessarily responsible.
“The great economic growth of the ‘90s was under the Republican Congress, but the credit went to the Democratic president even though the brunt of it came from the private sector, which couldn’t care less about which party did what,” Leach said. “So when times get a little stiff, it’s the executive that takes the blame … more than Congress.”
Prof. David King, who runs Harvard’s Program for Newly Elected Members of the U.S. said that the Bush administration will have to wait and see what fallout, if any, this creates for the Republican Party.
“This is a good time for Republicans to get to their base and pray,” King said. “A lot of what is going to happen is out of their control.”
Written by Stella Tsay · Filed Under HKS News, News
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