Feldstein on the Economy

What does it mean that Martin Feldstein (hat tip Mark Thoma) is now one of my favorite economists, when it comes to commenting on the current economic crisis? Feldstein’s analysis:

  • Evidence of recovery so far is thin.
  • The stimulus package will kick in and provide a short period of growth.
  • But as the stimulus wears off, growth will fade away again.
  • The Obama Administration’s policies are pointed in roughly the right direction but not big enough to turn the tide.

Here’s his conclusion:

The positive effect of the stimulus package is simply not large enough to offset the negative impact of dramatically lower household wealth, declines in residential construction, a dysfunctional banking system that does not increase credit creation, and the downward spiral of house prices. The Obama administration has developed policies to counter these negative effects, but, in my judgment, they are not adequate to turn the economy around and produce a sustained recovery.

Having said that, these policies are still works in progress. If they are strengthened in the months ahead – to increase demand, fix the banking system, and stop the fall in house prices – we can hope to see a sustained recovery start in 2010. If not, we will just have to keep waiting and hoping.

By James Kwak

12 responses to “Feldstein on the Economy

  1. It means that Martin Feldstein hasn’t been invited to the White House for dinner yet. Who would have guessed that Paul Krugman could be bought off so cheaply?

  2. James Twiner

    but ifaforo, Krugman got to go to the SECRET ROOM and see the BIG BOARD! Now he knows the TOP SECRET PLAN to save the economy!!!!!!!!

    If we just Hope and Change (er Trust), and CLAP LOUD ENOUGH, all will be well without having to make any hard choices!

  3. Kevin M. Arts

    Barry Eichengreen reaches similar conclusions here:

    http://www.econ.berkeley.edu/~eichengr/vargas_found_5-11-09.pdf

  4. Waiting and Hoping is not a plan. Any advisor giving such advice should be fired.

  5. Sandy Ferguson

    Feldstein was also on the Board at AIG, so his views on the financial crisis don’t really carry a ton a credibility.

    Feldstein is a prototypical member of the Commentocracy. He doesn’t have the time to sit down and really delve into a large dataset for a week or more and do any real analysis. He just looks at the topline economic data, mixes in a heavy dose of ideologically-driven world views, and spits out an extremely rough (and dubious) forecast, which is invariably based on intuitive feeling more than serious analysis. Sprinkle in “Harvard economics professor” as needed to fool journalists into thinking his views are worth publishing. Repeat as necessary.

    Welcome to the Commentocracy.

  6. Gawain's Ghost

    Sorry, but Feldstein is an idiot. Basically what he is proposing is bankrupting the government (aka the taxpayers) to return the economy to status quo ante. It isn’t going to work, and there will be hell to pay.

  7. Feldstein is too far to the right for me. But I agree with Mr. Kwak that Feldstein’s assessment of the current economy and where it’s going is very reasonable. I might even be a little more negative than him. But Feldstein is typical of his ethnicity in that he is very intelligent. His politics are too far to the right, but he’s definitely worth listening to and reading.

  8. True…waiting and hoping was what we were doing last year, when we watched Bear Stearns go down. Waiting and hoping ? I don’t know anyone who has a mortgage to pay (or any other bills, for that matter) who is waiting and hoping. That game is OVER. We are scrambling for other sources of income. We are making every effort to preserve the assets we have. We are doing everything in our power to keep our jobs or to get jobs.

  9. Pingback: The Baseline Scenario: May 27, 2009 | EthicalMarkets.com

  10. Wayne Tyson

    A FABLE OF FABLED WEALTH?

    “. . . policies to counter these negative effects, but, in my judgment, they are not adequate to turn the economy around and produce a sustained recovery.”

    “Having said that, these policies are still works in progress. If they are strengthened in the months ahead – to increase demand, fix the banking system, and stop the fall in house prices – we can hope to see a sustained recovery start in 2010. If not, we will just have to keep waiting and hoping.”
    –Feldstein

    The Corporate Feudal State (CFS) (C) 2009 by Wayne Tyson

    The Corporate Feudal State has not yet run its course, but it has reached its peak. The Great Golden Goose/Consumer has been cooked, and pick at its bones as you will, there will be no more golden eggs.

    It is not that a lesson has been learned, however–it is that the DEMAND for the kind of excess consumption that produced The Golden Egg Illusion has been exhausted, and the near-future will be preoccupied with NEED for survival, with real EFFICIENCY rather than EXPEDIENCY.

    In natural systems, when predators drive down populations of primary producers down below levels capable of not only sustaining themselves, but in producing sufficient surplus to maintain predator populations at a service-exchange level, both prey and predator populations crash, roughly in proportion to the degree of excess predation (such as when wildly successful predators go beyond the surpluses of prey populations and begin to feed upon the breeding stock). Recovery curves tend to be much flatter than the “boom” curves that preceded the even steeper “bust” curves. Prey populations that have been decimated by excess predation generally consist of more resilient individuals that, having been forced into poverty, embrace frugality as relative luxury and refrain from laying golden eggs–at least in the open.

    “Waiting and hoping” indeed!

  11. Wayne Tyson

    A FABLE OF FABLED WEALTH?

    “. . . policies to counter these negative effects, but, in my judgment, they are not adequate to turn the economy around and produce a sustained recovery.”

    “Having said that, these policies are still works in progress. If they are strengthened in the months ahead – to increase demand, fix the banking system, and stop the fall in house prices – we can hope to see a sustained recovery start in 2010. If not, we will just have to keep waiting and hoping.”
    –Feldstein

    The Corporate Feudal State (CFS) (C) 2009 by Wayne Tyson

    The Corporate Feudal State has not yet run its course, but it has reached its peak. The Great Golden Goose/Consumer has been cooked, and pick at its bones as you will, there will be no more golden eggs.

    It is not that a lesson has been learned, however–it is that the DEMAND for the kind of excess consumption that produced The Golden Egg Illusion has been exhausted, and the near-future will be preoccupied with NEED for survival, with real EFFICIENCY rather than EXPEDIENCY.

    In natural systems, when predators drive down populations of primary producers below levels capable of not only sustaining themselves, but in producing sufficient surplus to maintain predator populations at a service-exchange level, both prey and predator populations crash, roughly in proportion to the degree of excess predation (such as when wildly successful predators go beyond the surpluses of prey populations and begin to feed upon the breeding stock). Recovery curves tend to be much flatter than the “boom” curves that preceded the even steeper “bust” curves. Prey populations that have been decimated by excess predation generally consist of more resilient individuals that, having been forced into poverty, embrace frugality as relative luxury and refrain from laying golden eggs–at least in the open.

    “Waiting and hoping” indeed!

  12. … ah yes, the predatory and the prey, now we’re getting somewhere …

    Do BIG GAME investors (ie. the predators) really CARE one way or the other? Not one iota. The name of the game is ‘profit’ at ANY (ie. prey) cost.

    Predators aren’t going to develop any kind of ‘social conscience’ any time soon. Restricting restraints imposed by national governments will have little impact because BIG GAME investors, in collusion with ‘global’ banks, can move their money elsewhere, quickly, with impunity.

    In a simple world, it might be best to exile (kick out) all those off-shore investing predators who smugly (& blithely) continue to enjoy the ‘lifestyle’ afforded by the American taxpayers, ie. a working infrastructure, safety, a relatively pollution free environment, with ‘free’ education & expression.

    Maybe then they will recognize their are a part of a larger inter-connected human COMMUNITY and begin to act accordingly. Maybe then they would begin to re-invest ‘at home’ by helping/acknowledging the basic humanity of their neighbour, and maybe then they will become the LEADERS they most truly ARE. Perhaps then they will gain the recognition and respect of their lead … Who knows, perhaps they might even discover how PRICELESS that kind of RESPECT from their own kind can be …

    Wishful thinking? Perhaps. But what truly makes a man a man?