Martin Feldstein in the WSJ, The Good, The Not So Good and the Outright Wrong

Yes, He Does Get Some Things Right

The Wall Street Journal editorial pages were graced on Wednesday by a commentary from Martin Feldstein.  Mr. Feldstein gained notoriety as Chairman of the Council of Economic Advisors under Pres. Reagan, and in recent years resides at Harvard as a Conservative Economist. 

Here is the grading on Mr. Feldstein’s opus.

1. The title of the piece, “The Economy is Worse Than You Think” was surely pleasing to the staff and writers of the editorial section of the WSJ, who cheer on every bit of bad economic news as it supports their campaign to rid the nation of Mr. Obama and replace him with Ayn Rand. Mr. Daniel Henninger on the editorial pages can hardly contain his glee.

In this case, Mr. Feldstein was making a correct observation, as The Dismal Political Economist pointed out earlier, it is highly likely the economy is in a technical recovery rather than a real one.

2. Mr. Feldstein then says that

The administration's most obvious failure was its misguided fiscal policies: the cash-for-clunkers subsidy for car buyers, the tax credit for first-time home buyers, and the $830 billion "stimulus" package. Cash-for-clunkers gave a temporary boost to motor-vehicle production but had no lasting impact on the economy. The home-buyer credit stimulated the demand for homes only temporarily.

which simply underlines the fact that being at Harvard he has a limited view of the real world.  Both the Cash-for-Clunkers and tax credit for first time home buyers stemmed an almost uncontrollable downward spiral of the auto and housing industries.  They did not have a positive impact, but they slowed the negative trend, an important contribution to the economy.

3. With respect to the stimulus package, Mr. Feldstein concludes

As for the "stimulus" package, both its size and structure were inadequate to offset the enormous decline in aggregate demand

which is exactly correct.  This of course puts Mr. Feldstein in the company of folks like Paul Krugman and and Brad DeLong whose company we imagine he does not want to keep.

4. Mr. Feldstein blames the potential increase in taxes as a negative factor on business investment.  Like many others, Mr. Feldstein does not seem to understand what drives business investment, as explained here.  Actually he probably does understand that it is Aggregate Demand and not taxes, but some Conservative habits just cannot be broken.

A real problem that Mr. Feldstein does allude to is the uncertainty in the government policy on taxes and other issues associated with the deficit.  Uncertainty is the enemy of investment, better a certain high tax rate policy than an uncertain policy where no one knows where rates will end up.

5. The lack of a consistent dollar policy is blamed by Mr. Feldstein for low investment, saying

The Treasury repeats the slogan that "a strong dollar is good for America" while watching the real value of the dollar fall by 7% over the past year, and while urging the Chinese to allow the dollar to fall more quickly relative to the yuan.

Now Mr. Feldstein is an old Washington hand and he knows spin from reality.  The Administration is pursuing a weak dollar policy, which Tim Pawlenty does not understand, but everyone else does.  They just cannot admit it.

In grading Mr. Feldstein we will ignore his call for lower taxes and at the same time calling for policy to bring the deficit under control, Conservatives just cannot help themselves on that one.  His grade is a nice C+, about as good as one can get and still get published on the editorial pages of the Journal.


Follow Up:  Blogger Noahpinion says he is confused by Mr. Feldstein.  Not to worry, if you are not confused by Mr. Feldstein it is time to be concerned.