James Hamilton has a nice post noting why he would say we are in a recession and linking to a lot of very smart economists who are saying the same thing. All of these economists pay tribute to the tough task faced by the NBER Business-Cycle Dating Committee which has not officially declared that we are in a recession – at least not yet. But I suspect Teams McCain and Obama will both start talking about fiscal policy cures for the rise in the unemployment rate – or the drop in the employment-population ratio if you prefer.
I haven’t seen anything recent from Lawrence Summers on this but let me speculate what he might say – as I think he often gets these things quite right. Summers strikes me as a long-term deficit hawk for the same pro-growth reasons that I am. Something to do with increasing national savings – which of course the Reagan-Bush43-McCain wing of the Republican Party seems to think has it all backwards. We deficit hawks tend to favor countercyclical monetary policy that lowers interest rates to encourage investment (and yes net exports via dollar devaluation) when aggregate demand is weak. But the Federal Reserve has played that lever and some of us are concerned that it alone will not be enough.
So as the politicians want to pander to the public with promises of both more spending and tax cuts too, let’s try to figure out which set of fiscal policies can do the best job of giving timely, targeted, and effective short-term fiscal stimulus and at the same time tell Wall Street that we are serious about long-term fiscal responsibility. This policy prescription used to be called Rubinomics and I submit that it worked well for the Clinton Administration. But then Summers was one of his excellent economic advisors – to which President Clinton did listen to carefully.
McCain wants tax cuts – lots of them. Some of them are temporary tax cuts (gasoline tax rebates) which a lot of economists would argue have little bang for the back. But McCain is also advocating making George W. Bush’s tax cuts permanent. Whoops – that’s the complete opposite of what Rubinomics would call for. It would reduce national savings and long-term economic growth and could even hurt forward looking investors types such as those folks on Wall Street. The McCain recipe is a lot like the Reagan and Bush43 recipes and the evidence is that these recipes work poorly.
Obama is calling for an acceleration of public investment projects, which could give a large bang for the buck and perhaps more timely bang for the buck. But I’m not ready to say President Obama would be a repeat of what President Clinton did back in 1993. Candidate Obama wants to tell all but the very rich they get a tax cut. Then again candidate Clinton made that promise back in 1992. But at least candidate Obama is proposing less fiscal irresponsibility than candidate McCain and is willing to say some folks will have to pay more in taxes. Candidate Obama is also surrounding himself with economic advisors who are actual economists. McCain’s idea for economic advisors include Carly Fiorina and Phil Gramm.