Martin Feldstein’s partisan hack job in the 6/8/11 Wall St. Journal is shameful. Not every criticism he makes of Obama's policies in dealing with the economic stinkpile he inherited from Bush is wrong, but the essence of his case is both fallacious and duplicitous.
His first claim is that the administration pursued misguided fiscal policies like the cash for clunkers program, the tax credit for new homebuyers, and the $830 billion stimulus program. The first two programs, he complains, had only a temporary impact. But that was exactly the point: to stop a spiral of despair and deflation, the administration’s programs were precisely targeted at breaking the psychology of gloom that had taken hold after Bush’s debacles. And so they did.
His critique of the stimulus package is that “both its size and structure were inadequate to offset the enormous decline in aggregate demand.” That is true. But he duplicitously fails to mention is that the size was limited by Republican obstructionism, and fell far short of what Obama and the Democrats thought advisable. Nor could any stimulus program have, in itself, offset the multi-trillion dollar decline in demand. As with the other programs, and in accordance with everything economists learned from the Great Depression, the goal was to reverse the deflationary psychology that had taken hold. It would have been more successful if not for Republican obstructions, but it nonetheless managed to stem the depression and turn it into a recovery, much slowed due to Republican obstructionism.
Mr. Feldstein’s next claim is that by opposing further tax cuts for the wealthy, and in fact seeking to increase taxes on them, Obama increased the uncertainty of the investing class and caused them to withhold their investments. This claim comes at a time when the effective tax rate on the wealthy and large corporations is the lowest since World War II, a time when corporations have compiled over $2 trillion in savings. There is not a shred of evidence to suggest that companies and individuals who invested heavily under the higher tax rates of the Clinton administration are now holding back because of the administration’s threats to restore the Clinton tax rates. Feldstein’s is an absurd claim, an appeal to the grotesque ignorance and gullibility of his WSJ audience.
Feldstein’s third complaint is that the administration has not fashioned an explicit plan to deal with deficits. I have some sympathy for this complaint, although it rests on a critique of negotiating tactics that neither of us is really in a position to fathom. The administration must negotiate tricky currents in formulating, with a hostile House, an approach to these issues, and we do not yet know the outcome of its approach.
Feldstein’s last critique, that the administration takes inconsistent positions with respect to the dollar’s strength, seems more naïve or stupid than anything else. As should be reasonable obvious to any observer, the administration is pursuing a highly pragmatic approach to the dollar’s position. It cannot publicly embrace a weak dollar, as that would undermine its role, highly benficial to the US, as the world’s principal reserve currency. On the other hand, by allowing a gradual weakening of the dollar the administration has made exports much more viable, and allowed American workers and firms to once again participate in the explosive growth now taking place in the developing world—a policy that has proven immensely helpful in combatting the Bush Recession. I think the administration is very skillfully walking a narrow line in fashioning this policy.