[By Brian Goldsmith]
Over the last few weeks, the Times columnist (and Nobel laureate) Paul Krugman has accused conservatives of neo-Hooverism. Krugman, as well as other liberals, argue the Republicans' opposition to stimulus spending and unemployment insurance -- for the sake of limiting national debt -- represents the same strategy that deepened depression in the 1930's. Those who disagree with the idea of more spending for more demand constitute a "coalition of the heartless, the clueless, and the confused."
What's the response from the economic right? Two senior White House aides to two Republican presidents outlined an alternative philosophy that represents, in some critical ways, a midpoint between the views of the Obama administration and current GOP leaders.
Michael Boskin served as chair of the Council of Economic Advisers, the lead professional economist for President George H.W. Bush. He says that "Krugman is using an extreme form of Keynesian economics that has been left behind by the vast bulk of the economics profession several decades ago." He believes " [Krugman's] notion that increases in deficit will somehow pay for themselves because of a very large multiplier" effect is refuted by "most studies." In Boskin's view, the Obama Administration's $800 billion Recovery Act was not worth it. It produced, he said, "a small amount of short term gain at a sizeable long term cost" in expanded government borrowing.
But he would not join those in his party who take the "extreme" view that the stimulus had no effect. ( ("I think that is a big exaggeration.") Boskin also favors an extension of unemployment benefits, provided that they are paid for, and on a glide path to reduction once the economy improves. He disagrees with conservatives who argue people are unemployed by choice: "most who are unemployed are as a result of the state of the economy not because they're hooked on benefits." He even could go along with carefully targeted aid to states, "although I'd be holding my nose."
Keith Hennessey takes a similar view. Hennessey was George W. Bush's Director of the National Economic Council--the policy coordinating post Larry Summers holds today. He joins Boskin in supporting an extension of unemployment benefits ("at a lower unemployment rate you worry about effects on labor supply, at nine and a half percent unemployment, that's not a big concern"). Hennessey also won't argue the stimulus had no effect. "I think it probably did increase the rate of growth above what it otherwise would have been," Hennessey said. But he believes it is impossible to know for sure and thinks the money was "inefficiently allocated from a macroeconomic perspective." Hennessey's alternative? He would convert unspent Recovery Act funding into tax reduction (one-third of the stimulus is already tax relief). Asked about the concern that a tax cut is saved as well as spent (reducing the stimulative effect), Hennessey said he still believes people make quicker and more efficient decisions with the money than government does.
Boskin's ideal plan shares Hennessey's focus on tax cutting. "If we had suspended several points of the payroll tax for employer and employee, stimulus could have been achieved for less money and been far more effective, especially in reducing private sector layoffs in the depths of the recession." He also would have adopted Reagan economic adviser Martin Feldstein's proposal to speed up spending on military purchases that were going to be made anyway.
On the hypocrisy charge--the accusation that GOP economists, outraged about debt, were silent on the subject when the Bush tax cuts or the Iraq war were at stake--Boskin and Hennessey both argue they supported additional spending cuts to compensate. In addition, Hennessey notes the "inconsistency" of the Obama plan to stimulate, but also to let the Bush tax cuts expire for those making over $250,000 per year.
Most notably, for all the Republican rhetoric on reducing spending, neither of these conservative economists seems prepared to begin the process in the face of a big downturn--a point of agreement with Krugman, who argues for aggressive deficit cuts, but beginning later. "I would not be arguing for dramatically smaller budget deficits this year," Hennessey says, "I would be arguing for it in future years."