An Open Letter to My President
Dear President Obama,
Tonight you will address a joint session of Congress to outline your proposal to get the economy moving at a fast enough pace to finally make some significant and consistent progress in reducing the intolerable level of joblessness that has plagued the nation for too long. I implore you Mr. President--do not waste this opportunity on proposals to placate in any fashion the congressional deficit hawks and Tea Partyers, the Mitt Romneys, the Rick Perrys, the Michele Bachmanns and their conservative academic economist advisors. This Great Recession, precipitated by the financial crisis, is now a consequence of inadequate aggregate demand. Consumer spending is insufficient because consumers are deleveraging and job prospects are woeful. Businesses aren’t spending or hiring because consumers aren’t spending, not because of uncertainties about the debt, the deficit, regulations, taxes, etc. as some would argue ad nauseam, e.g. John B. Taylor in Wednesday’s New York Times. And so, if the private sector is not spending, it is up to the public sector to fill the void, it is up to the public sector to spend, but spend wisely. Ignore those who echo the tired conservative refrain that the $800 billion fiscal stimulus failed—it wasn’t large enough to even be called a stimulus and it was ill-targeted because you tried to placate those who cannot be placated. Ignore those who argue that the government’s spending will simply “crowd-out” private spending. That won’t happen to any significant degree in our current “liquidity trap” condition. Ignore those who would demonize additional government spending because of its deficit and debt impacts. The latter should not now be the main focus of macroeconomic policy.
From you I want to see a bold proposal that increases substantially federal aid to state and local governments, first for the maintenance of existing infrastructure (roads, bridges, sewer systems, schools, parks, recreation facilities, retrofitting of government facilities to enhance energy efficiency) and second for new infrastructure projects. Most of the funds should be targeted to infrastructure maintenance as these projects tend to yield higher returns and can be started more quickly than new infrastructure projects.
Extend unemployment benefits. Pay little attention to those who argue that this kind of policy actually causes unemployment to be much greater and the duration much longer since it reduces the urgency of taking a job. The evidence for this is really not very compelling especially with labor market conditions as they exist today.
Stay away from proposing too much in the way of relatively ineffective tax cuts, even payroll tax cuts, for individuals and/or businesses. The impetus that such cuts give to spending is relatively minor. Indeed, this was a major problem with your first “stimulus” package.
Do not compromise needlessly on delaying necessary regulations whether environmental, financial, consumer, or otherwise. They are not the culprits here—the lack of aggregate spending is.
The additional spending should continue for about two years. As the economy recovers and the unemployment rate shows a consistent decline, the weaning will have to begin. Note that none of these short-run stimulus prescriptions should preclude discussions and/or passage of effective long-run policies and proposals to deal the long-term fiscal problems we face. But please, do not use these long-term problems as an excuse for holding back any longer on the short run stimulus measures that are necessary to get out of the serious economic malaise in which the nation finds itself.
Mr. President, I wish you well.
Ernest M. Zampelli