Does Harvard economist Martin Feldstein agree?

You may recollect that the Harvard economist Martin Feldstein has been a top adviser to President Reagan. Having been the head of the US's National Bureau of Economic Research, Feldstein is now a member of President Obama's Economic Recovery Advisory Board.

In an interview given to Reuters reporters Jason Subler and Zhang Shengnan in Beijing today, he is reported to have said that President Obama's fiscal stimulus plan, signed last month and worth $787 billion, would offset only a small fraction of the likely fall in consumer spending, exports and residential construction: "The fiscal stimulus is just not large enough to offset the downward pressure that comes from reduced consumer spending. So unless somehow fixing the financial markets is enough to offset that, which I very much doubt, I think there will be a need for another fiscal stimulus package at some point."

He is also reported to have said that the size of a potential future package would depend on how effective the current one is at stimulating the economy. As Feldstein does not believe that fixing the financial markets will restore consumer spending, a future package will probably have to be even larger than the one President Obama has already created.

So here is a curious matter: does Feldstein not believe that "fixing the financial markets" will restore consumer and commercial confidence? If not what is his definition of a financial market that has been "fixed"?

In any case, I am glad that such an eminent person has begun to admit that economic recovery is unlikely any time soon, given the kinds of actions that are being taken - though Feldstein says, at least publicly, that the "problem" is lack of spending by consumers and companies. He doesn't seem to want to analyse WHY consumers and companies are not spending.

That has more to do with the facts that I have rehearsed in earlier blogs regarding the size of the problem that people don't want to name ("toxic assets"), and the fact that such toxic assets (consisting of derivatives and other such exotic financial instruments) have actually increased by probably as much as 20% in the last six months. In view of that, it would seem that the recovery is actually further away that it was six months ago.

Another matter: it is hardly possible that Feldstein was unaware of the just-announced Geithner/ Obama $1 trillion plan to give taxpayers' money to private companies in order to facilitate those private companies buying toxic loans, it is interesting that Feldstein made no comment on that!

Could it be that Feldstein knows that a $1 trillion plan is desperately insufficient? Toxic loans are, according to current best official estimates, actually $2 trillion.

And even the current $1 trillion plan will mean that the US taxpayer will have paid for much or most of the current downside risk involved in the purchases, while private investors (who will of course be exposed to continuing future downside risk) will pocket ALL the potential profit if and when the economy improves. So the problem will not be solved at present, but arrangements have been put in place for private parties to benefit at public expense whenever the economy does improve.

In other words, we have a public private partnership in which the public pays but private parties benefit.

Wasn't that sort of thing partly what got the American public so upset with the previous Republican administration?

Now the American public has reason to be upset with a Democrat administration for the same reason.

But my guess is that most Americans will be afraid to be seen to be negative about a black President, and will simply swallow this.

The more's the pity for the USA. But even more's the pity for the rest of the world. Sphere: Related Content