WASHINGTON -- The U.S. Senate is due to vote on releasing the second half of President George W. Bush's $700 billion financial bailout package. President-elect Barack Obama has lobbied strongly for the money to be made available immediately. Obama also is expected to ask Congress for an additional $800 billion for his own stimulus package.
As expensive as these program are, some economists say it isn't enough to give the American economy the kind of spark it need. Others say it goes too far.
Among the skeptics is William Niskanen, who served as acting chairman of the White House Council of Economic Advisers under President Ronald Reagan and is now chairman of the Cato Institute, a Washington think tank. Niskanen tells RFE/RL Washington correspondent Andrew F. Tully that Obama's economic recovery plan is not only too much, but too much of the wrong thing.
RFE/RL: Some critics of Obama's proposed economic recovery package say it doesn't go far enough to restore economic health. Others say it goes too far and spends too much. How do you view it?
William Niskanen: There have been two interesting experiments with plans of this nature. One is by the Roosevelt administration, which had a huge public-works program, and the second is in Japan in the 1990s, a huge -- even much larger -- public-works program.
In the first case, the Great Depression lasted from 1929 to 1940, and it ended with a 15 percent unemployment rate before World War II. In the Japanese case, they went through a decade, in the 1990s, with basically no growth. So the historical record is really rather bleak. I don't know of a single historical fiscal stimulus plan that has significantly reduced the depth or duration of a recession.
RFE/RL: So you don't see Obama's proposal as too small?
Niskanen: The smaller the better [laughs], in the sense that if you don't expect very much of it, you don't want to spend an awful lot of money on it.
Now, the federal deficit for fiscal 2009 will be on the order of $1 trillion before any of these plans, based on what has already been approved [in existing recovery packages], and all of what Obama's got in mind would add to that. We're starting this bidding based upon a very large federal deficit, a near-record peacetime federal deficit relative to the size of the economy.
Doing Too Much?
RFE/RL: Are you concerned that the United States may face trouble borrowing additional money, primarily from lenders overseas?
Niskanen: I think we're nearing the limits on our ability to borrow, particularly from foreigners. Most of the money that is loaned [to] us to finance our current account deficit comes from China and Japan and the oil countries.
Now China is experiencing a low-growth year, Japan is in a recession, the oil countries' revenues are way off this year because the price of oil has been off. These have been the countries that have financed most of our current account deficit. So I think we're approaching a limit on the ability of the Treasury to borrow.
RFE/RL: So your view is not that Obama wants to do too little, but proposing doing too much?
Niskanen: Well, I think he's doing too much of the wrong things. He's basically packaged proposals that he has made for some years, long before anybody realized that we were in a recession, and wrapped the words "fiscal stimulus" around this package for addressing this current recession.
This is a quite heterogeneous package of subsidies to renewable fuels, subsidies to expand access to broadband, to have a national electricity grid, to have a national electronic medical records [database], plus spending on conventional infrastructure, plus bailing out the state governments and so forth.
Now, part of the problem is that many of these proposals that he's making wouldn't lead to any action in the real economy for months or years. And none of the measures that he's particularly proposed address the housing industry.
RFE/RL: Speaking of housing, the U.S. housing crisis is the source of the current global financial trouble. Lenders made home loans to customers without caring whether the homeowners could afford to pay them back. What should Obama do -- and not do?
Niskanen: 1) Don't subsidize home builders. The housing problem is only going to be solved when the number of unoccupied housing units goes down, and that is not helped by subsidizing the home builders.
I think that there is a basis for trying to help the people who are "underwater," their mortgages are "underwater" [owe more in mortgage payments than their houses are worth]. And I think there are a number of fiscal measures that might be valuable in doing that.
One thing would be to allow people to have an automatic [tax] deduction for their mortgage payments. This would actually help solve the problem of foreclosure, but in an important way would also solve most of the political problem because none of these measures so far have particularly helped the people who are in trouble with their mortgages.
...Or Doing The Wrong Thing?
RFE/RL: How can tax cuts help the economy, in your view?
Niskanen: Tax cuts that do not reduce the marginal tax rate have basically no effect on anything. That has been true of all of these prior episodes like in 2001 and in 2008 in which you basically gave people tax credits without reducing their marginal tax rate. And most of the checks that people get -- they're used to help people pay off their credit or put in the bank. It has none of the effects that people expect. To have any significant economic effect, you actually have to reduce somebody's tax rate.
There are two elements to the Obama tax plan. One is basically tax credits to middle-income people, and second is a temporary measure to subsidize companies that have recently lost a good bit of money. Most of the benefits of that would go to home builders and to banks who lost money making mortgages. That element of [the] Obama plan is least likely to pass Congress.
RFE/RL: How does government spending on public-works programs compare with tax cuts for stimulating the economy?
Niskanen: There are types of spending which may be valuable. If these spending proposals can pass, basically, a cost-benefit test, there's no reason to dismiss them out of hand.
It may be that some of the items that Obama has proposed in fact would pass the benefit-cost test. I don't want to say that you can never improve the state of the economy by government spending, because some kinds of government spending clearly pass a benefit-cost test.
But I think that test ought to be applied to every proposal he makes on the spending side. And I think relatively few of his spending proposals would pass that kind of test.
RFE/RL: It seems you prefer tax relief -- specifically cuts in tax rates -- as the way to go in stimulating a feeble economy.
Niskanen: In terms of fiscal stimulus, I think that I would favor only tax measures that reduce marginal tax rates. The most likely measures that would help the economy, in fact, are some things that are not very politic, and that is to reduce the corporate tax rate. Public-works programs are not the way to go. We have lots of historical evidence that that doesn't work.