Feldstein and Stiglitz approach the subject from quite different philosophical perspectives, so it was striking to see that they agree on key points. For example, both agree that the current crisis is very real and that a large fiscal stimulus is vitally necessary. Both agree that the TARP bailout was badly designed, has thus far been badly executed, and has thus far accomplished very little. Both agree that the remainder of the TARP funds ($350 billion) should be used to reset the mortgages on homes where buyers are upside down. (Stiglitz would have the banks take a bigger haircut than Feldstein would.) Both worry that the US economy has been propped up for the last several years by bubbles (in tech stocks, housing, and consumer spending) and that, while government spending can prop the economy up in the short run, it's unclear how we will restore sustainable economic growth in the longer run.
I was struck by Stiglitz's concern that the Bush administration's failures will prejudice people against the vitally necessary government action to come. Perhaps, he worries, people will look at the failure of tax cuts and the bailout, and in a context of huge inherited debts and deficits, they will conclude that it's now best to let the market solve its own problems. This would be a disaster, so I hope the Obama administration is ready to roll on this.
It's also notable that there is so little discussion about fixing the home mortgage crisis. Both Feldstein and Stiglitz agreed that the financial sector won't make any progress until that happens, and relief to homeowners should be a central pillar of any stimulus package. After all, there's no way consumers will start spending again until they quit bleeding out wealth in the falling values of their homes, and their homes will continue falling in value so long as foreclosures continue to devastate the housing market. I hope Team Obama is listening to Barney Frank on this.
On Christmas Eve Martin Feldstein published a piece in the Wall Street Journal arguing that increased military spending would be a great stimulus.To some extent he has a point. For example, this makes perfect sense:
Replacing the supplies that have been depleted by the military activity in Iraq and Afghanistan is a good example of something that might be postponed but that should instead be done quickly. The same is true for replacing the military equipment that has been subject to excessive wear and tear. More generally, replacement schedules for vehicles and other equipment should be accelerated to do more during the next two years than would otherwise be economically efficient.
Industry experts and DOD officials confirm that military suppliers have substantial unused capacity with which to produce additional supplies and equipment. Even those production lines that are currently at full capacity can be greatly expanded by going from a single shift to a two-shift production schedule. With industrial production in the economy as a whole down sharply, there is no shortage of potential employees who can produce supplies and equipment.
Military procurement has the further advantage that almost all of the equipment and supplies that the military buys is made in the United States, creating demand and jobs here at home.
This has to be done anyway, and the need for projects ready to go makes the repair or replacement of military equipment a good candidate for prompt action. So far, so good. But Feldstein takes his point much further.
Military planners must also look ahead to the missions that each of the services may be called upon to do in the future. Additional funding would allow the Air Force to increase the production of fighter planes and transport aircraft without any delays. The Army could accelerate its combat modernization program. The Navy could build additional ships to deal with its increased responsibilities in protecting coastal shipping and in countering terrorism. And all three services have significant infrastructure needs.
This is where I get off the bandwagon. It would be a tremendous mistake to build our future defense policy around the desire for a short term fiscal stimulus. As Andrew Bacevich has explained in his masterful book, The Limits of Power: The End of American Exceptionalism, our foreign policy is already excessively militarized -- to continue unsustainable domestic policies, we maintain a vast imperial presence abroad to insure (among other things) a reliable supply of cheap oil. We need to change those unsustainable domestic policies, and thereby obviate the burdens of empire that make our domestic situation even worse. In this context, the last thing we need are more aircraft carriers, littoral combat ships, advanced fighter/bomber aircraft, and nuclear submarines. If we build these things, policy will follow procurement. This would be a terrible idea.
Instead, we should enact a stimulus focused on measures that would produce sustainable domestic prosperity in the future. Instead of buying military aircraft we don't need, we should reinvest in our decaying transportation infrastructure with expenditures on both roads and bridges and the expansion of mass transit. Instead of a new aircraft carrier we should invest in a new "smart" electronic grid that allows alternative energy sources to be incorporated into our transmission system. Instead of a new submarine we should invest in green technologies that would conserve energy more cost-effectively than we could produce it. Instead of a littoral combat ship we should become the world's leader in the manufacture of electric, hybrid, and other highly efficient cars that would help us escape our addiction to imported oil. All of these measures would produce a larger and more enduring stimulus than the procurement of military equipment we don't need, and unlike the military equipment we don't need, these expenditures would produce a vast new infrastructure that would sustain our prosperity in the future.
We already spend more on what we euphemistically call "defense" than the rest of the world combined. This means we can cut our "defense" budget and still maintain massive military superiority. It is desperately necessary that we do so, in part because we have far more pressing domestic needs (see, for example, national health care) and also because we need to abandon the policies that require an imperial military abroad. Instead of expanding the military so we can keep on fighting in places like Iraq and Afghanistan, we should adopt more sensible domestic and foreign policies that don't make our security dependent on resolving intractable problems in dysfunctional regions where we have no real idea what we're doing.