Conservative and moderate economists agree with Paul Krugman that an economic slump is likely to continue. | REUTERS Economics vs. politics on deficit

There was an astonishing harmonic convergence Tuesday at a Washington conference on the nation’s economic and fiscal future.

Martin Feldstein, Ronald Reagan’s former chief economist, Paul Krugman of The New York Times and Princeton University and Jan Hatzius, chief economist of Goldman Sachs, all called for far more aggressive economic intervention.


All three, representing the left, right and center of their profession, agreed that a deep economic slump is likely to continue indefinitely, in the absence of a much larger stimulus program and more short-run deficit spending than any mainstream politician is currently proposing.

In my 40 years covering economics and finance, I’ve never seen a more alarming disconnect between the economic and the political — or higher stakes.

These unlikely viewpoints on the economy were brought together by four think tanks — Demos, the Economic Policy Institute, The Center on Budget and Policy Priorities and the Century Foundation — seeking to counter what has become Washington conventional wisdom on the need for deficit reduction.

Krugman, asked when the economy would return to full employment, replied, “Basically never” — unless we get a huge stimulus comparable to the most recent “recovery to full employment” from a global financial crisis “known as World War II.”

No surprise there. But Feldstein quickly agreed. According to the former Reagan adviser, the American Recovery and Reinvestment Act of 2009 spending tried to fill a “GDP gap” of about $1 trillion a year with about $800 billion spread over at least three years. “So we never got liftoff. We never got a recovery,” Feldstein said.

“The various temporary measures that we had,” Feldstein added, “the Cash for Clunkers, the first-time homebuyers [credit] — they’re finished.”

Feldstein joined Krugman in calling for more stimulus, including a far more aggressive program of mortgage relief to offset the drag of nearly one in three homeowners having a mortgage worth more than the value of the house. That, warned Feldstein, deepens the slump.

On the other hand, he said, “if housing prices are beginning to go up, consumers are going to have more confidence. They’re going to spend more.”

Feldstein added that the full force of the collapse of commercial real estate prices is yet to hit, because commercial real estate is typically financed by five-year bank loans. The loans financed at the peak of the bubble will be coming due in 2011 and 2012.

“All that lending is highly concentrated in small banks,” Feldstein said. “So if we don’t fix that problem, the banks are not going to lend.”

Hatzius urged the Federal Reserve to redouble its monetary policy of buying Treasury bonds and other securities, warning that “there is a natural bias toward caution on monetary policymakers in this sort of environment.”

He explained that the Fed asks its experts what to do, “they come back with an enormously large number for the amount [of bonds] that needs to be purchased, and the policymakers say, ‘Oh, you know, are you really sure?’”

All three economists agreed that a lower dollar wouldn’t help much, because, as Krugman observed, the two natural currencies against which the dollar might depreciate, the yen and the euro, have even less investor confidence. “We are really talking about a race between the halt, the lame and the blind here,” Krugman said.

The conference was timed to provide an alternative to the austerity program likely to be commended by President Barack Obama’s fiscal commission, which must report by Dec. 1. Two other reports, from privately funded commissions dominated by deficit hawks, are due out as well.

All three economists warned that growth is slowing, not increasing; that unemployment is stuck on a plateau; and that no policies or natural recovery trends on the near horizon were likely to reverse that course.

The surprise was not that Krugman was a deficit dove but that the concern about a long-term economic stagnation extends across the spectrum of economists.

This debate is less left vs. right than one between high-minded centrists, who use fiscal austerity as an emblem of public virtue, and professional economists worried about the prospect of a 1930s-style indefinite and self-deepening slump.

The problem is not that there are no solutions. A more aggressive fiscal and monetary policy could provide more jobs, consumer purchasing power and more business investment. A more interventionist approach to mortgage relief and banking reform could overcome the drag of the banking and housing sectors.

The problem is that the solutions are beyond respectable political and legislative discourse — and deficit hawks seem to have the ear of elite opinion.

Robert Kuttner is co-editor of The American Prospect. His latest book is “A Presidency in Peril.”