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expert's podium

Paul KrugmanMIKE CLARKE

Dan Richards is president of Strategic Imperatives. He is a faculty member in the MBA program at the Rotman School at the University of Toronto.

richards@getkeepclients.com

On stimulus plans

If I could do it, I would have another package as big as the first one, if there were no political constraints.

We are still at 10 per cent unemployment in the country, with full employment being more like 5 per cent. That's a really big gap.

So that calls for a large stimulus. In January of last year, [chair of the Council of Economic Advisers]Christina Romer's back-of-the-envelope calculation said $1.2-trillion [U.S.] What they actually did, once you take out the stuff that isn't real, was $700-billion. The economy has done worse since then, versus what was expected. To say that we should double it to $1.4-trillion, total, is perfectly reasonable, except that it is completely out of bounds politically.

Shovel-ready programs

Shovel-ready turns out to be a bit of a misnomer. Even if the money is allegedly ready to go, it takes a while to get things going - unless it is China where issues of environmental impact and corruption don't matter.

That has turned out not to be a big concern. People were worried we would pass the bill in February and some of the spending would not happen until the middle of 2010, by which time the economy would have already recovered. That has turned out not to be an issue.

I was saying that right from the beginning. Based on everything we knew about the aftermath of financial crises, this was likely to be a really prolonged period of depressed economy. It was not going to be an issue of whether it took a year or two for projects to come on line. That was less important than people were saying.

U.S. tax rates

Advanced countries can collect a lot of taxes. Claims about the horrible disincentive effects of high tax rates are greatly exaggerated.

I'm not for going back to the great socialist Dwight Eisenhower and 90 per cent top marginal tax rates.

We can have more taxes. In fact, even if we get health care expenses under control, it's very difficult to see how we manage in the long run without adding at least several per cent of tax revenue to GDP. ... There is a pretty good case, at very high incomes, to have something like a tax rate in excess of 50 per cent. We had a 70 per cent tax rate for a good part of the 1960s and 1970s at the top end and survived with that. We had a 50 per cent rate for a good part of the Reagan years, which people forget about. I would be willing to go north of 50 per cent ... but I don't know how high.

Then, if you put a super-high rate on income of $5-million, then you are basically hitting only sports stars and Wall Street wheeler-dealers.

Deficit fears ...

We are looking probably at consolidated debt at all levels of government of 80 per cent or 90 per cent of GDP 10 years from now. That's not five-alarm level but it's not good. We've seen examples of advanced countries, even ones with somewhat wobbly governments, going to debt levels that high and higher without trouble.

But it's a level that makes you a little worried.

... and coming to terms with those fears

Suppose we did my $700-billion of additional stimulus. Bear in mind we are now predicting $9-trillion of additional borrowing over the next decade. That would make the economy stronger, and some of it would come back in the form of revenue - probably $200-billion to $250-billion. That would be adding $450-billion, so it would be raising an extra 5 per cent on the total amount of debt we are going to accumulate.

Plus a stronger economy would probably mean better long-run growth. So it would be easier to borrow. The point is, basically, is that the debt level as an argument against fiscal stimulus just doesn't work.

Japan's history lesson

The lesson from Japan is be very afraid.

The maximum likelihood estimate of how long it takes to recover from a financial crisis, based on the Japanese experience, is forever. ...

The Japanese never had a dramatic recovery program. What they've had is ameliorative programs. They cut rates as far as they could. They've had fiscal support, which has been enough to keep the economy from plunging but never enough to generate a boom. The theory of the case has been that eventually private market forces would come along and generate the recovery and they could withdraw the stimulus. That is not happening.

You need something more aggressive. We have a real shortage of role models. Recoveries from financial crises almost invariably are export-led. The trouble is now we have a global crisis and you can't do that - unless Mars becomes an export destination.

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