American Economic Policy, as told by Martin Feldstein at Harvard University: Lecture 1, Introduction to Economics 1420

“This is a remarkable year for studying economic policy in the United States.”

That is how Martin Feldstein began his course “American Economic Policy” for undergraduates at Harvard University. I’ve gone in cognito and hope all the 20 year olds will not notice me—well not really.

It is just one of several courses I’ll audit this spring semester, and besides it was not too hard to hide in the overflowing room, standing room only at least for this first day of class.

Feldstein is a player in US economic policy. The biography on his website says:

From 1982 through 1984, Martin Feldstein was Chairman of the Council of Economic Advisers and President Reagan’s chief economic adviser. He served as President of the American Economic Association in 2004. In 2006, President Bush appointed him to be a member of the President’s Foreign Intelligence Advisory Board. In 2009, President Obama appointed him to be a member of the President’s Economic Recovery Advisory Board.

Since I am slated to teach a similar course at the University of Ottawa next year after my academic leave is over, it makes sense to see how the Harvard professor handles the big macro-economic issues of our time. So every Monday, Wednesday, and Friday morning it is back to undergraduate economics for me, and I’ll post my edited class notes if you want to follow along, learn some macro-economic theory, and develop an appreciation of the economic challenges facing the United States (and presumably other rich countries).

During the first class Professor Feldstein posed the big questions and issues the course will tackle, as well as laying out some of the administrative  ground work.

• Why is the American economic recovery more robust than elsewhere, and will it last?
• Why did the Federal Reserve Bank wait so long to raise interest rates, and what will be the consequences?
• What are the principles that guide tax policy decisions?
• The national debt has been rising significantly, and it is projected to increase rapidly. Why is this a problem?

This a course about the major aspects of economic policy in the US. What should be done? What does get done? How do policies affect the economy? And how should they be governed?

Professor Feldstein said that he will do most of the lectures, but some lectures will be given by others: Jeff Liebman, Larry Summers, and Kate Baicker. “I’m proud to say that all three were my PhD students.”

As you know we are now emerging from a very serious recession. At the end of 2007 the economy fell into a recession “It was the worst recession I have ever seen.” It combined a severe financial crisis and an economic downturn, and required an intellectual shift in how economists thought about policy. This course will contrast the different perspectives.

The downturn ended in summer 2009, but the recovery was very weak. Five years after the downturn began Gross Domestic Product (GDP) was still lower than it had been before the recession, and the pace of economic growth was still slow. We will ask why recovery was so slow, and why it picked up steam.

Our problems now also include a large budget deficit that is projected to grow over time. The recent agreement in Congress avoided a shut down, but did little to set things on a proper course.

We will also look at whether the Federal Reserve Bank’s policy has been effective, and the kind of risks it has raised.

But fundamental conditions are better here than elsewhere, particularly than in Europe and Japan. Growth in US has been better. The unemployment rates is now 5%, essentially full employment. That is where we were before the recession. In the United States the unemployment rate has fluctuated at around 5.5% for decades, but in Europe it has been rising. [Hmm … in this little cross-country survey, no mention at all of Canada, where the recession was not as deep, recovery was quicker, and the central bank quicker off the mark in lowering interest rates than in the United States.]

The inflation rate is low, why did it come down? And why are some worried that it is too low?

There were remarkable achievements in the decades before the recession, much better than before. Why? Will this be sustained going forward? “I think it will, but it will depend on economic policy. That is why we are studying policy in this course.”

I am more confident about our future than Europe, Germany, or Japan.

Four things make the US economy structurally better.

1. The US labour market is better at directing people to the right jobs as there are less institutional frictions like union rules.
2. Entrepreneurship and innovation is encouraged by US culture and financing.
3. Regulation, in spite of everyone complaining about it being excessive, is lower and less intrusive than elsewhere.
4. The US government is smaller and more decentralized: 22% of GDP passes through the federal budget, and about 12% by states. This difference matters.

This is a course about policy but it is not a an anecdotal course. We will look at data and econometric evidence, but I assure you that we will not look at methods. We will also look at what we have learned from historic experience.

“There are many readings, but they are very short.”

[Here they are if you want to read along.]