MIT Economists Send Bush Letter of AdviceBy Eric Richard
On Monday, March 30, MIT Professor of Economics Robert M. Solow and Yale Professor James Tobin, both Nobel Prize winners in economics, presented an open letter to President Bush, Congress, and members of the Federal Reserve Board suggesting a three-pronged plan to revive the national economy.
The letter was signed by over 100 of the nation's top economists, including Nobel laureate and Institute Professor Franco Modigliani, Dean of the Sloan School of Management Lester C. Thurow, and Professor of Economics Paul R. Krugman PhD<\!s>'77.
The letter outlined a three-part method by which the economists hoped to jump-start the economy and increase capital investments. First the letter suggests that a $50 billion, federally financed program be set up which would enable state governments to restart programs they had put on hold as the current economy dwindled. Such a program would help state and local governments pay for road work and education.
Second, the letter calls for an investment tax credit specifically designed to encourage increased company investment.
Critical of current Congressional ideas to lower taxes on the middle-income tax brackets, Solow said, "All that would do is increase consumption, not investment. Right now our problem is that we consume too much compared to what we produce as a nation."
Finally, the letter was directed as a plea to the Federal Reserve Board to lower the discount rate a full percentage point, to 2.5 percent, in order to increase borrowing and encourage investments.
Through this three-pronged attack, authors of the letter hope that more money would be spent on providing "human capital, training, and research and development."
"Our real goal was to find a short-term policy to start up the economy while avoiding the long-term problems we are headed for," Solow said.
Recession, economic inequality
The letter came as a response to what Solow sees as both long and short term problems. "On the short term, it is not simply the fact that the economy has seen two quarters of recession in a row, but more that the U.S. economy has been going nowhere for three years. ... On the long term, we are seeing an increase in economic inequality," Solow said.
According to Solow, the letter arose out of a conversation between Solow and Tobin on their views on the economy and how it could be helped. When the two found that they were in nearly complete agreement on the topic, they wrote down their ideas as a letter and distributed it. "Before we knew it, we had over 100 signatures on the letter," Solow said.
The two then scheduled a press conference at the National Press Club and, along with several colleagues, presented their ideas to the media.
Solow says that the letter has received "on the whole, a favorable reaction. The people who we thought would be hostile are, but there are still a lot of people who are calling up and saying, `I am glad someone finally said that.' "
Speaking on the upcoming presidential elections, Solow said, "It is likely that the economy will turn up and grow slowly -- just enough to re-elect Bush. But at the same time, unemployment will not fall perceptibly and it is possible that it won't be enough" to get Bush re-elected.
As a group, the economists tend to believe that the danger of slow economic growth or further slippage is justification to temporarily raise the deficit to fund these projects.
Economists from other schools who signed the letter included Nobel laureates Kenneth Arrow and William Sharpe of Stanford, and Lawrence Klien of the University of Pennsylvania.