Father of Bush tax cuts: Recession likely

Harvard economist Martin Feldstein says more tax relief, deeper Fed rate cuts needed if U.S. is to avoid recession.

Martin Feldstein, the Harvard economist credited with being one of the fathers of the Bush administration tax cuts, says the U.S. economy is now likely to slip into a recession, and that avoiding one will take a new round of tax cuts and interest rate cuts from the Federal Reserve.

Feldstein is president and CEO of the National Bureau of Economic Research (NBER), the organization charged with determining when the economy is in a recession and when it is growing. He told CNNMoney.com that he had thought the chance of a recession was about 50-50 even before last week.

But he said he now believes a recession is likely, as he pointed to both a report from the Institute of Supply Management showing manufacturing activity in decline for the first time in almost a year, and Friday's December jobs report that showed a jump in the unemployment rate to a two-year high.

He did not give a new percentage for the chance of a recession, saying that will depend on what both the Federal Reserve and Congress and the administration do in response to the weakness.

"It's not just clear that lower interest rates and monetary policy more generally will have enough traction because of conditions in the credit market," he said when asked if the Fed could hold off a recession. "We should have some fiscal stimulus to back that up."

Feldstein made his remarks the same day President Bush gave a speech in Chicago in which he said that economic indicators are "increasingly mixed," and he acknowledged that many Americans are growing anxious about the economy. But the president argued the economy itself is resilient.

The president did not propose any kind of short-term economic stimulus package in his comments, as some had expected, although he argued that it was important not to raise taxes and called for making permanent the tax cuts he passed early in his administration that are due to expire after he leaves office.

Feldstein said he was not surprised that there was no plan laid out on Monday, saying he expects to see it in the State of the Union address. He said an extra $300 tax credit for each tax payer, similar to what was passed in 2001, would only be a good first step this time, and that some kind of deeper cuts might be necessary if the economy starts to lose jobs.

"The precise mix is not as important as a decision that what the economy needs is an additional amount of fiscal stimulus on top of the lower interest rate. That can be a cut in personal taxes, it can be a business investment credit of the sort we had in 2003 or some combination of the two," he said.

Feldstein served as chairman of the Council of Economic Advisers during the Reagan administration. He has served as president and CEO of NBER since leaving that post in 1984, as well as serving on Harvard's faculty. He has given notice that he will be retiring from NBER in June of this year.

Feldstein said that the NBER generally waits at least six months after the economy goes into recession to meet and assign a date to the start of the downturn, and that it is nowhere near ready to call such a meeting. But he said that some stimulus is needed, even if it turns out that the economy continues to grow, albeit at a weak rate.

"What's clear is even if the economy doesn't go into a full scale recession it will be a slow year, one that would benefit from a fiscal stimulus like a $300 (tax credit.) If we're going to actually going to slip into negative GDP, I would want to see more than that."

While he did not serve in the Bush administration, he was an advisor to the campaign and was seen as a leading force in shaping the administration's tax cut strategy, as well as its push to privatize social security. He also served as the faculty advisor for several top members of the Bush administration's economic team when they were working on their doctorates in economics.