Fed’s Economic Outlook Hits Stocks: A ‘Much Bigger Scale’ Obama Plan Is Needed Says Blinder

If you think there was pressure on Federal Reserve Chairman Ben Bernanke to "do nothing" prior to yesterday's release you ain't seen nothing yet. Given the way stocks plunged after the August meeting and again this week, perhaps the Do Nothing camp has a point. Breakout invited former Vice Chairman of the Board of Governors of the Federal Reserve Alan Blinder on to the show to discuss.

In Part I of my interview, Blinder said Bernanke won't stop doing virtually anything in his power to meet the Fed's dual mandate, regardless of growing futility. In part II we addressed the political pressure facing Bernanke and what could be done, outside of monetary policy moves, to jump start the economy.

Blinder quickly dismissed politician's ability to threaten the Fed's independence, influence Bernanke, and says any Fed Chair must ignore political pressure. "You don't want to get in a political fight with politicians, you're going to lose it," he says. Clearly there's no way for Bernanke to win a political debate, particularly when his actions are being called "treasonous."

With the Fed set on doing whatever it can and the politicians and Treasury Department seemingly intent on doing nothing until 2012, I declared Blinder hypothetical ruler of the world and asked him what he would do to improve the US economy.

"I'd combine significant fiscal stimulus, highly targeted on jobs now, with very substantial long-run deficit reduction," Blinder told me. The Princeton professor fully realizes spending excessively now while promising to save money later is correctly viewed as a lie.

Traditionally Washington, D.C. gets the "spending now" part done, but the "savings later" never seem to materialize. In Blinder's blue sky world the cuts would be legislated, giving the government the best chance to "bank" the cuts. Even with the threat of the savings never happening, Blinder says providing the dying economy with stimulus is worth the risk.

I pushed Blinder on the point that government spending is wildly inefficient, as evidenced by the failure of the "shovel ready" initiative of 2009. He cited the Civilian Conservation Corp, the Hoover Dam, and other projects that are "nowadays called socialism" as one half of a two-pronged spending plan. He wants to put people to work immediately on the small stuff then jam the bigger projects through the inevitable delays as fast as possible.

Of course speed is the challenge. As illustrated by the debacle of Boeing's (BA) fight with the NLRB in South Carolina, the desperate need for American jobs doesn't seem to create a sense of urgency in terms of getting past the endless protests and red tape. That being the case, it's debatable whether stimulus later will get corporations to spend today. It's a point Blinder concedes. "People react to what they see in the economy (not what may happen)", he says, "I don't think they go on expectations".

If not huge public works what could be done now? Blinder likes the idea of repatriation tax breaks for corporations, allowing them to bring an estimated $1 trillion of overseas profits back home, but only if they are accompanied by job creation. "If you don't increase your payrolls, you're not allowed to repatriate," he says.

If he could do just one thing to stimulate this economy, Blinder would do whatever necessary to create low-end jobs. He'd replicate part of the Obama plan, only much bigger. "If I had to choose one, I think it would be the new jobs tax credit on a much bigger scale," he says. Specifically $5,000 or $6,000 per job. Such a move, says Blinder, would "concentrate the fire power on the lower wage jobs. That's where the stress is."