The United States: Do economists have any ideas?.
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Transcript of The United States: Do economists have any ideas?.
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The United States: Do economists have any ideas?
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The Great Recession: progress and prognosis
• Mistakes of 1930s avoided (thanks in part to economic ideas)– Monetary policy: interest rates to zero + QE– Fiscal policy: stimulus did help– Bank recapitalization– No protectionist slide in trade
• These efforts helped stabilize the economy and prevent a deeper collapse
• But growth prospects are undermined by:– high debt overhang (both private and public)– weak competitive position in global economy– large increase in income and wealth inequality
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Are there ideas in Economics?
Some concrete illustrations of programmatic proposals based on ideas from economics
• Infrastructure• Inequality in pay • Tax policy• Finance
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Reinvigorating infrastructure (Alpert, Hockett, Roubini)
• Focus: public infrastructure ($1.2 trillion over 5 years?)– highways, railroads, ports, air transport, energy,…– where there are great unmet needs
• Idea: borrowing costs are low, potential returns are high• Bonus: will create jobs at a time of high unemployment• Vehicle: a national infrastructure bank
– Issue bonds, backed by government guarantee– Use U.S. Army Corps of Engineers as project manager and general
contractor of last resort (to limit private-sector overbidding)
• What about public debt?– program would likely improve government balance sheet, properly
valued• Value of physical assets created + larger tax base due to expansion of economy
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Addressing pay gaps (Freeman, Blasi, and Kruse)
• Focus: the gap between productivity and pay• Idea: link employee earnings to firm performance• Vehicle: tax-deductibility of incentive payments if they cover
all full-time employees– Additional requirement: amount spent on bottom 80% must be as
large as top 5%– Current tax laws subsidize incentive pay to few top executives thru
deduction for stock-options– Can come in different forms: cash incentive plans, performance shares,
stock options,…
• Evidence: broad-based incentive compensation systems improve firm performance and labor market performance– Less turnover, more effort, more peer monitoring– Not so with incentive schemes that apply to few workers
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Reforming tax system (R.H. Frank)
• Focus: Raise fiscal revenue while reducing socially wasteful activities
• Idea: too much competition is harmful when individual rewards depend on relative performance (“the arms race”)– E.g., competition for relative status, or slots in good schools/top firms,
luxury goods… – Adam Smith goods versus Charles Darwin goods– Need to discourage not only activities that provide direct harm
(pollution, CO2) but also those that generate indirect harm
• Vehicle: scrapping the current progressive income tax in favor of a more steeply progressive tax on consumption
• Bonus: no tax on saving, investment
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Making finance safer (S. Johnson)
• Focus: reduce moral hazard/systemic risk created by banks that are “too big to fail”
• Idea: mega-banks provide no social benefit while creating large amount of systemic risk and exerting political influence – concentrated power– government had no choice but to bail them out for fear of complete
collapse of financial system
• Vehicle: use anti-trust law or regulatory tools to break-up mega-banks and put a cap on their size– Citigroup, Goldman Sachs, Morgan Stanley, JPMorgan Chase, Bank of
America, Wells Fargo …
• Evidence: no empirical evidence that performance correlates with size