How to Fix the Economy: Short-Term Version and Long-Term Version
Just by coincidence, I have articles in both the New York Times and Los Angeles Times today dealing with different aspects of our economic problem. The LA Times asked me and a bunch of people far more distinguished than myself what could be done to stimulate growth in 300 words. Although I think there is a case for further fiscal stimulus, I didn't see any point in saying so since the political chances of that were zero even before Republicans won control of the House. So I suggested some ideas for the Federal Reserve, because it is really the only game in town.
The New York Times also had a symposium with me and some others far more knowledgeable than me. But our assignment was what to do about the long-term debt problem in 250 words. I reiterated my belief that significantly higher revenues will be necessary to a permanent solution and that a value-added tax would be the best way to raise those revenues.
All of the contributions to these symposiums are worth reading. I reprint mine below as a convenience to CG&G readers.
Los Angeles Times
November 14, 2010
Don't subsidize reserves; tax them
It's unfortunately the case that sometimes you get only one bite at the apple. That's what happened to the Obama administration and fiscal stimulus. It had just one chance to enact a meaningful program, and unfortunately it didn't do enough.
While there is a strong case for additional fiscal action to stimulate growth and lower unemployment, realistically that was not in the cards even before Republicans gained control of the House of Representatives.
That leaves only the Federal Reserve with the freedom of action to stimulate the economy via monetary policy. Just recently, it announced a plan to buy $600 billion more Treasury securities in order to goose the economy. But there is already more than $1 trillion in excess bank reserves available for lending that banks are just sitting on. Many economists believe that the Fed's latest round of quantitative easing will simply add to that total without providing any additional stimulus.
What is desperately needed from the Fed is some action that will force the banks to lend and get the money that is sitting idle into the economy where it will finance consumption and investment. One idea would be to emulate Sweden and tax excess reserves rather than subsidizing them as the Fed now does by paying banks 0.25% per year on money that is not lent. Another would be for it to intentionally raise inflationary expectations because people tend to spend today when they think prices will be higher tomorrow.
The Fed has shown an admirable ability throughout the crisis to act in unprecedented ways. Its actions prevented a second Great Depression, but they have been insufficient to restore sustainable growth. Now that the Fed is the only game in town, however, it may be necessary for it to go beyond its comfort zone. The alternative could be a decade or more of stagnation of the sort we have seen in Japan.
New York Times
November 14, 2010