The United States: Do economists have any ideas?

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

Are there ideas in Economics?

Some concrete illustrations of programmatic proposals based on ideas from economics

• Infrastructure• Inequality in pay • Tax policy• Finance

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

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

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

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