Friday, August 31, 2012

Me, the next Fed Chair or Treasury Secretary?

Maybe not. How about the next presidential Chief Economic Adviser? Today, the Fed Chair, Ben Bernanke, stated that the Federal Reserve Bank will gladly help stimulate the economy again, but they can't fix the problem of a slow-growing GDP by themselves. Both political parties have ideas too, but I'm not sure they make sense. I'm not an economist but I am the target of fiscal and monetary policies, so let's see what will get me to jump a hoop.

Those that say we need tax rate reductions are goofy. As a business person, I'm not going to hire someone if my business is doing poorly just because I get a tax break. If my business is doing well, I'm going to hire someone even if I don't get a tax break. Same thing with purchases of new equipment or facility expansion: I'm going to spend the money because it makes sense. Besides businesses are sitting on plenty of cash right now and enjoying high levels of profitability. Why cut corporate rates?

Likewise, why cut personal income rates? To get more money into the flow? M2--one of the broadest measures of the amount of cash in the system has grown 15% in the past two years. The Fed acknowledges that the relationship between the money supply and the economy has broken down in the past 30 years. So, there's lots of money out there but nobody's spending it.

Another plan is to stimulate the economy through government spending. This is good if the government spends money on things the government is responsible for: defense, education, infrastructure (roads, bridges, e.g.), some health care and other human services. However, they've gotten into trouble when they stimulate business through subsidies: agriculture, energy, automotive, etc. Subsidies never seem to expire. We've had ag and oil subsidies for a hundred years, but they're not in a slump. Government subsidies of mortgages--through income tax deductions and more recent stimuli--haven't pulled the housing market out of the slump completely, though it's showing some signs of life recently. Other construction is still down. Yet road and bridge construction is woefully underfunded by national and state governments.

What we need is a stimulus that encourages me to get rid of my cash so more businesses can hire people? Don't do it through hybrid car tax credits. Don't subsidize the hybrid cars to reduce the prices. Or subsidize anything to reduce prices. Give me an "option" on a return on investment based on what I spend. I'm hardly rewarded for saving--yet savings (think M2 money supply again) is sky-rocketing. So reward me for spending.

Take my income and subtract out contributions made to savings, 401(k) and other similar accounts (here and abroad, Governor Romney). That becomes my spending rate. Next year, I get 50% of the GDP growth rate as a tax credit on that differential between income and savings. (Okay, I know it's not what I said would incent me.) This plan has a distinction in that it rewards me for growth in the overall society's economic welfare, not just my hedge-funding prowess. It rewards me for future thinking, not current thinking. It rewards me later based on results rather than giving me the money now and hoping that I spend it.

If I save most of my money (I wish), I don't much of a credit in the future because I haven't contributed much to the growth of the economy. If the economy doesn't grow, I don't get a credit either. That's fine too. I wasn't entitled to it and the government probably needs the money to pay for my re-education for a new career.

Alright, there's flaws in this plan too, which is why I won't replace Ben Bernanke, Tim Geithner, Alan Krueger or anyone that Romney appoints if he wins the presidency. But remember: the problem isn't government spending or tax credits. It's what we're incenting through them. And incentives are tricky, which you know if you've read either of the Freakonomics books.

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