The United States: Do economists have any ideas?

1. The United States: Do economists have any ideas?

2. 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

3. Are there ideas in Economics? Some concrete illustrations of programmatic proposals based on ideas from economics • Infrastructure • Inequality in pay • Tax policy • Finance

4. 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

5. 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

6. 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

7. 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