Monday, April 4, 2011

Robert Frank: The Choices That Pay Us Back

From: Bill Totten

Sent: Friday, April 01, 2011 4:29 PM

 

http://www.nytimes.com/2010/07/04/business/04view.html

 

The Choices That Pay Us Back

                    

by Robert H Frank

New York Times (July 03 2010)

 

IT'S been a banner summer for the champions of fiscal austerity.

 

At the recent Group of Twenty conference in Toronto, for example, world

leaders solemnly pledged to enact big spending cuts over the next several

years. In Washington, deficit hawks in the Senate blocked an extension of

benefits for the long-term unemployed. And at the state and local levels,

revenue shortfalls have activated balanced-budget requirements, forcing

extensive layoffs and spending cuts.

 

But as the nation struggles to emerge from the most severe downturn since

the Great Depression, such cuts are the last thing we need. There is no

conflict - absolutely none - between our twin goals of putting the economy

back on its feet and reducing long-term deficits. On the contrary,

government could take many steps that would serve both goals

simultaneously.

 

For example, it could create a program to restructure consumer debt.

Although rates on ten-year Treasury bonds are only about three percent,

many consumers still carry tens of thousands of dollars of credit card

debt at twenty percent or more. This burden has been a continuing drag on

spending. The federal government could reduce it by borrowing at three

percent and lending to consumers at eight percent under a one-time

debt-restructuring plan.

 

With their debt service payments cut by more than half, consumers could

increase spending immediately. And the five-percentage-point spread on

money lent under the program would help cover its administrative costs,

and maybe even relieve short-run government budget pressure.

 

(Banks might complain, but because the money owed to them would be repaid

in full, and because they insist that their high interest rates barely

cover their costs, such complaints would ring hollow.)

 

Another useful measure would be a carbon tax - or its approximate

equivalent, a cap-and-trade system - scheduled for a gradual phase-in

after the economy has again reached full employment. This would stimulate

an immediate, huge jump in private investment without the government

having to spend a penny.

 

Why? Investment is currently depressed because companies can already

produce much more than people want to buy. But once a carbon tax was

announced, the design of nearly every existing machine or structure that

uses or produces energy would be rendered suddenly obsolete. Motor vehicle

engines, electric power plants, refrigerators, air-conditioners, furnaces

- all would have to be redesigned for greater efficiency.

 

The resulting flood of research and investment would enhance our ability

to cope with future energy shortages and would serve another crucial

purpose. Taxing carbon could eliminate the catastrophic risk of vastly

rising global temperatures by the end of this century; it would be a

prudent act, quite apart from its utility as an economic stimulus.

 

The tax would generate no revenue until its phase-in, so it wouldn't

reduce the current deficit. But deficits are a long-run problem, and its

enactment alone would increase creditors' confidence that we are committed

to solving it.

 

Another productive measure would be to increase public investment in

infrastructure. When road repairs are deferred for just two to three

years, total maintenance expenses can more than double - even if we ignore

the cost of accidents and vehicle damage caused by potholes. Spending an

extra dollar now to save two dollars three years from now is an investment

with an annual rate of return of more than eighteen percent.

 

Making that investment with money borrowed at three percent would not only

put people to work immediately, but would also help balance government

budgets. And after decades of infrastructure neglect, there are many other

public investment opportunities that promise returns even higher than

eighteen percent.

 

Here's a final example, which I've long advocated: The government could

enact a progressive surtax on extremely high levels of consumption, with a

phase-in beginning once the economy recovers. This would reduce long-run

deficits while stimulating extra spending immediately. And, like the other

examples, it would be a step worth taking even apart from those effects.

 

Because incomes of the wealthy have been growing sharply in recent

decades, luxury consumption has also been rising rapidly. But beyond a

certain point, additional consumption raises the bar that defines what

counts as adequate, without any increase in objective measures of

well-being. And because savings would be untouched by this surtax, it

would help steer resources away from keep-up-with-the-Joneses spending

races and into productive investment. That would increase productivity

growth.

 

Under a consumption surtax, people would report their incomes and their

annual savings to the IRS, as many now do for tax-exempt retirement

accounts. A household's annual consumption would be calculated as the

difference between its income and savings. Congress might apply the surtax

only to annual consumption beyond $500,000.

 

THE resulting revenue would reduce deficits after the phase-in. In the

meantime, just the knowledge that the surtax was on the way would

stimulate a temporary surge in consumption, as wealthy families rushed to

build additions to their mansions and make other purchases before the tax

took effect.

 

In short, the government could take many steps that immediately bolster

spending and employment, while also addressing deficit worries. But that's

not where we appear to be headed, as big spending cuts are being proposed

in the name of fiscal responsibility.

 

But as almost ten percent of the labor force remains unemployed, such cuts

would instead be the height of fiscal irresponsibility.

 

_____

 

Robert H Frank is an economist at the Johnson Graduate School of

Management at Cornell University. A version of this article appeared in

print on July 04 2010, on page BU4 of the New York edition.

 

http://www.nytimes.com/2010/07/04/business/04view.html

 

 

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