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
leaders solemnly pledged to enact big spending cuts over the next several
years. In
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
Management at
print on July 04 2010, on page BU4 of the
http://www.nytimes.com/2010/07/04/business/04view.html
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