Ffw 2011

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Ffw 2011

  1. 1. US Economy Crazy Economic Suggestions More Serious Economic Suggestions What If Politicians Listened to Economists Ryan W. Herzog Gonzaga University October 24, 2011
  2. 2. US Economy Crazy Economic Suggestions More Serious Economic Suggestions US Economy Crazy Economic Suggestions More Serious Economic Suggestions
  3. 3. US Economy Crazy Economic Suggestions More Serious Economic Suggestions Current Output Figure: Gross Domestic Product and Potential Output
  4. 4. US Economy Crazy Economic Suggestions More Serious Economic Suggestions Unemployment Figure: Unemployment and Employment to Population
  5. 5. US Economy Crazy Economic Suggestions More Serious Economic Suggestions Inflation and Interest Rates Figure: Inflation and Interest Rates
  6. 6. US Economy Crazy Economic Suggestions More Serious Economic Suggestions How Economists Think Figure: Incentives Matter
  7. 7. US Economy Crazy Economic Suggestions More Serious Economic Suggestions The Height Tax • Should we replace the income tax with a height tax? • Greg Mankiw (chairman of the Council of Economic Advisors to G.W. Bush) proposes a height tax. • Optimal tax policy should focus on generating revenue without create perverse incentives. An income tax creates a disincentive to work. • There is a correlation between height and income (the taller the person the greater the income). • Placing a tax on height, removes the disincentive to work since you pay the tax regardless of the number of hours worked.
  8. 8. US Economy Crazy Economic Suggestions More Serious Economic Suggestions Negative Interest Rates Figure: Setting a Negative Interest Rate
  9. 9. US Economy Crazy Economic Suggestions More Serious Economic Suggestions Negative Interest Rates • The Federal Reserve will lower interest rates if unemployment increases or inflation decreases • During the financial crisis, the levels of unemployment and inflation warranted a negative interest rate. • It would encourage spending but who would lend at negative interest rates?
  10. 10. US Economy Crazy Economic Suggestions More Serious Economic Suggestions Negative Interest Rates • “Imagine that the Fed were to announce that, a year from today, it would pick a digit from zero to 9 out of a hat. All currency with a serial number ending in that digit would no longer be legal tender. Suddenly, the expected return to holding currency would become negative 10 percent. That move would free the Fed to cut interest rates below zero. People would be delighted to lend money at negative 3 percent, since losing 3 percent is better than losing 10. ” Greg Mankiw (4/18/2009, NY Times) • Realistically we could get negative real interest rates (after inflation) if we expect an increase in future inflation. • What would happen to the real cost of borrowing money if we expect the inflation rate to increase to 5%?
  11. 11. US Economy Crazy Economic Suggestions More Serious Economic Suggestions Helicopter Drop • During a financial crisis (or large recession) consumers cut spending potentially leading to a dangerous deflationary period (Great Depression and Japan). • To prevent deflation, the central bank needs to get money into the hands of the consumers. Interest rates are set to zero (liquidity trap) but no one is spending. With deflation there is a positive return to holding cash. • “Let us suppose now that one day a helicopter flies over this community and drops an additional $1000 in bills from the sky.... Let us suppose further that everyone is convinced that this is a unique event which will never be repeated.” Milton Friedman (1969, The Optimum Quantity of Money) • The goal is to increase spending and raise inflationary expectations. A side effect would be a reduction in government debt.
  12. 12. US Economy Crazy Economic Suggestions More Serious Economic Suggestions Blinder and Hubbard • To the maximum extent possible, fiscal adjustments should promote economic growth rather than retard it. • The burden of policy adjustment should be borne progressively. That means it should ask more sacrifices from more-well-off households than from less-well-off households. • The fiscal adjustment should be gradual.
  13. 13. US Economy Crazy Economic Suggestions More Serious Economic Suggestions Blinder and Hubbard • Social Security: The program’s finances need to be shored up • Increase retirement age • Means-testing - reduce benefits for high income households. • Increase payroll cap. • Medicare and Medicaid:A substantial share of the budget cuts must come out of Medicare and Medicaid. • Greater means-testing in Medicare. • Increase in co-payment. • Payment advisory board. • Tax health care benefits
  14. 14. US Economy Crazy Economic Suggestions More Serious Economic Suggestions Tax Reform • “Tax reform can enhance growth. And if voters want a larger government, a reformed system would raise the necessary revenue with less damage to growth.” • Broaden the base, lower the rates (Corporate and personal income taxes) • End majority of tax exemptions • Selective taxes that propose an externality to society (sin taxes, perhaps?)
  15. 15. US Economy Crazy Economic Suggestions More Serious Economic Suggestions The Council of Economic Advisors • Ten past chairmen and chairwoman of the Council of Economic Advisors came together and advised Congress and the President to strongly consider some of the recommendations in the Bowles-Simpson Deficit Reduction Plan. • Similar to the previous suggestions
  16. 16. US Economy Crazy Economic Suggestions More Serious Economic Suggestions Stimulus Possibilities • Direct government spending and a simplification of the tax code • Military Spending - Feldstein • Infrastructure - Stiglitz • R and D - (many economists) • Don’t let the phrase shovel ready be a deterrent (the slowdown will last for a while)
  17. 17. US Economy Crazy Economic Suggestions More Serious Economic Suggestions Carbon Tax • “A majority of the economists said a tax on fossil fuels would be the most economically sound way to encourage alternatives. A tax would raise the price of fossil fuels and make alternatives, which today often are more costly to produce, more competitive in the consumer market.” Wall Street Journal (2/9/2007) • “For a long time I have felt the price of gasoline in the United States was way too low. Pretty much all economists believe this.” Steven Levitt
  18. 18. US Economy Crazy Economic Suggestions More Serious Economic Suggestions Carbon Tax • Blinder labels them the miracle cure. Reduce foreign oil dependence and reduce the income tax burden. Greg Mankiw maintains a list of economists in support of carbon taxes (the list is very long) • Removes government from subsidizing alternative fuels and let’s the market determine oil alternatives. • Canada and Australia have passed similar proposals. • The average fuel efficiency for new automobiles sold in the US has only increased by 5 mpg (car 28 to 33 mpg and light truck 21 to 25 mpg)
  19. 19. US Economy Crazy Economic Suggestions More Serious Economic Suggestions Carbon Tax - Benefits (from Mankiw) • The environment - would be the most direct and least invasive policy to address environmental concerns. • Road congestion - Reduce congestion on streets and highways. • Regulatory relief - A higher gas tax would accomplish everything CAFE standards do, but without the adverse side effects. • The budget - A $1 per gallon hike in gas tax would bring in $100 billion a year in government revenue and make a dent in the looming fiscal gap. • Economic Stability - A reduced dependence on foreign oil will minimize the impact of oil shocks.
  20. 20. US Economy Crazy Economic Suggestions More Serious Economic Suggestions Carbon Tax - Benefits (from Mankiw) • Tax incidence - A higher gas tax discouraged oil consumption, the price of oil would fall in world markets. As a result, the price of gas to consumers would rise by less than the increase in the tax. Some of the tax would in effect be paid by Saudi Arabia and Venezuela. • Economic growth - Public finance experts have long preached that consumption taxes are better than income taxes for long-run economic growth, because income taxes discourage saving and investment. It would also encourage firms to devote more R & D spending to the search for gasoline substitutes. • National security - Alan Greenspan called for higher gas taxes recently. “It’s a national security issue,” he said. The gas tax is an economic policy with positive spillovers to foreign affairs.
  21. 21. US Economy Crazy Economic Suggestions More Serious Economic Suggestions Free Trade • Increases in U.S. exports have accounted for most of our growth since 2007 ($500 billion) • Remove barriers to trade (85% of economists) • For those workers that are displaced due to trade nearly 60% of economists support increased unemployment benefits and retraining programs. • Promote greater free trade agreements (Colombia, Korea, and Panama) • Work with China, don’t place tariffs on Chinese goods.
  22. 22. US Economy Crazy Economic Suggestions More Serious Economic Suggestions Food Prices
  23. 23. US Economy Crazy Economic Suggestions More Serious Economic Suggestions Farm subsidies • Farm subsidies have lead to an overproduction of certain crops (mainly corn). • Artificially lowered the price of beverages that use corn syrup. • This will promote healthier eating.

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