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Congress: Three Ways To Save Our Economy

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EDITOR NOTE: Keynesian and non-Keynesian economics suggest a possible middle ground, acceptable to left and right, for economic recovery. Common sense, however, has a hard time accepting paying people for nothing as a means to expand the economy. 

(Bloomberg Opinion) -- The U.S. economy desperately needs help. Unemployment, already at the highest level since the Great Depression, is expected to get worse and remain elevated for years. Yet the divide between Republicans and Democrats is threatening to delay action.

What’s needed are measures that can be put into practice quickly, without getting bogged down in ideological debate. I have some ideas.

Rarely has the argument for government spending to support the economy been more compelling. Long-term joblessness can do great damage, and the cost of preventing it is extremely low: The U.S. can borrow for thirty years at an interest rate of approximately zero, adjusted for inflation. The question, then, is how to use this fiscal capacity to the greatest effect

The answer tends to depend on whether you’re a follower of a long-dead but still important economist: John Maynard Keynes. Keynesians think that unemployment is a demand problem: People aren’t buying enough goods and services, so businesses aren’t hiring people who are otherwise eager to work. The solution is to generate more spending – for example, by expanding and lengthening unemployment benefits.

Non-Keynesians see unemployment as a supply problem: The jobless simply aren’t willing to provide their labor at the wages being offered. Thus, the right response is to cut benefits, to give people an incentive to get back to work.

That said, I can think of a few ideas for fiscal stimulus that both camps would support (or at least accept):

Eliminate sales tax.(1) Every three months, as long as the unemployment rate exceeded 5%, the government would grant states that reduce sales taxes to zero an amount equal to their quarterly sales tax revenue in 2019. This would cost about $350 billion a year. Keynesians would like it because it encourages spending, by making goods and services cheaper now than in the future (in a way similar to an interest-rate cut). Non-Keynesians would like it because, in their view, it would allow businesses to charge higher prices and hence offer higher wages, drawing people back into jobs. Eliminate employee payroll taxes.(2) Workers would be free of their portion of the payroll tax until the unemployment rate fell to 5%. This would cost about $500 billion per year. Keynesians would see it as putting more spending money in people’s pockets. Non-Keynesians would see it as an inducement to work, because less of the money would go to taxes. From the non-Keynesian view, the lower tax rate would mean that anyone who is non-employed would be more willing to accept a given wage offer.  (The policy could be scaled up in magnitude by making the employee-side payroll tax negative.) Introduce a temporary uniform basic income. Every adult, regardless of income, would receive $2000 every three months until the unemployment rate declined to 5%. This would cost about $2 trillion per year, and would represent more of a compromise (meaning that neither group would be completely happy with it). Keynesians would like putting money in the hands of the poorest households, which are most likely to spend it -- but less excited about giving it to wealthier households that are more likely to save it. Non-Keynesians would prefer it to unemployment benefits, because it’s less likely to keep people away from work(3) -- they get the cash whether or not they’re employed.

Legislators are already starting to fight about whether to extend the added $600 in weekly unemployment benefits that Congress provided through July. This is a waste of time. They should instead move quickly to enact measures that will truly help, and on which they can agree.

(1) Robert Hall and Susan Woodward advanced essentially this same proposal in December 2008: https://woodwardhall.wordpress.com/2008/12/08/options-for-stimulating-the-economy/.

(2) This policy has been proposed by the Trump administration.

(3) Cesarini, etal (2017) (https://www.aeaweb.org/articles?id=10.1257/aer.20151589) find that a person who receives an increase in their wealth of $1000 would reduce their hours worked so as to induce a $10 fall in their earnings.

Originally posted on Yahoo! Finance

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