The Krugman writes:
But short-term interest rates are set by Fed policy; right now they’re more or less zero, but they will rise eventually — and hopefully sometime within the next 10 years — when the economy recovers sufficiently.
See, I wouldn't do that. I would keep interest rates near zero forever. Rather than raising interest rates -- which chokes off growth and raises cost in the whole economy, I would establish a variable tax rate. Someone with a lot of debt would pay higher taxes than someone with only a little debt. So only specific borrowers are targeted.
That probably doesn't sound good now, because now everybody has a lot of debt. But if that policy had been put in place before we had a lot of debt, it would have kept debt from accumulating. And that would have prevented the financial crisis.
Anyway, here's how it works: If you have a lot of debt you taxes are high. But you can lower your taxes by making extra payments on your debt. So it's not really as bad as it sounds. The goal of this plan is not to prevent people from borrowing. The goal is to get people to pay off debt, instead of rolling it over forever.
Oh -- paying off debt is a way to fight inflation. It destroys the money that borrowing creates. I think it would be way better to do that, than what we do now.
13 comments:
Hey Art
I wonder if you've noticed an increase in the number of people talking about the morality of our system?
It seems to me that there has been a noticeable uptick in conversations about the moral dimensions of our economic conversations.
Andolfatto, Steve Waldman, Mark Thoma, Krugman have all prompted conversations of this nature in the last few weeks. I think its a sign that we are getting to a whole new level of analysis of our system. Maybe not new in that there have always been critics of our system using moral language but new in that even people who had at one time felt that our commitment to growth would solve the moral concerns of our critics (that our rich country has too many poor people) are now starting to say "not so fast". More and more people are starting to see that growth in our private credit riddled economy is now virtually impossible and if growth is impossible then capitalism (as it is conceived of here anyway) is inadequate.-
"raising interest rates -- which chokes off growth and raises cost in the whole economy, I would establish a variable tax rate. Someone with a lot of debt would pay higher taxes than someone with only a little debt. So only specific borrowers are targeted."
1) Some element of this already exists, in that if you already have a lot of debt, you get a lower credit score (I hope) so higher interest. But definitely, Debt needs to be discouraged more, rather than encouraged. e.g. in personal taxation, deductions should be linked to repayments rather than interest. Interest IMO should actually attract a tax like sales tax....That might do it -- what you are suggesting! i.e. More Debt = More Tax,...with accelerated repayments incentivized.
2) I want to also take off from "for the whole economy". It cuts both ways. If you depress rates for the whole economy, you can get too much of financial and other unproductive "investments" (derivatives including in commodities, property,...we know).
So there might also be a case to *target* based on what the money will be used for. That is, for Fed to refinance the banks AFTER they have made a loan, with refinancing rates based on WHAT the bank lent it forth for.
"paying off debt...destroys the money that borrowing creates."
Debt in the economy is not the only way to manage the amount of money in the economy, it's just more popular with the Govts because it's under the radar. The other method is via tragetted fiscal spend/save. THAT needs to be used more than it has been. The wisdom to imbibe is that all the money created via Greenspan policies (which are actually being continued today) eventaully became the Fiscal Deficit anyway:-(...in all the bailouts and shotgun spray tax cuts.
Greg, I don't really have a good feel what you mean by a moral approach to economics. (I have to confess, I never did read that interfluidity post.) So bear with me.
...new in that even people who had at one time felt that our commitment to growth would solve the moral concerns of our critics (that our rich country has too many poor people) are now starting to say "not so fast".
Okay (this helps me get the "moral" component). But if these people are now abandoning growth as a goal, you will never find me among them.
More and more people are starting to see that growth in our private credit riddled economy is now virtually impossible and if growth is impossible then capitalism (as it is conceived of here anyway) is inadequate.
But are you saying the moral thing is to abandon capitalism? It seems to me that if growth is virtually impossible in our credit-riddled economy, then we can restore growth by reducing debt, quickly, by conscious design of policy.
I think there are starting to be questions that growth itself will lead to the alleviation of the great wealth inequalities, that in fact those goals need to be addressed via specific policies not just encouraging growth. Growth is not in and of itself bad but it must be directed towards some end, not just growth itself.
Im not suggesting that it is moral to abandon capitalism but that our private debt fueled capitalism does have negative moral consequences that should not be ignored. As you so effectively argue, our policy choices are in favor of private debt. Its a conscious decision we've made and it has put way too many people on the edge of economic disaster.
"that in fact those goals need to be addressed via specific policies not just encouraging growth. Growth is not in and of itself bad but it must be directed towards some end, not just growth itself."
I agree with this. The reason growth mantra is invoked in the hope that if the size of the pie is made bigger, there will be no need to "take from Peter to fill Paul". But if growth brings most of the new money into Peter's hands, Paul is now in even worse shape. So we come to the quoted conclusion.
And there might not be any need to invoke morality. It's a practical matter that if the income distribution gets skewed beyond a point, people start to fall off the economic circuit, and economy shrinks...UNLESS you either do something about the distribution OR push debt into the hands of the people. The debt route can sustain and grow the size of the economy for a finite time... it eventually comes dead end. THEN the fundamental problem of income distribution simply *has* to be addressed, else you get shrinkage. THAT's pretty much where life is today.
Emmanuel Saez has shown that the distribution of income was stable until the advent of Reaganomics. To me this means that certain particular policies established to promote growth turned out to be harmful to economic balances.
We can remove those harmful policies and restore the policies that tended to keep income distribution stable; I'm all for it. But then we are left with the original problem -- the inadequate growth that gave rise to Reaganomics in the first place. The original problem remains to be solved.
This original problem is the one I propose to solve by reducing debt and reducing the reliance on credit.
I have no objection to adding the moral argument to the arsenal of persuasion (as long as it does not lead to religious war). But all of my ideas come from looking at graphs and seeing when things were good, and when things changed. "It's a practical matter."
Art
I couldnt agree more with this;
"I have no objection to adding the moral argument to the arsenal of persuasion (as long as it does not lead to religious war)"
and I ardently believe that a secular morality is what is needed. A morality which transcends religious voodoo and petty concerns of afterlife.
The reason the conservatives are winning the economic arguments though (and many democrats are in the economic conservative camp to be sure) is that they ARE appealing to a sense of moral outrage in people. Using; 1) false analogies between govt and households ( if a household cant spend more than it takes in neither can a govt!!) 2) moral hazard type arguments (extending help to underwater borrowers will only encourage more of the same behavior in the future) and 3) the absolute worst example is the Austrians who view the "economy" as some sort of naturally balancing being that uses market forces perfectly. It seems to have holy qualities that do gooder govts only disrupt because they dont understand how market forces will work to the benefit of all. This of course leads Austrians to conclude that mass unemployment is only a result of people not working hard enough during the good times and living beyond their means. There is a certain gut appeal of these arguments but they lack substance when analyzed closely.
I think a big part of the answer to todays problems is to switch the moral outrage onto the false notions that the conservatives push so well.
I also think that deep down many people making these arguments know they are wrong but they are perpetrating a fraud on the workers of the world.
Many are simply misguided but too many are downright extremely selfish and evil.
I'm working on my post about this moral dilemma and how to attack it. Its not coming easy though
Ohm
Nice to see you commenting over here. Ive enjoyed finding your site.
Hey Greg:
I'm working on my post about this moral dilemma and how to attack it. Its not coming easy though
Do parts of it in comments, I'll tell ya what I think...
I find it useful to do shorter posts and use'em as building blocks later.
Thats good advice Art. I think that is what I have done in a sense so I'm trying to go back and find some of my comments at different sites over the last few months. Then I can piece them together coherently. I have been very sloppy at times about saving my work so I often cant find something I thought I wrote.
I need to get better about just posting shorter posts, twitters if you will and not just wait til I think I have it all figured out and give my magnum opus on a subject.
I know that I consciously try to avoid just being a soundbyte blogger and as a result I dont say much.
Your daily postings are all moving towards a theme you are working on and its great. I can follow it, I agree with most all your conclusions and like the way you have worked a lot of other peoples ideas into your narrative.
A moral search of my email turns up a few of of your comments:
The morality play they seem to be invoking has no moral compass...
I must say that I'm starting to get just a little weary of simply exploring possible causes...
These arguments need to have an emotional attachment. They need to feel right.
Put another way, unemployment is used as a tool to control prices. Which to me is a moral issue.
Four different posts. Check all your comments at each of those, I just linked to one.
It does start to add up, when ya look at the Collected Thoughts...
I have my blog set to email me a copy of the comments I get. And I try always to remember to check the "Email follow-up comments to myself" box. I KNEW it would come in handy someday!!
This is probably a little over-simplified, but if I have a post that reaches three good, strong conclusions, I'll break it into three posts with one clear conclusion in each.
I think it's easier to read. I know it's easier to write. And I get three posts instead of one :)
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