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Saturday, November 08, 2008

What Steps Should the New Administration Take to Improve Economic Performance?

Tyler Cowen:

The Mood Always Matters, So Restore Confidence First, by Tyler Cowen, Commentary, NY Times: ...President-elect Barack Obama faces the very important task of restoring confidence in our nation’s economy. ... Rebuilding confidence might seem a small matter, but it is not. ... Americans are not used to losing and Americans are not used to panic. ...

Very bad events can cause a panic..., which translates into subsequent bad decisions. For a classic example of a negative policy dynamic, look at 9/11. The United States lost 3,000 lives and a great deal of wealth and confidence. The government then took actions, most of all the Iraq war, which led to even greater losses.

We are in danger of getting stuck in another negative dynamic, but this time in the realm of economics. We might follow up the financial crisis with some worse responses and policies. ...

The notion of a downward spiral of ideas and events is not unprecedented. Starting in the early part of the 20th century, the West experienced one awful event after another, including a world war, a flu pandemic and a major depression. The response was a global spread of totalitarian ideas, a loss of confidence in democracy and capitalism and, eventually, another war.

While today’s world is far from this point, there is a small chance that we will move in an unstable and worsening direction. Steering away from it should be a priority for the next president. ... We need to avoid overreaction at the same time we need to return to feeling in control.

Robert Shiller:

The Real Mandate Is to Bridge the Wealth Gap, by Robert J. Shiller, Commentary, NY Times: The new president will have a clear mandate to redress economic inequality. During the campaign, John McCain made sure that voters clearly heard Barack Obama say “spread the wealth around,” and they elected him anyway.

Indeed, there has been a significant, decades-long trend toward greater inequality that needs to be corrected. ... The best way to battle gratuitous inequality is to make our financial institutions better embody the true principles of risk management. ...

Traditional mutual funds and retirement saving plans, as well as insurance plans for loss of one’s home due to fire or flood, or of one’s income due to disability, are actually risk management vehicles that help reduce inequality. The new president’s important mission should be to broaden these plans. ...

[T]hree areas of action that would democratize finance — make it work better for the people — and help prevent future crises. We must improve the information infrastructure, encourage broader and more robust risk markets, and develop better retail financial products. ...

A fourth and more radical step would be to index the tax system to income inequality. The system would automatically become more progressive if inequality became more acute. ...

In short, the best thing that President-elect Obama can do is to set up permanent new structures to harness the innovations of finance to improve people’s lives on Main Street. ...

Greg Mankiw:

It’s a Time to Listen, and to Obey the Laws of Arithmetic, by N. Gregory Mankiw, Commentary, NY Times: It was a good campaign, and a historic victory. As the president-elect gets ready for new responsibilities, here are four ways to become a reliable steward of the economy:

LISTEN TO THE ECONOMISTS...

EMBRACE SOME REPUBLICAN IDEAS...

PAY ATTENTION TO BUDGET CONSTRAINTS...

RECOGNIZE PAST MISTAKES...

Alan Blinder:

Remember That Capitalism Is More Than a Spectator Sport, by Alan S. Blinder, Commentary, NY Times: Among the daunting set of tasks ahead for the president-elect, perhaps the most basic is to restore a sense of fairness to and faith in our economic system — much as Franklin D. Roosevelt did in the 1930s.

For too many years, too many Americans watched helplessly as ... top dogs prospered, and their national government either sat by passively or intervened to help the “haves.” No wonder trust in the system ... has been destroyed.

An economy isn’t supposed to work that way. ... So the new president’s most fundamental job is to restore the people’s confidence that the economy will perform — for them. ...

Barack Obama will have to begin with the troubled Troubled Asset Relief Program... [which is] in danger of becoming the most unpopular use of public money in the history of the republic...

If it’s not already too late, the new president must convince Americans that the bailout is being managed for their benefit, not for Wall Street’s. ... Quick changes in the bailout program ... are necessary. ...

Next up, after reforming the bailout plan, is the Economic Recovery Act of 2009... Regarding objectives, I’d suggest sticking to two: creating jobs by creating new spending, and alleviating the misery that accompanies deep recessions. ...

These ... programs are often referred to as the “social safety net,” and America’s is in tatters. But we need both repairs and a new metaphor. Lyndon B. Johnson had it right when he called upon the government to provide a “hand up, not a handout.” The Obama administration should seek to create a new “social trampoline” that not only catches people when they fall, but also propels them back into productive employment. ...

Robert Frank:

Just What This Downturn Demands: A Consumption Tax, by Robert Frank, Commentary, NY Times: ...[W]ith the country sliding into what promises to be a sharp and protracted economic downturn, it is imperative to increase spending over the short run, regardless of how we pay for it. ...

In the long run, though, it will be necessary to raise enough tax revenue to balance the budget. One of the most effective ways to do that is by changing what we tax. ...

The first reform that Barack Obama should consider is replacing the progressive income tax with a progressive tax on consumption. ...

Such a tax could raise more revenue than the current system, yet would be far less burdensome for families at nearly all income levels. Because of the large standard deduction, middle-income families would pay less..., and high-income consumers could limit their tax increases by saving more. ...

Other changes in what we tax could further reduce the revenue shortfall while producing positive side effects. Energy and climate specialists, for example, have long advocated taxes on carbon. ...

Imposing new taxes is never easy. ... To overcome this hurdle, Congress could vote to increase future taxes — a strategy that happily coincides with current fiscal imperatives. ... Higher taxes could be phased in gradually, after income growth resumes. As long as each year’s tax increase is smaller than the corresponding growth in income, painful reductions in consumption will not be necessary. ...

    Posted by on Saturday, November 8, 2008 at 07:56 PM in Economics | Permalink  TrackBack (0)  Comments (42)

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