Wednesday, September 28, 2011

Kotlikoff’s Five Ideas to Boost the Economy

Laurence Kotlikoff has put forth 5 proposals to get us closer to full employment. Proposal #4 – “get prices and wages unstuck” – has already been rightfully criticized and his fifth proposal is fiscal contraction, which is even more absurd. But what about his first 3 proposals?

Proposal #1 is “stop paying interest on bank reserves”, which Kotlikoff argues would encourage banks to make more loans. But that is exactly the hope of any expansionary move by the Federal Reserve. The problem is not so much that the banks don’t wish to make new loans but firms are as interested in taking out loans when aggregate demand is so depressed.

Proposal #3 is in the same vein as its goal is more investment demand – “compel corporate America to invest”:

They are waiting for the economy to improve before they invest, but it won’t improve until they all do so. The president can help resolve this problem by assembling in one room the CEOs of the largest 1,000 U.S. companies and getting them to collectively pledge to double their U.S. investment over the next three years. If they all invested simultaneously, they would immediately create much of the demand needed to make their investments worthwhile.

Presidential jawboning as an inducement to increase investment? By the same logic – passing the President’s bill to increase public infrastructure investment would generate a similar self sustaining recovery. But then Kotlikoff rejects fiscal stimulus with this incredibly silly claim:

The president’s new-yet-familiar jobs bill entails more spending and more tax cuts, neither of which is affordable absent new revenue.

Which leaves us with his proposal #2:

President Barack Obama could call on the workers and shareholders in these companies to voluntarily hire 7.5 percent more workers and do everything possible to maintain the higher level of employment going forward. How, one might ask, would all the new workers be paid? Existing employees could agree to a 7.5 percent wage cut in exchange for immediately vested shares of their companies’ stock of equal value.

I leave it to others to discuss how his creative proposal might work.


Ryan C. said...

So with #2... not only do we lose wages but we could ultimately lose even more when the company's stock price goes down... did I read that right?

Ralph Musgrave said...

I agree with criticisms in the above article. Re the idea that banks should be encouraged to lend out their reserves, if you Google the phrase “banks don’t lend reserves” you’ll find numerous articles explaining that banks DO NOT lend reserves. I suspect that Kotlikoff doesn’t fully understand banking.

I tried to read his book on limited purpose banking, “Jimmy Stewart is Dead”, and found it a bit of a disorganised ramble.

If anyone knows of a paper or article where he has set out his ideas on limited purpose banking in some sort of brief coherent manner, I'd like to know about it.

TheTrucker said...

Not paying interest on reserves is the right move. In that case, if the money hoarders want to have income then they will have to offer to lend at rates acceptable to borrowers. If that means home equity lines of credit at just above LIBOR then so be it. At present, a reverse mortgage is made at 2.5% more then LIBOR and you must also pay a 1.5% mortgage insurance on top of that. If the line of credit being offered was more than 70% of appraised value then I could see it. As it is, the bankers are just sucking the blood of the people. And with a lower credit limit the interest margin is even higher because the bank doesn't want to MESS WITH that sort of chump change.

It isn't just business that is being shafted by the banks and the FED.