Laurence Kotlikoff has five prescriptions for improving the economy over at Bloomberg. Here’s a quick summary:
- Stop paying interest on bank reserves.
- Get workers to invest in jobs.
- Compel corporate America to invest.
- Get prices and wages unstuck.
- Achieve fiscal sustainability.
I think these prescriptions are something of a mixed bag. I agree with the first and think it’s just commonsensical. I guess I don’t understand why we’re paying interest on bank reserves in the first place. If it’s to induce banks to increase their reserves, that sounds to me like a perfect thing that should just be a mandate. If you want banks to have higher reserves, just make it a requirement of being eligible for federal deposit insurance, allowing your shares to be traded publicly, and all of the other benefits of a federal charter.
#3 isn’t just thinking outside of the box, it’s confusing a box with a hat. It’s either pathetically naive, frustratingly wrong-headed, or terribly phrased. The descriptive paragraph doesn’t describe “compelling” but rather cajoling. Yeah, that’ll work.
There are other problems with it as well. GE is frequently held up as an example of a company that’s sitting on a lot of cash, something on the order of $80 billion. Dr. Kotlikoff’s suggestion to “double their U.S. investment” is puzzling in this context. GE’s market capitalization is around $166 billion and the enterprise worth is something like a half trillion. I strongly suspect that its present U. S. investment dwarfs the $80 billion it’s holding in reserve. That can’t be what Dr. Kotlikoff means.
Does he mean increase whatever increase in U. S. investment it’s already planning to make? My off-hand guess is that GE has disinvested in the U. S. over the last couple of decades and plans to continue that next year. Double nothing is still nothing.
Additionally, how much of that $80 billion is offshore? Maybe an incentive to repatriate that money would be more effective.
Let me present an alternative prescription: provide incentives for companies investing more in the U. S. and disincentives for investing elsewhere. The U. S. government has enormous leverage, most of which is rarely if ever used. Just to give one example, if an executive order went out that no Microsoft products could be used in any U. S. government contract until the country stops eliminates its overseas facilities and replaces them with domestic ones that would be a pretty big hit on the company. It will never happen, of course. The Washington Congressional delegation would scream bloody murder, a horde of lobbyists would descend like a cloud of locusts, a telephone and email campaign would be started, and, importantly, actually doing it would be tremendously disruptive to government operations. My point is that the federal government has a lot of levers to pull and it doesn’t need permission to pull them.
Official Position
FAQs about Interest on Reserves and the Implementation of Monetary Policy
Paying interest induces the banks to keep larger reserves, and the larger reserves allow them to borrow more money from the Fed. Theoretically, the banks will then lend to main street.
“For the Snark was a Boojum, you see.”
Where did Kotlikoff use the word ‘compel’? And maybe there is something to that problem. Maybe it is an issue of being the first to move. Everyone might be sitting around saying, “If I invest and nobody else does, I’m screwed.” Reminds me of the dragaon-slaying and ballroom dancing games in game theory. Is this the case here? I don’t know, but that appears to be Kotlikoff’s position.
Uhhmmm yeah, protectionism is bad, mkay?
We tried this during the Great Depression, Smoot-Hawley, didn’t work so well as it lead to a round of tit-for-tat trade restrictions. Not to mention the problem of network externalities. Microsoft is popular because everyone uses it (except for a few cult like people). Because its use is so widespread it makes sharing information nearly effortless. So not only will you lose that positive external benefit you’ll likely reduce overall trade as well.
Yes, and because it is a dumb idea too. For once, the lobbyists, politicians, and so forth would be right. But then again a broken clock is also right twice a day too and the blind chicken does occasionally find the kernel.
Since I copied and pasted the list from the original op-ed, clearly it has been sanitized since I read it.
So is 9.1% unemployment. I would prefer that we stand up to Chinese or European protectionism but we’re clearly not willing to do that.
Protectionism has a rather dubious history at lowering unemployment, in fact it has a great history at raising it.