On December 3, 2014, I participated in a panel of Harvard University’s Bipartisan Program for Newly Elected Members of Congress. After establishing that the median US household has not shared in recent strong economic gains, I went on to consider policy remedies.
I offered the Congressmen eight policy recommendations. Some will sound popular, some very unpopular; some associated with “liberals”, some with “conservatives.” I would claim that they all have in common heavy support from economists, regardless of party – even the very unpopular ones.
- Enable universal pre-school education
- Spend on infra-structure
o For now, the spending could be financed by Treasury borrowing: 1% is a very attractive interest rate!
o For the longer term: Finance roads and bridges by putting the Federal Highway Trust Fund on a sound footing.
o That means restoring real gas taxes to their past levels and putting the tax rate on an upward path over time. Very unpopular of course. But the best time to start this process is now, when gas prices are falling and inflation is low.
- Take steps today to put social security on a sound footing for the long term
o We spent the last three years getting fiscal policy exactly backwards
o The US fiscal problem, measured for example by the path of the federal debt, is in future decades, not today.
o We hurt the economy during 2011-2013 by cutting spending and raising taxes and have done nothing to address the big future deficits in social security and medicare, exactly the opposite of what we should have been doing: allowing deficits while the economy has been weak, while taking steps to address entitlements on a long-term basis.
o Specific policies to put social security on sound footing:
* Raise the retirement age (while accommodating blue collar workers);
* and slow the rate of growth of dollar benefits for future retirees.
* At the same time, make payroll taxes less regressive:
* Exempt low-income workers.
* Raise the maximum-income threshold (from $118,500).
- Reverse the long-term rise in household debt: housing, auto, and student loans
o Reduce especially the heavy policy tilt toward getting American families up to their eyeballs in mortgage debt that they can’t afford (which mainly drives up housing prices, without much raising home ownership rates for the middle class).
o Require a serious minimum down payment
o Require that mortgage-originators keep “skin in the game.”
o Curtail tax deductibility of mortgage interest, which benefits the well-off (the deduction generally gives households earning $65,000 a year less than $200 in tax savings.
* Reduce deductions at upper end (like Rep. Dave Camp’s proposal to cut from $1m to $500k)
* Especially stop subsidizing mortgages that are used for something other than purchase of residence (i.e., second home or “cash out” home equity line of credit).
o Car-dealers should not have been exempted from the Consumer Finance Protection Bureau.
o Most college educations are still a good deal, and worth going into debt for if that is the only way a student can go.
* But some enterprises are bad deals.
* Government should expand student grants and loans, but require that the college or university have a decent record regarding rates of graduation and employment.
- Tax reform
o We can’t afford to cut tax revenues.
o But we can reduce the most distortionary tax polices (those that most discourage work or encourage harmful activities) and raise a given amount of revenue in a less distortionary way.
o For the corporate tax system, that means cutting the overall tax rate some, but making up the lost revenue by eliminating wasteful exemptions, like oil subsidies.
o For household taxes, I have in mind:
* Expanding the Earned Income Tax Credit, especially for young single workers who miss out;
* and eliminating the payroll tax on lower-income working Americans (currently their marginal tax rate is often higher than anybody’s; currently 63% of taxpayers pay more in payroll taxes than income taxes);
* but making up lost revenue by curtailing distortionary deductions (e.g., mortgage debt).
- Allow fracking
o in every state, while allowing individual communities to opt out.
o Actually encourage it by expediting LNG export facilities.
o But regulate fracking carefully, e.g., to prevent methane leaks.
o It is good for jobs, manufacturing, national security and even — if carefully done — the environment (because natural gas is cleaner than coal).
- Resume US global economic leadership:
o Pass Trade Promotion Authority (for WTO, TPP & TTIP)
o Pass IMF quota reform
- Do No Harm: Avoid going back to the dysfunctional fiscal policy of the past. The uncertainty created by the morass of cliffs, shutdowns, debt-ceiling standoffs (Figure 5) together with the reality of the sequesters, held back growth by at least 1 per cent per annum during 2011-13. (“The Cost of Crisis-Driven Fiscal Policy” MacroAdvisers, Oct. 15, 2013.) One reason growth has been stronger lately is that 2014 is the first year in the last four when Congress has not impeded growth very actively.
o Dysfunctional fiscal politics hurt the economy in 2011-2013, not just directly (e.g., through the sequester), but also indirectly through the risks for business created by policy uncertainty. (See Figure 5.)
Figure 5: Economic Policy Uncertainty