Play the Advisor Game

The New York Times has a piece on Obama’s latest stimulus proposals.

[Obama] chided Senate Republicans for engaging in “pure partisan politics” by holding up a jobs bill that would offer tax breaks to small businesses and ease credit with a $30 billion initiative to channel loans through community banks.

Community banks!? That‘s the stimulus plan?

The president also said he and his team were “hard at work in identifying additional measures,” including extending tax cuts for the middle class that are scheduled to expire this year, increasing government investment in clean energy and rebuilding more infrastructure.

What a joke. Sorry, but none of these is going to make a significant contribution to ending the recession.

Maybe we can help Obama identify some additional measures to stimulate the economy. Here are the rules. First, your proposal must be revenue-neutral, or at least very cheap. Second, Sumnerian monetary policy (which I support) is off the table as “too obvious,” as is encouraging people to counterfeit. Third, your proposal needs to provide actual short-term stimulus, not just be good long-term policy.

My proposals:

First, permanently eliminate the employer portion of the payroll tax and charge it to employees instead. Remember, in the long run this change makes no difference whatsoever, since the incidence of a tax is the same no matter who technically pays it, as long as prices are flexible. But the reason labor markets don’t clear in recessions is that the price of labor (the wage) is not flexible. Real wages need to fall to clear the market. Shifting the payroll tax burden to employees would be an immediate cut in real wages, which would induce greater hiring and a lower quantity of labor supplied, moving the market closer to clearing.

Second, let in several million more immigrants. There are 19 million unoccupied houses in the country. The malinvestment in housing has decreased homeowners’ and investors’ net worth, which is creating fear and uncertainty. The wrong way to solve the housing problem is through subsidies which encourage further malinvestment. The right way is to make the malinvestment an ex post good investment. This can be done by importing residents, demanders of housing. Start by eliminating quotas for H1B and student visas, but ultimately, if people promise not to go into the construction industry, let them in. This proposal would have been even more stimulative during the financial crisis when it could have also propped up the value of mortgage-backed securities, but it would still do some good now.

Are there flaws in my proposals? What would you suggest instead or in addition?

9 replies to “Play the Advisor Game

  1. Master of None

    Use money illusion to our advantage.

    Reinstate the old calculation of CPI inflation. This would raise current inflation estimates to ~5% versus the current ~1%.

    Even though nothing changes in the real world (i.e. “revenue neutral”), all of a sudden inflation hawks be choking on very inflationary headlines. Bond yields will rise, and investors will pile into equities and inflation-protected assets. Preference-to-rent will shift to preference-to-buy as people begin to expect rising prices. Increased equity investment will result in higher real private investment in the near-term (i.e. more real production and jobs).

    More here:

  2. Bill Stepp

    Instead of shifting the payroll tax as you suggest, how about abolishing it?
    That would lead to higher employment, and is consistent with natural rights and justice.

  3. Eli Post author

    Bill, I would gleefully eliminate most or all government transfer programs, but the post is about roughly revenue-neutral stimulus ideas. Your proposal involves a gigantic political fight; my proposal only involves convincing others that their ideological commitments are not threatened by the tax shift.

    Also, I have to admit that I don’t think natural rights exist. There are sounder bases for libertarian ideology.

  4. Bill Stepp

    I assume you’re an advocate of utilitarianism, which I am not. Leland Yeager once wrote a comment on a blog discussing a book he wrote that there are no such things as rights. I responded by inquiring if he would hire a lawyer to protect his rights if he had a property dispute with his neighbor. He didn’t repond.
    Nor do I accept that rights are conventions created by the State, which after all is a murdering and stealing criminal entity. There is no such thing as a civil right.

  5. Eli Post author

    Bill, I’m not a utilitarian. The reason I don’t think rights are useful as a framework for discussing political morality is that people tend to opportunistically assert that rights in fact are whatever their preferences dictate they ought to be. But this is taking us far afield of the topic of the original post.

  6. Master of None

    By the way, Eli, I agree: Immigrants = free stimulus

    On the payroll tax, I agree, but to take a card from Krugman’s deck, if we’re already using the “revenue neutral” constraint, perhaps we should consider political feasibility as well =)

    BTW, on my original point (change the inflation measurement), Sumner was quickly dismissive. I’m not saying it’s a cure-all, but I don’t see how it could hurt. There’s a natural justification: it’s more consistent with the prior century’s measurement of inflation. So I don’t think “credibility” is a justification for not doing it.

  7. Eli Post author

    Master of None, I’m still not sure your proposal works. For one, it’s not revenue-neutral because retirement benefits are indexed to inflation, as are TIPS. Second, unless you secretly reinstate the old calculation, I’m not sure you’re going to trick bond traders, who are very financially savvy. Third, I think that the current CPI might overstate inflation, particularly when quality is taken into account.

    Political feasibility is a perfectly reasonable constraint, and perhaps my proposals do not pass muster. Honestly, I am out of touch with how the median voter thinks, so I am not a good judge of political feasibility. But I do think it is a feature of my proposals that people of all sorts of ideological commitments could approve of them if they took the time to patiently understand the rationale behind them. My proposals should appeal at least to the wonks in Congress and the White House, if not to the political strategists.

  8. Master of None

    You (and most people) give “professional” investors too much credit. Many, if not most, are making decisions on advanced methodologies such as “gut feeling” and “instinct”. Some even invest solely on what kind of animal the historical price chart most closely resembles. I am not joking.

    Let’s not forget that mutual fund flows and individual investors account for a large amount of market movement.

    The change would also feed into quant models, and the algorithms that drive them would shift capital into stocks, from bonds (unless they were specifically tweaked to ignore the change).

    You’re right about the stuff that’s indexed to inflation, but (as long as we’re dreaming) we could always mitigate that effect by explicit cuts in benefits, etc.

    In any case, I think it would on-net be a positive, especially for the housing market, which is still a huge drag on the economy.

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